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, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to
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Commission File Number:
001-31216
McAfee, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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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
Santa Clara, California
(Address of principal
executive offices)
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95054
(Zip
Code)
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Registrants telephone number, including area code:
(408) 988-3832
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting
company 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, 2008) was approximately $5.3 billion.
As of February 24, 2009, Registrant had outstanding
approximately 154 .1 million shares of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with our 2009 Annual Meeting of
Stockholders are incorporated by reference in Part III
herein.
MCAFEE,
INC. AND SUBSIDIARIES
FORM 10-K
For the fiscal year ended December 31, 2008
TABLE OF
CONTENTS
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are statements that look to future
events and consist of, among other things, statements about our
anticipated future income including the amount and mix of
revenue among type of product, category of customer, geographic
region and distribution method and our anticipated future
expenses and tax rates. Forward-looking statements include our
business strategies and objectives and include statements about
the expected benefits of our strategic alliances and
acquisitions, our plans for the integration of acquired
businesses, our continued investment in complementary
businesses, products and technologies, our expectations
regarding product acceptance, product and pricing competition,
continuation of our stock repurchase program, cash requirements
and the amounts and uses of cash and working capital that we
expect to generate, as well as statements involving trends in
the security risk management market and statements including
such words as may, believe,
plan, expect, anticipate,
could, estimate, predict,
goals, continue, project,
and similar expressions or the negative of these terms or other
comparable terminology. These forward-looking statements speak
only as of the date of this Annual Report on
Form 10-K
and are subject to business and economic risks, uncertainties
and assumptions that are difficult to predict, including those
identified below in Item 1A, Risk Factors
as well as in Item 1, Business and
Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations in
this Annual Report on
Form 10-K.
Therefore, our actual results may differ materially and
adversely from those expressed in any forward-looking
statements. We cannot assume responsibility for the accuracy and
completeness of forward-looking statements, and we undertake no
obligation to revise or update publicly any forward-looking
statements for any reason.
TRADEMARKS
AND TRADE NAMES
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, but are not limited to: McAfee,
ePolicy Orchestrator, VirusScan,
IntruShield, Entercept,
Foundstone, SiteAdvisor,
Avert, Preventsys, Policy
Enforcer, Total Protection,
AntiSpyware, SecurityAlliance,
McAfee Security, SafeBoot,
ScanAlert, McAfee SECURE, McAfee
Security Center, Unified Secure Access,
Artemis and TrustedSource. Any other
non-McAfee related products, registered and/or unregistered
trademarks contained herein are only by reference and are the
sole property of their respective owners.
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PART I
OVERVIEW
We are a leading global dedicated security technology company
that secures systems and networks from known and unknown
threats. We empower home users, businesses, government agencies,
service providers and our partners with the ability to block
attacks, prevent disruptions, enforce policy and continuously
track and improve their security and compliance.
Security has emerged as one of the most critical concerns facing
businesses and consumers. Security breaches have risen
dramatically in the past few years, fueled in part by the
proliferation of mobile devices such as laptop computers, cell
phones and smart phones with email and web-surfing
capabilities. For corporations, the increasing frequency of
security breaches has coincided with expanding regulatory
compliance requirements relating to security and more
specifically, to privacy. Failure to comply with these
requirements, and with the requirements of internal security
policies and procedures, creates an additional level of
enterprise risk. For consumers, the increasing frequency of
online fraud and security concerns discourages customers from
transacting online for example, visiting and
purchasing from
e-commerce
sites, using online banking services and preparing taxes online.
All of these trends point toward a growing demand for effective
security solutions.
BUSINESS
DEVELOPMENTS AND HIGHLIGHTS
During 2008 we took the following actions, among others, to
enhance our business:
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We completed three acquisitions: ScanAlert, Inc., Reconnex, Inc.
and Secure Computing Corporation (Secure Computing).
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ScanAlert offers web site vulnerability detection and security
certification services to protect users from identity theft and
credit card fraud. This acquisition enhances our triple play
protection securing consumers on the PC, web and mobile
platforms by integrating ScanAlerts
e-commerce
security certification service into our SiteAdvisor web rating
system.
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Reconnex, a leading data loss prevention (DLP)
company, brings a unique technology that learns and adapts to
automate the ongoing protection of sensitive data.
Reconnexs technology helps an organization define and
identify what information to protect on its network, determine
data proliferation risks, and create appropriate security
policies and remediate violations, regardless of how information
is stored, secured or communicated. The Reconnex suite of
comprehensive network and discovery/DLP compliance technology
solutions complements and enhances our existing data protection
offerings.
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Secure Computing delivers a comprehensive set of software,
appliance and firewall solutions that help customers protect
their critical web, email and network assets. Secure
Computings TrustedSource technology will extend our
in-the-cloud security as a service offering and with
Secure Computing, we plan to deliver complete content and data
lifecycle management at the network, spanning detection,
filtering, encryption, blocking, archiving, reporting and
compliance levels.
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We developed and launched several new products and integrated
enhanced feature functionality into new versions of our products
across our offerings. Some of these new offerings include:
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Artemis Technology, a new internet-based
in-the-cloud service hosted by McAfee Avert Labs
provides active protection on the fly when a computer gets hit
by malicious computer code. Artemis Technology provides an
always-on delivery model for relevant, up-to-date
research and response to close the protection gap. Using a
combination of signature/behavior analysis and the application
of community threat intelligence, it delivers protection to the
system whenever it is required in real time. Artemis Technology
is enabled through ePolicy Orchestrator with McAfee VirusScan
for enterprise customers and through McAfee Security Center for
consumer, small business, and midmarket customers.
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McAfee Unified Secure Access, our network access control
(NAC) offering links endpoint and network security
with access control and compliance and is centrally managed by
ePolicy Orchestrator software to help organizations ease the
deployment and management of NAC.
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Total Protection for Secure Business is a comprehensive suite
that offers small and medium-size businesses complete security
for endpoints, email, web, and data in one easy-to-manage
package, including our secure search service based on McAfee
SiteAdvisor technology.
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We formed strategic relationships with numerous new partners
including CommVault, HP ProCurve and Intel. We have agreed with
CommVault to deliver an integrated data and security management
solution built on our two companies respective data
management, backup and security expertise. We created a
strategic alliance with HP ProCurve to jointly develop and
deliver network security solutions. Under this agreement, we
will build security solutions with HP ProCurve that combine
information security products with HP ProCurves networking
product portfolio. We also agreed to work with Intel to provide
security below the operating system layer on PCs using Intel
vPro technology.
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We expanded our relationship with existing partners, including
VMware. VMware is shipping McAfee VirusScan Plus software with
VMware Fusion VMwares desktop virtualization
product for running Microsoft Windows applications side by side
with Apple Macintosh applications on any Intel-based Macintosh.
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In May, Albert A. Rocky Pimentel joined McAfee as
its new Chief Operating Officer and Chief Financial Officer.
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OUR
BUSINESS MODEL AND OFFERINGS
Our business has been organized along the following 3x5x3
business model that aligns and interlocks the major elements of
our business, customers, geographic theaters and major product
lines.
3 × 5 × 3 Business Model
Customers
We categorize our customers as:
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consumer/small business;
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mid-market; or
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enterprise.
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We develop products and services specific to each customer group
and deliver these solutions through various routes to markets
based on customer group requirements. Customer groups are
supported by designated sales and marketing resources and go to
market partners as described below in SALES AND
MARKETING . Our consumer products and services provide an
overall safe consumer experience on the internet or mobile
networks. Our corporate products and services include our small
and mid-market business products and services as well as our
enterprise products and services. For financial information
about the amount of net revenue contributed by product group,
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customer category and key components of net revenue, See
Item 7 Managements Discussion and Analysis
of Financial Condition and Results of Operations.
Geographic
Theaters
We divide our markets into five regional theaters:
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North America;
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Europe, Middle East and Africa (EMEA);
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Asia-Pacific;
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Japan; and
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Latin America.
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Each geographic theater is supported by both corporate resources
and local sales and marketing resources. We develop products and
services specific to customer groups as well as geographic
location, including internationalization and localization for
some of our offerings, theater price lists and specific routes
to market. For financial information about our foreign and
domestic (segment) operations, including net revenue, operating
income and total assets by geographic area, see Note 17 to
our consolidated financial statements included elsewhere in this
report. For information about risks associated with our foreign
operations, See Item 1A, Risk Factors.
Product
Lines
Our major product lines are system security, network security
and vulnerability and risk management. We manage our products
under business units that enable us to be entrepreneurial and
responsive within a specific market, moving quickly to seize
emerging opportunities and fostering focus and familiarity
within a particular market and its customers.
We apply business discipline and a pragmatic approach to
security that is based on four principles of security risk
management: (i) identify and prioritize assets,
(ii) determine acceptable risk, (iii) protect against
threats and (iv) enforce and measure compliance. We
incorporate some or all of these principles into our solutions.
Our solutions protect systems and networks by blocking immediate
threats while proactively providing protection from future
threats. We also provide software to manage and enforce security
policies for organizations of any size. Finally, we incorporate
McAfee Avert Labs, Expert Services, Foundstone services and
McAfee technical support to ensure a solution is actively
meeting our customers needs. These integrated solutions
help our customers solve problems, enhance security and reduce
costs.
We have designed a strategy that focuses on the following
business objectives:
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To extend our leadership position in corporate and consumer
endpoint security;
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To establish and extend leadership in network security;
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To interlock our endpoint solutions with our network
solutions; and
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To pursue new solution opportunities that build upon our
multi-platform strategy of PCs, internet and mobile security.
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McAfee ePolicy Orchestrator, the unified security management
platform that links our protection and vulnerability and risk
management capabilities, provides our customers with centralized
policy management, a common endpoint agent, efficient
deployment, actionable reporting, and administration processes.
The protection and vulnerability and risk management
capabilities of the McAfee Total Protection solutions and other
key enterprise and midmarket solutions are integrated with
McAfee ePolicy Orchestrator to help customers increase
operational efficiencies, achieve a more effective defense
against threats along, and optimize compliance. For consumers,
we offer McAfee Security Center, an easy-to-use graphical
interface with a real-time external security alert system that
assesses, informs, and warns consumers about their PCs
security vulnerabilities and then provides recommendations so
they can act quickly to secure their computers.
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System
Security Offerings
Our system security portfolio includes endpoint protection, data
protection, and mobile security protection. Endpoint protection
encompasses security solutions for both consumer and corporate
computer systems, including servers, desktop and laptop
computers, handheld voice and data phones, and other devices
that are connected to corporate systems and networks and home
PCs. McAfee data protection solutions use strong encryption to
safeguard vital information residing on various devices. Our
data loss prevention technology prevents malicious or
unintentional data loss that occurs through unauthorized
transmission or through theft or loss of devices that contain
sensitive information. Our endpoint protection and data
protection offerings include anti-virus, anti-spyware and
anti-spam, desktop firewall, host intrusion prevention, web
security, device control, and endpoint encryption products. The
majority of our net revenue has historically been derived from
the system security products now represented in McAfee Total
Protection solutions.
McAfee mobile security solutions proactively protect mobile
operators and their users by safeguarding mobile terminals,
applications, and content. Our mobile security offerings limit
the spread of mobile malware, inappropriate content, and
unsolicited messaging. They reduce negative brand impact,
recovery costs, customer service issues, and revenue disruption
that may result from mobile exploits while enabling value-added
operator strategies such as mobile payments, location-based
services and mobile advertising. Our approach helps mobile
network operators assess global and local risks, protect their
network and devices, and recover from attacks to their
environment.
Network
Security Offerings
Products in this area apply to corporate network boundaries and
provide the same type of security measures that endpoint
protection provides for servers, laptops, and other devices.
Network protection encompasses firewall, intrusion detection and
prevention, web, email, and data loss protection security
appliances. Network security appliances provide policy
enforcement and threat detection and prevention across network
boundaries. Email protection includes spam filtering, virus,
spyware and worm protection, and content encryption for email
traffic. Web protection products block malicious websites and
content at the network gateway, and data loss protection
discovers, detects, and blocks the loss of confidential and
restricted data.
Our network security portfolio also includes McAfee SiteAdvisor
and McAfee SECURE web security products. McAfee
SiteAdvisors innovative technology provides color-coded
safety ratings for websites accessed through a browser or
through links in emails and instant messages. It helps protect
internet users from a broad range of security threats, including
spyware and other malicious downloads, spam, and identity theft
scams. SiteAdvisor also provides customers a search tool bar
that eliminates red-rated sites on search engine results for
those searches initiated from the toolbar search box. The basic
version of SiteAdvisor is currently free. SiteAdvisor is
included as a feature in each of our consumer product suites
worldwide. SiteAdvisor Plus contains additional premium features
and is sold to home users.
The McAfee SECURE standard is an aggregate of industry best
practices (separate from the Payment Card Industry Data Security
Standard) designed to provide a level of security that an online
merchant can reasonably achieve to help provide consumers with
better protection when interacting with websites and shopping
online. Merchants who comply with the McAfee SECURE standard can
promote their certification by publicly displaying the McAfee
SECURE trustmark. When consumers see this trustmark, they feel
more secure when they shop online. Merchants displaying the
McAfee SECURE trustmark benefit by gaining consumer confidence.
Vulnerability
and Risk Management Offerings
Our vulnerability and risk management offerings identify and
resolve security policy and regulatory issues in a measurable
and sustainable manner. Our vulnerability and risk management
portfolio offerings help companies meet security compliance
objectives across their entire organization from
identification of security risks and enforcement of security
policies to compliance audits for industry and government
security regulations. Our NAC solution supports internal
security policies by preventing noncompliant personal computers
from connecting to the internal network. McAfee Vulnerability
Manager assesses and prioritizes risks from vulnerabilities and
threats and can be integrated with McAfee Risk and Compliance
Manager, McAfee Policy Auditor, and McAfee Remediation
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Manager to provide advanced risk mitigation, which furthers
regulatory compliance. DLP capabilities, security policy
compliance, and automated vulnerability remediation (for
example, patch management) are also part of our vulnerability
and risk management products and services. DLP represents an
exciting new technology that addresses a high-visibility problem
that concerns many companies. The combination of our data
protection solutions with the encryption technology we acquired
through our acquisition of SafeBoot Holding B.V. in November
2007 creates a leading data protection solution. Our solutions
help customers secure their data whether it at rest, in use or
in motion.
Support
and Services
Our technical support provides our customers continuous
comprehensive coverage through online, telephone-based, and
on-site
technical support services and proactive protection for all of
our product offerings. These extend the value of their security
investment. At the beginning of 2008 we enhanced our corporate
support offerings Gold, Gold Select, Platinum and
Platinum Select to align our core capabilities
providing tailored levels of support for small businesses to the
largest multi-nationals and government departments.
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Our core support capabilities are standard with all corporate
support offerings and include a suite of tools that provide
preventive, responsive, and analytical resources to our
customers. Our customers benefit from daily malware protection
updates, proactive alerting and product upgrades, an online
product evaluation lab, automated diagnostic tools, and a
state-of-the-art knowledgebase backed up by rapid access to our
support experts around the clock.
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Our premium support offerings (Gold Select, Platinum and
Platinum Select) deliver expert resources that offer flexible
levels of enhanced support coverage specialist
support for escalated technical assistance, personalized
management through support account managers, dedicated coverage
from assigned technical experts, and onsite support through a
security specialist co-located at the customers site.
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In 2008, we also extended our
on-site
resource options through: (i) our Resident Support Account
Manager offering, which provides a dedicated onsite expert for
planning assistance, operational advice, strategic account
management, and direct intercession with McAfee teams; and
(ii) our Resident Malware Researcher offering that provides
an on-call or co-located researcher to investigate the business
impact of malware threats and write exclusive signatures to
protect the customers environment.
Our professional services consultants help customers to improve
the time-to-value of their security investment by helping speed
up deployment, optimize configurations to our customers
specific needs, and provide guidance on areas of risk. Customers
can also choose from a comprehensive array of online and
classroom training courses to maximize the value of their
products.
Our Foundstone Professional Services includes (i) threat
modeling to identify potential software security problems,
(ii) security assessments and (iii) education.
Foundstone Professional Services assists clients in the early
assessment, design, and enhancement of their security and risk
architectures. The Foundstone Security Practice advises
government and commercial organizations on the most effective
countermeasures required to meet business and legislative
policies for security and privacy. Foundstone Education provides
a range of classroom-based training and education courses.
Research
and Development, Investments and Acquisitions
The market for computer software has low barriers to entry, is
subject to rapid technological change and is highly competitive
with respect to timely product introductions. We believe that
our ability to maintain our competitiveness depends in large
part upon our ability to develop, acquire, integrate, and launch
new products and solutions, and to enhance existing offerings.
Our research and development efforts support all of our
offerings. They refine our security risk management processes,
improve our product design and usability, and keep us at the
forefront of threat research. Most importantly, our research
helps us better protect our customers.
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In addition to developing new offerings and solutions, our
development staff also focuses on upgrades and updates to
existing products and on enhancement and integration of acquired
technology. Future upgrades and updates may include additional
functionality to respond to market needs, while also assuring
compatibility with new systems and technologies. We are
committed to researching malicious code and vulnerability
through our McAfee Avert Labs organization. McAfee Avert Labs
conducts research in the areas of host intrusion prevention,
network intrusion prevention, wireless intrusion prevention,
malicious code defense, security policy and management,
high-performance assurance and forensics and threats, attacks,
vulnerabilities and architectures. In 2008, McAfee Avert Labs
launched our new Artemis Technology offerings.
For 2008, 2007 and 2006, we expensed $252.0 million,
$217.9 million, $193.4 million, respectively, on
research and development, excluding in-process research and
development. Technical leadership is essential to our success
and we expect to continue devoting substantial resources to
research and development.
As part of our growth strategy, we have also made and expect to
continue to make acquisitions of, or investments in,
complementary businesses, products and technologies. See
Note 3 to our consolidated financial statements included
elsewhere in this report for more information about our recent
business combination activities.
SALES AND
MARKETING
We market our brand, business solutions and offerings directly
to commercial and government customers through traditional
demand generation programs and events as well as indirectly
through resellers and distributors. Our two largest
distributors, Ingram Micro Inc. and Tech Data Corp., together
accounted for 27% of our net revenue in 2008. See Note 17
to our consolidated financial statements included elsewhere in
this report for more information about the percentage of net
revenue from sales to each of these distributors. We market our
consumer solutions and offerings to individual consumers
directly through online distribution methods and indirectly
through traditional distribution channels, such as retail and
original equipment manufacturers (OEMs). Our
consumer business is responsible for online distribution of our
products sold to individual consumers over the internet,
including products distributed by our online partners, and for
licensing of technology to strategic distribution partners for
sale to individual consumers, with certain exceptions.
Sales
in North America
Our North American sales force is organized by product offerings
and customer type. A subset of our sales representatives focus
on renewing the McAfee systems security installed base, while a
larger group focuses on our full offering of security risk
management products and upgrades. Our customers are served
primarily through our reseller partners with a channel marketing
organization assisting with lead generation, and a channel
support team responsible for partner training and support.
Although members of our sales team are a necessary part of the
sales process, the majority of our ordering and fulfillment for
our commercial customers is handled by our distribution partners.
Sales
Outside of North America
Outside of North America, we have sales and support operations
in EMEA, Japan, Asia-Pacific, and Latin America. In 2008, 2007,
and 2006, net revenue outside of North America accounted for
47%, 48% and 45% of our net revenue, respectively. Within our
global geographies, our sales resources are organized by
country, and the larger markets may further allocate their sales
resources by product line
and/or
customer types. As in North America, the majority of our
ordering and fulfillment is handled by our distribution partners.
Resellers
and Distributors
Substantially, all of our sales come through our network of
resellers, distributors and retailers. The McAfee
SecurityAlliance Global Partner Program is a global sales and
marketing enablement program designed to meet the needs of our
reseller partners in supporting end-user customers. We currently
utilize corporate resellers, including CDW Corporation,
Computacenter PLC, Dell, Inc., Dimension Data, Insight
Enterprises, Inc., Softmart, Inc.,
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Software House International, Softchoice Corporation and others,
as well as network and systems integrators who offer our
solutions to corporate, small and medium-business and government
customers.
Independent software distributors who currently supply our
products include Ingram Micro Inc., Tech Data Corporation,
Avnet, Inc. and Alternative Technology, Inc. These distributors
supply our products primarily to large retailers, value-added
resellers (VARs), mail order and telemarketing
companies. We also sell our retail packaged products through
several of the larger computer and software retailers as well as
broader-based retailers, including Frys, Office Depot,
Wal-Mart, Costco and Yamada. McAfee sales and marketing teams
work closely with our major reseller and distributor accounts to
manage demand generating activities, training, order flow and
affiliate relationships.
Our top ten distributors represented 35% to 55% of net sales
during 2008, 2007 and 2006. Our agreements with our distributors
are not exclusive and may be terminated by either party without
cause. Terminated distributors may not continue to sell our
products. If one of our significant distributors terminated its
relationship with us, we could experience a significant
disruption in the distribution of our products and a decline in
our net revenue.
We use a sell-through revenue recognition model for
distributors, under which we recognize revenue at the time our
distributors sell the products to their customers. Under this
model, our distributors are permitted to purchase software
licenses from us at the same time they fill customer orders and
to pay for hardware and retail products only when they sell
these products to their customers. In addition, prior to selling
our products to their customers, our distributors are permitted
rights of return subject to varying limitations. After a
distributor sells a product to its customer, the distributor
generally has no right to return the product to us, unless we
approve the return from the final customer to the distributor.
Strategic
Channel Partners
Our channel efforts include strategic alliances with
complementary manufacturers to expand our reach and scale. OEMs
and internet service providers (ISPs) license our
products for resale to end users or inclusion with their
products. Strategic channel partners include Acer, Inc., AOL,
AT&T, Cable and Wireless PLC, Comcast Corporation, Dell,
Inc., Hewlett Packard Company, Lenovo Group Limited, Sony
Corporation, Telecom Italia S.p.A., Toshiba, and Telefonica
S.A., among others. Depending on the arrangement, OEMs may sell
our software bundled with the PC or related services,
pre-install our software and allow us to complete the sale, or
sublicense a single version of our products to end users who
must register the product with us in order to receive updates.
Strategic
Alliances
From time to time, we enter into strategic alliances with third
parties to support our future growth plans. These relationships
may include joint technology development and integration,
research cooperation, co-marketing activities
and/or
sell-through arrangements. For example, our Security Innovation
Alliance program is a technology partnering program that is
designed to accelerate the development of interoperable security
products that can be integrated in complex customer
environments. Members of the alliance can develop products that
will integrate with ePolicy Orchestrator and market them as
McAfee-compatible. Our customers benefit from faster and less
costly deployment. As part of our NTT DoCoMo alliance in Japan,
we have jointly developed technology to provide integrated
malware protection against threats to mobile handsets.
Marketing
Activities
Our marketing approach involves a collaborative planning process
to develop global marketing campaigns aligned to corporate goals
and objectives. Global marketing campaigns drive cross-sell,
up-sell and net new customer acquisition activity in support of
our business model across our three major product lines, five
regional theaters and three customer types. One of the principal
means of marketing our brand, products and services is online
via the internet. Our web site, www.mcafee.com, supports
marketing activities to our key customers and prospects,
including home and home office users, small and medium-sized
businesses, large enterprises and our partner community. Our web
site contains various marketing materials and information about
our products. Our customers can download and purchase some
products directly online. We also promote the McAfee brand, our
products and services through marketing activities in trade
publications, direct mail campaigns, television,
10
billboards, and strategic arrangements, as well as, online
through key word and search-based advertising. We attend trade
shows and industry conferences, publish periodic channel and
customer newsletters, and generate sales leads through email
marketing campaigns.
We also market our products through the use of rebate programs
and marketing development funds. Within most countries, we
typically offer incentive rebates to channel partners based on
sales and promotional rebates to end users. We use channel
marketing to market, promote, train and provide incentives to
our resellers and distributors, and to promote our offerings to
their end-user customers. We offer our resellers and
distributors technical and sales training classes, online
training resources, and sales and marketing demand generation
assistance kits. We also provide specific cooperative marketing
programs for end-user seminars, catalogs, demand creation
programs, sales events, and other items.
COMPETITION
The markets for our products are intensely competitive and are
subject to rapid changes in technology. We expect both product
and pricing competitive pressures to increase in the near-term
as the industry continues to consolidate and our competitors
grow more rapidly through acquisitions. Many of our competitors
have longer operating histories, greater brand recognition,
stronger relationships with strategic channel partners, larger
technical staffs, established relationships with hardware
vendors
and/or
greater financial, technical and marketing resources, and other
advantages compared to us. Increasingly, security protection is
offered by third parties at significant discounts to our prices
or, in some cases is bundled for free. Potential customers may
perceive our products as unnecessary if similar functionality is
available for free. If our competitors gain market share in the
markets for our products, our sales could grow more slowly or
decline. Competitive pressures could also lead to increases in
competition-driven expenses such as advertising expenses,
product rebates and marketing funds provided to our channel
partners. See Risk Factors We face intense
competition and we expect competitive pressures to increase in
the future. This competition could have a negative impact on our
business and financial results.
We believe that the principal competitive factors affecting the
market for our corporate products include, but are not limited
to, the following: performance; functionality and features;
brand name recognition; breadth of product group; integration of
products; time to market; price; the effectiveness of
distributor promotion programs; sales and marketing efforts;
quality of customer support and financial stability. We believe
that we generally compete favorably against our competitors in
these areas. However, lack of name recognition may be a concern
with potential new customers. Competitor solutions may be more
attractive than ours to the extent they are integrated with a
larger product solution (such as outsourced email). In addition,
our pricing may be less competitive, particularly compared to
smaller competitors trying to enter the market.
Our principal competitors in the corporate market are set forth
below:
System Security Market. Our principal
competitors in this market are Symantec Corp., Trend Micro,
Inc., Microsoft Corporation and Sophos Plc.
Network Security Market. Our principal
competitors in the network protection market are Cisco Systems,
Inc., IBM, Juniper Networks, Inc., Symantec Corp., Blue Coat
Systems, Inc., Websense, Inc., Microsoft Corporation, Trend
Micro, Inc., Barracuda Networks Inc., Check Point Software
Technologies Ltd., Sourcefire, Inc., 3Com Corporation, EMC
Corporation and various search engine providers, principally
Google, Inc. and Yahoo!, Inc.
Vulnerability and Risk Management Security
Market. Our principal competitors in the
vulnerability and risk management market are IBM, Qualys and
nCircle.
Other Competitors. In addition to competition
from large technology companies such as IBM, Novell, Inc. and
Microsoft Corporation, we also face competition from smaller
companies and shareware authors that may develop competing
products.
In the consumer market, we believe that the principal
competitive factors include, but are not limited to, the
following: brand name recognition and reputation; convenience of
purchase; price; breadth of functionality and
11
features; ease of use; and frequency of upgrades and updates.
Our principal competitors are Symantec Corp. with their Norton
product line, Microsoft Corporation, Kaspersky, AVG, Trend
Micro, Inc., F-Secure Corporation and AhnLab Inc. We believe
that we generally compete effectively in each of these areas.
However, if it is more convenient for consumers to use a
competitive product (for example, when they purchase computers
that are prebundled with a competitors product), we could
be at a competitive disadvantage. Our prices are also a
competitive disadvantage compared to free solutions or when
competitors offer limited-time promotions. For example,
Microsoft recently announced that in 2009 it will begin offering
a free anti-malware product in emerging markets. There are also
several smaller regional security companies that we compete
against primarily in the EMEA and Asia-Pacific regions.
OUR
PROPRIETARY TECHNOLOGY
Our success depends to a great extent on our 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, the steps
taken by us to protect our proprietary software technology may
be inadequate to deter misuse or theft of this technology.
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 with
our products that are distributed in a box. Although this is
common practice for software companies that sell off-the-shelf
products to have licenses that are not signed by the licensee,
certain 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. Furthermore, we are aware that a
significant number of users of our anti-virus products have not
paid any license or support fees to us. See Risk
Factors We face numerous risks relating to the
enforceability of our intellectual property rights and our use
of third-party intellectual property, many of which could result
in the loss of our intellectual property rights as well as other
material adverse impacts on our business and financial results
and condition below.
SEASONALITY
As is typical for many large software companies, our business is
seasonal. Software license and maintenance orders are generally
higher in our third and fourth quarters and lower in our first
and second quarters. A significant decline in license and
maintenance orders is typical in the first quarter of our year
as compared to license and maintenance orders in the fourth
quarter of the prior year. In addition, we generally receive a
higher volume of software license and maintenance orders in the
last month of a quarter, with orders concentrated in the later
part of that month. We believe that this seasonality primarily
reflects customer spending patterns and budget cycles, as well
as the impact of compensation incentive plans for our sales
personnel. Revenue generally reflects similar seasonal patterns
but to a lesser extent than orders because revenue is not
recognized until an order is shipped or services are performed
and other revenue recognition criteria are met and a large
portion of our revenues are recognized ratably over the
subscription period.
OUR
EMPLOYEES
As of December 31, 2008, we employed approximately 5,600
individuals worldwide, with approximately 50% in the
U.S. Less than 2% of our employees are represented by a
labor union or work council. Competition for qualified
management and technical personnel is intense in the software
industry.
COMPANY
INFORMATION
We were incorporated in the state of Delaware in 1992 under the
name of McAfee Associates, Inc. In conjunction with our 1997
merger with Network General Corporation, we changed our name to
Networks Associates, Inc. In 2004, we changed our name to
McAfee, Inc. and began trading on the New York Stock Exchange
under the symbol MFE. 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.
12
ADDITIONAL
INFORMATION
We file registration statements, periodic and current reports,
proxy statements, and other materials with the Securities and
Exchange Commission (SEC). You may read and copy any
materials we file with the SEC at the SECs Office of
Public Reference at 100 F Street, NE,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC,
including our filings. We make available, free of charge,
through the investor relations section of our web site
(investor.mcafee.com), 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. Except as
expressly set forth in this
Form 10-K
annual report, the contents of our web site are not incorporated
into, or otherwise to be regarded as part of this report.
Investing in our common stock involves a high degree of risk.
Some but not all of the risks we face are described below. Any
of the following risks could materially adversely affect our
business, operating results, financial condition and cash flows
and reduce the value of an investment in our common stock.
Adverse
conditions in the national and global economies and financial
markets may adversely affect our business and financial
results.
National and global economies and financial markets have
experienced a severe downturn stemming from a multitude of
factors, including adverse credit conditions impacted by the
sub-prime mortgage crisis, slower or receding economic activity,
concerns about inflation and deflation, fluctuating energy
costs, decreased consumer confidence, reduced corporate profits
and capital spending, adverse business conditions and liquidity
concerns and other factors. Economic growth in the U.S. and
many other countries slowed or receded in the fourth quarter of
2008. The severity or length of time these economic and
financial market conditions may persist is unknown. During
challenging economic times and in tight credit markets, many
customers may delay or reduce technology purchases. This could
result in reductions in sales of our products, longer sales
cycles, difficulties in collection of accounts receivable,
slower adoption of new technologies and increased price
competition. In addition, weakness in the end-user market could
negatively affect the cash flow of our distributors and
resellers who could, in turn, delay paying their obligations to
us. This would increase our credit risk exposure and cause
delays in our recognition of revenue on future sales to these
customers. Specific economic trends, such as declines in the
demand for PCs, servers, and other computing devices, or
softness in corporate information technology spending, could
have a more direct impact on our business. Any of these events
would likely harm our business, operating results, cash flows
and financial condition.
We
face intense competition and we expect competitive pressures to
increase in the future. This competition could have a negative
impact on our business and financial results.
The markets for our products are intensely competitive and we
expect both product and pricing competition to increase. If our
competitors gain market share in the markets for our products,
our sales could grow more slowly or decline. Competitive
pressures could also lead to increases in expenses such as
advertising expenses, product rebates, product placement fees,
and marketing funds provided to our channel partners.
Advantages of larger competitors. Our
principal competitors in each of our product categories are
described in Business Competition
above. Our competitors include some large enterprises such
as Microsoft, Cisco Systems, Symantec, IBM, Google and Trend
Micro. Large vendors of hardware or operating system software
increasingly incorporate system and network protection
functionality into their products, and enhance that
functionality either through internal development or through
strategic alliances or acquisitions. For example, Cisco recently
announced an agreement with Trend Micro to embed internet
security software on Ciscos Linksys wireless routers. Some
of our competitors have longer operating histories, more
extensive international operations, greater name recognition,
larger technical staffs, established relationships with more
distributors and hardware
13
vendors, significantly greater product development and
acquisition budgets,
and/or
greater financial, technical and marketing resources than we do.
Consumer business competition. More
than 40% of our revenue comes from our consumer business. Our
growth of this business relies on direct sales and sales through
relationships with ISPs such as AOL, Cox and Comcast, and PC
OEMs, such as Acer, Dell, Sony Computer and Toshiba. As
competition in this market increases, we have and will continue
to experience pricing pressures that could have a negative
effect on our ability to sustain our revenue and market share
growth. As our consumer business becomes increasingly more
dependent upon the partner model, our retail businesses may
continue to decline. Further, as penetration of the consumer
anti-virus market through the ISP model increases, we expect
that pricing and competitive pressures in this market will
become even more acute.
Low-priced or free competitive
products. Security protection is increasingly
being offered by third parties at significant discounts to our
prices or, in some cases is bundled for free. For example,
Microsoft announced that beginning in 2009 it will offer in
emerging markets a free anti-malware consumer product dubbed
Morro. The widespread inclusion of lower-priced or free 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 unmarketable even if
these incorporated products are inferior or more limited than
our products. It is possible that a major competitor may offer a
free anti-malware enterprise product. The expansion of these
competitive trends could have a significant negative impact on
our sales and financial results.
We also face competition from numerous smaller companies,
shareware and freeware authors and open source projects that may
develop competing products, as well as from future competitors,
currently unknown to us, who may enter the markets because the
barriers to entry are fairly low. Smaller
and/or newer
companies often compete aggressively on price.
We
face product development risks due to rapid changes in our
industry. Failure to keep pace with these changes could harm our
business and financial results.
The markets for our products are characterized by rapid
technological developments, continually-evolving industry trends
and standards and ongoing changes in customer requirements. Our
success depends on our ability to timely and effectively keep
pace with these developments.
Keeping pace with industry changes. We
must enhance and expand our product offerings to reflect
industry trends, new technologies and new operating environments
as they become increasingly important to customer deployments.
For example, we must expand our offerings for virtual computer
environments; we must continue to expand our security
technologies for mobile environments to support a broader range
of mobile devices such as mobile phones and personal digital
assistants; we must develop products that are compatible with
new or otherwise emerging operating systems, while remaining
compatible with popular operating systems such as Linux,
Suns Solaris, UNIX, Macintosh OS_X, and Windows XP, NT and
Vista; and we must continue to expand our business models beyond
traditional software licensing and subscription models,
specifically, software-as-a-service is becoming an increasingly
important method and business model for the delivery of
applications. We must also continuously work to ensure that our
products meet changing industry certifications and standards.
Failure to keep pace with any changes that are important to our
customers could cause us to lose customers and could have a
negative impact on our business and financial results.
Impact of product development delays or competitive
announcements. Our ability to adapt to
changes can be hampered by product development delays. 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 adversely impact market
acceptance. We may also experience delays or unforeseen costs
associated with integrating products we acquire with products we
develop because we may be unfamiliar with errors or
compatibility issues of products we did not develop ourselves.
We may choose not to deliver a partially-developed product,
thereby increasing our development costs without a corresponding
benefit. This could negatively impact our business.
14
If
our products do not work properly, we could experience negative
publicity, damage to our reputation, legal liability, declining
sales and increased expenses.
Failure to protect against security
breaches. Because of the complexity of our
products, we have in the past found errors in versions of our
products that were not detected before first introduced, or in
new versions or enhancements, and we may find such errors in the
future. Because of the complexity of the environments in which
our products operate, our products may have errors or defects
that customers identify after deployment. Failures, errors or
defects in our products could result in security breaches or
compliance violations for our customers, disruption or damage to
their networks or other negative consequences and could result
in negative publicity, damage to our reputation, declining
sales, increased expenses and customer relation issues. Such
failures could also result in product liability damage claims
against us by our customers, even though our license agreements
with our customers typically contain provisions designed to
limit our exposure to potential product liability claims.
Furthermore, the correction of defects could divert the
attention of engineering personnel from our product development
efforts. A major security breach at one of our customers that is
attributable to or not preventable by our products could be very
damaging to our business. Any 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.
False alarms. Our system protection
software products have in the past, and these products and our
intrusion protection products may at times in the future,
falsely detect viruses or computer threats that do not actually
exist. These false alarms, while typical in the security
industry, would likely 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.
Our email and web solutions (anti-spam, anti-spyware and safe
search products) may falsely identify emails, programs or web
sites as unwanted spam, potentially unwanted
programs or unsafe. They may also fail to
properly identify unwanted emails, programs or unsafe web sites,
particularly because spam emails, spyware or malware are often
designed to circumvent anti-spam or spyware products and to
incorrectly identify legitimate web sites as unsafe. Parties
whose emails or programs are incorrectly blocked by our
products, or whose web sites are incorrectly identified as
unsafe or as utilizing phishing techniques, may seek redress
against us for labeling them as spammers or unsafe
and/or for
interfering with their businesses. In addition, false
identification of emails or programs as unwanted spam or
potentially unwanted programs may discourage potential customers
from using or continuing to use these products.
Customer misuse of products. Our
products may also not work properly if they are misused or
abused by customers or non-customer third parties who obtain
access and use of our products. These situations may arise where
an organization uses our products in a manner that impacts their
end users or employees privacy or where our products
are misappropriated to censor private access to the internet.
Any of these situations could impact the perceived reliability
of our products, result in negative press coverage, negatively
affect our reputation and adversely impact our financial results.
We
face risks associated with past and future
acquisitions.
We may buy or make investments in complementary or competitive
companies, products and technologies. We may not realize the
anticipated benefits from these acquisitions. Future
acquisitions could result in significant acquisition-related
charges and dilution to our stockholders. In addition, we face a
number of risks relating to our acquisitions, including the
following, any of which could harm our ability to achieve the
anticipated benefits of our past or future acquisitions.
Integration. Integration of an acquired
company or technology is a complex, time consuming and expensive
process. The successful integration of an acquisition requires,
among other things, that we integrate and retain key management,
sales, research and development and other personnel; integrate
the acquired products into our product offerings from both an
engineering and sales and marketing perspective; integrate and
support pre-existing suppliers, distribution and customer
relationships; coordinate research and development efforts; and
consolidate duplicate facilities and functions and integrate
back-office accounting, order processing and support functions.
15
The geographic distance between the companies, the complexity of
the technologies and operations being integrated and the
disparate corporate cultures being combined may increase the
difficulties of integrating an acquired company or technology.
Managements focus on the integration of operations may
distract attention from our day-to-day business and may disrupt
key research and development, marketing or sales efforts. In
addition, it is common in the technology industry for aggressive
competitors to attract customers and recruit key employees away
from companies during the integration phase of an acquisition.
If integration of our acquired businesses or assets is not
successful, we may experience adverse financial or competitive
effects.
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. Acquisitions of privately held
and/or
non-US companies are particularly challenging because their
prior practices in these areas may not meet the requirements of
the Sarbanes-Oxley Act and public accounting standards.
Use of cash and securities. Our
available cash and securities may be used to acquire or invest
in companies or products. Moreover, when 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. To the extent we continue to make acquisitions, we
will require additional cash
and/or
shares of our common stock as payment. The use of securities
would cause dilution for our existing stockholders.
Key employees from acquired companies may be difficult to
retain and assimilate. The success of many
acquisitions depends to a great extent on our ability to retain
key employees from the acquired company. This can be
challenging, particularly in the highly competitive market for
technical personnel. Retaining key executives for the long-term
can also be difficult due to other opportunities available to
them. It could be difficult, time consuming and expensive to
replace any key management members or other critical personnel
that do not accept employment with McAfee following the
acquisition. In addition to retaining key employees, we must
integrate them into our company, which can 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
some unique skills and the departure of existing employees
and/or
customers.
Accounting charges. Acquisitions may
result in substantial accounting charges for restructuring and
other expenses, write-offs of in-process research and
development, amortization of intangible assets and stock-based
compensation expense, any of which could materially adversely
affect our operating results.
Potential goodwill impairment. We
perform an impairment analysis on our goodwill balances on an
annual basis or whenever events occur that may indicate
impairment. If the fair value of each of our reporting units is
less than the carrying amount of the reporting unit, then we
must write down goodwill to its estimated fair value. We cannot
be certain that a future downturn in our business, changes in
market conditions or a long-term decline in the quoted market
price of our stock will not result in an impairment of goodwill
and the recognition of resulting expenses in future periods,
which could adversely affect our results of operations for those
periods.
Establishment of VSOE. Following an
acquisition, we may be required to defer the recognition of
revenue that we receive from the sale of products that we
acquired, or from the sale of a bundle of products that includes
products that we acquired, if we have not established vendor
specific objective evidence (VSOE) of the separate
value of the acquired product. A delay in the recognition of
revenue from sales of acquired products or bundles that include
acquired products may cause fluctuations in our quarterly
financial results and may adversely affect our operating
margins. Similarly, companies that we acquire may operate with
different cost and margin structures, which could further cause
fluctuations in our operating results and adversely affect our
operating margins. If our quarterly financial results or our
predictions of future financial results fail to meet the
expectations of securities analysts and investors, our stock
price could be negatively affected.
Our
international operations involve risks that could divert the
time and attention of management, increase our expenses and
otherwise adversely impact our business and financial
results.
Our international operations increase our risks in several
aspects of our business, including but not limited to risks
relating to revenue, legal and compliance, currency exchange and
interest rate, and general operating. Net
16
revenue in our operating regions outside of North America
represented 47% of total net revenue in 2008 in comparison to
48% in 2007 and 45% in 2006. The risks associated with our
continued focus on international operations could adversely
affect our business and financial results.
Revenue risks. Revenue risks include,
among others, longer payment cycles, greater difficulty in
collecting accounts receivable, tariffs and other trade
barriers, seasonality, currency fluctuations, and the high
incidence of software piracy and fraud in some countries. The
primary product development risk to our revenue is our ability
to deliver new products in a timely manner and to successfully
localize our products for a significant number of international
markets in different languages.
Legal and compliance risks. We face a
variety of legal and compliance risks. For example,
international operations pose a compliance risk with the Foreign
Corrupt Practices Act (FCPA). Some countries have a
reputation for businesses to engage in prohibited practices with
government officials to consummate transactions. Although we
have implemented training along with policies and procedures
designed to ensure compliance with this and similar laws, there
can be no assurance that all employees and third-party
intermediaries will comply with anti-corruption laws. Any such
violation could have a material adverse effect on our business.
Another legal risk is that some of our computer security
solutions incorporate encryption technology that is governed by
U.S. export regulations. The cost of compliance with those
regulations can affect our ability to sell certain products in
certain markets and could have a material adverse effect on our
international revenue and expense. If we, or our resellers, fail
to comply with applicable laws and regulations, we may become
subject to penalties and fines or restrictions that may
adversely affect our business.
Other legal risks include international labor laws and our
relationship with our employees and regional work councils;
compliance with more stringent consumer protection and privacy
laws; and unexpected changes in regulatory requirements. Our
principal tax risks are potentially adverse tax consequences due
to foreign value-added taxes, restrictions on the repatriation
of earnings and changes in tax laws.
Currency exchange and interest rate
risks. A significant portion of our
transactions outside of the U.S. are denominated in foreign
currencies. We translate revenues and costs from these
transactions into U.S. dollars for reporting purposes. As a
result, our future operating results will continue to be subject
to fluctuations in foreign currency rates. This combined with
economic instability, such as higher interest rates in the
U.S. and inflation, could reduce our customers
ability to obtain financing for software products, or could make
our products more expensive or could increase our costs of doing
business in certain countries. During 2008 and 2007, we recorded
net foreign currency transaction gains of $6.4 million and
$1.0 million, respectively, in our consolidated statements
of income and comprehensive income and a net foreign currency
transaction loss of $8.5 million in 2006. We may be
positively or negatively affected by fluctuations in foreign
currency rates in the future, especially if international sales
continue to grow as a percentage of our total sales.
Additionally, fluctuations in currency exchange rates will
impact our deferred revenue balance, which is a key financial
metric at each period end.
General operating risks. More general
risks of international business operations include the increased
costs of establishing, managing and coordinating the activities
of geographically dispersed and culturally diverse operations
(particularly sales and support and shared service centers)
located on multiple continents in a wide range of time zones.
We
face a number of risks related to our product sales through
distributors and other third parties.
We sell substantially all of our products through third-party
intermediaries such as distributors, value-added resellers, PC
OEMs, ISPs and other distribution channel partners (referred to
collectively as distributors). Reliance on third parties for
distribution exposes us to a variety of risks, some of which are
described below, that could have a material adverse impact on
our business and financial results.
Limited control over timing of product
delivery. We have limited control over the
timing of the delivery of our products to customers by
third-party distributors. We generally do not require our
resellers and OEM partners to meet minimum sales volumes, so
their sales may vary significantly from period to period. For
example, the volume of our products shipped by our OEM partners
depends on the volume of computers shipped by the PC OEMs, which
17
is outside of our control. These factors can make it difficult
for us to forecast our revenue accurately and they also can
cause our revenue to fluctuate unpredictably.
Competitive aspects of distributor
relationships. Our distributors may sell
other vendors products that compete with our products.
Although we offer our distributors incentives to focus on sales
of our products, they often give greater priority to products of
our competitors, for a variety of reasons. In order to maximize
sales of our products rather than those of our competitors, we
must effectively support these partners with, among other
things, appropriate financial incentives to encourage them to
invest in sales tools, such as online sales and technical
training and product collateral needed to support their
customers and prospects. If we do not properly support our
partners, they may focus more on our competitors products,
and their sales of our products would decline.
Our PC OEM partners are also in a position to exert competitive
pricing pressure. Competition for OEMs business continues
to increase, and it gives the OEMs leverage to demand lower
product prices from us in order to secure their business. Even
if we negotiate what we believe are favorable pricing terms when
we first establish a relationship with an OEM, at the time of
the renewal of the agreement, we may be required to renegotiate
our agreement with them on less favorable terms. Lower net
prices for our products would adversely impact our operating
margins.
Reliance on a small number of
distributors. A significant portion of our
net revenue is attributable to a fairly small number of
distributors. Our top ten distributors represented 38% of our
net revenue in 2008, 39% in 2007 and 47% in 2006. Reliance on a
relatively small number of third parties for a significant
portion of our distribution exposes us to significant risks to
net revenue and net income if our relationship with one or more
of our key distributors is terminated for any reason.
Risk of loss of distributors. We invest
significant time, money and resources to establish and maintain
relationships with our distributors, but we have no assurance
that any particular relationship will continue for any specific
period of time. The agreements we have with our distributors can
generally be terminated by either party without cause with no or
minimal notice or penalties. If any significant distributor
terminates its agreement with us, we could experience a
significant interruption in the distribution of our products and
our revenue could decline. We could also lose the benefit of our
investment of time, money and resources in the distributor
relationship.
Although a distributor can terminate its relationship with us
for any reason, one factor that may lead to termination is a
divergence of our business interests and those of our
distributors and potential conflicts of interest. For example,
our acquisition activity has resulted in the termination of
distributor relationships that no longer fit with the
distributors business priorities. Future acquisition
activity could cause similar termination of, or disruption in,
our distributor relationships, which could adversely impact our
revenue.
Credit risk. Some of our distributors
may experience financial difficulties, which could adversely
impact our collection of accounts receivable. Our allowance for
doubtful accounts was approximately $3.9 million as of
December 31, 2008. We regularly review the collectability
and credit-worthiness of our distributors to determine an
appropriate allowance for doubtful accounts. Our uncollectible
accounts could exceed our current or future allowances, which
could adversely impact our financial results.
We also face legal and compliance risks with respect to our use
of third party intermediaries operating outside the United
States. As described above in Our international
operations involve risks that could divert the time and
attention of management, increase our expenses and otherwise
adversely impact our business and financial results,
any violations by such third party intermediaries of FCPA or
similar laws could have a material adverse effect on our
business.
We
face numerous risks relating to the enforceability of our
intellectual property rights and our use of third-party
intellectual property, many of which could result in the loss of
our intellectual property rights as well as other material
adverse impacts on our business and financial results and
condition.
Limited protection of our intellectual property rights
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 we have taken to
protect our proprietary software may not deter its misuse, theft
or misappropriation. Competitors may independently develop
technologies or products that are
18
substantially equivalent or superior to our products or that
inappropriately incorporate our proprietary technology into
their products. We are aware that a number of users of our
security products have not paid license, technical support, or
subscription fees to us. Certain jurisdictions may not provide
adequate legal infrastructure for effective protection of our
intellectual property rights. Changing legal interpretations of
liability for unauthorized use of our software or lessened
sensitivity by corporate, government or institutional users to
refraining from intellectual property piracy or other
infringements of intellectual property could also harm our
business.
Frequency, expense and risks of intellectual property
litigation in the network and system security
market. Litigation may be necessary to
enforce and protect our trade secrets, patents and other
intellectual property rights. Similarly, we may be required to
defend against claimed infringement by others. For example, as
discussed in Item 3, Legal Proceedings,
we recently settled a patent infringement case that sought to
prevent us from selling certain of our products.
The security technology industry has increasingly been subject
to patent and other intellectual property rights litigation,
particularly from special purpose entities that seek to monetize
their intellectual property rights by asserting claims against
others. As we become a larger and more profitable company, we
can expect this trend to accelerate. For example, as discussed
in Item 3, Legal Proceedings, we recently
settled a patent infringement case that sought to prevent us
from selling certain of our products. We expect this trend to
continue and that in the future we will be required to defend
against this type of litigation. The litigation process is
subject to inherent uncertainties, so we may not prevail in
litigation matters regardless of the merits of our position. In
addition to the expense and distraction associated with
litigation, adverse determinations could cause us to lose our
proprietary rights, prevent us from manufacturing or selling our
products, require us to obtain licenses to patents or other
intellectual property rights that our products are alleged to
infringe (licenses may not be available on reasonable commercial
terms or at all), and subject us to significant liabilities.
If we acquire technology to include in our products from third
parties, our exposure to infringement actions may increase
because we must rely upon these third parties to verify the
origin and ownership of such technology. Similarly, we face
exposure to infringement actions if we hire software engineers
who were previously employed by competitors and those employees
inadvertently or deliberately incorporate proprietary technology
of our competitors into our products despite efforts by our
competitors and us to prevent such infringement.
Litigation may be necessary to enforce and protect our trade
secrets, patents and other intellectual property rights.
Potential risks of using open source
software. Like many other software companies,
we use and distribute open source software in order
to expedite development of new products. Open source software is
generally licensed by its authors or other third parties under
open source licenses, including, for example, the GNU General
Public License. These license terms may be ambiguous, in many
instances have not been interpreted by the courts and could be
interpreted in a manner that results in unanticipated
obligations regarding our products. Depending upon how the open
source software is deployed by our developers, we could be
required to offer our products that use the open source software
for no cost, or make available the source code for modifications
or derivative works. Any of these obligations could have an
adverse impact on our intellectual property rights and revenue
from products incorporating the open source software.
Our use of open source code could also result in us developing
and selling products that infringe third-party intellectual
property rights. It may be difficult for us to accurately
determine the developers of the open source code and whether the
code incorporates proprietary software. We have processes and
controls in place that are designed to address these risks and
concerns, including a review process for screening requests from
our development organizations for the use of open source.
However, we cannot be sure that all open source is submitted for
approval prior to use in our products.
We also have processes and controls in place to review the use
of open source in the products developed by companies that we
acquire. Despite having conducted appropriate due diligence
prior to completing the acquisition, products or technologies
that we acquire may nonetheless include open source software
that was not identified during the initial due diligence. Our
ability to commercialize products or technologies of acquired
companies that
19
incorporate open source software or to otherwise fully realize
the anticipated benefits of any acquisition may be restricted
for the reasons described in the preceding two paragraphs.
Pending
or future litigation could have a material adverse impact on our
results of operation, financial condition and
liquidity.
In addition to intellectual property litigation, from time to
time, we have been, and may be in the future, subject to other
litigation including stockholder derivative actions or actions
brought by current or former employees. If we continue to make
acquisitions in the future, we are more likely to be subject to
acquisition related shareholder derivative actions. Where we can
make a reasonable estimate of the liability relating to pending
litigation and determine that an adverse liability resulting
from such litigation is probable, we record a related liability.
As additional information becomes available, we assess the
potential liability and revise estimates as appropriate.
However, because of the inherent uncertainties relating to
litigation, the amount of our estimates could be wrong. In
addition to the related cost and use of cash, pending or future
litigation could cause the diversion of managements
attention. In this regard, we and a number of our current and
former officers and directors are involved in or the subject of
various legal actions. Managing, defending and indemnity
obligations related to these actions have caused significant
diversion of managements and the board of directors
time and resulted in material expense to us. See Note 18 to
the consolidated financial statements for additional information
with respect to currently pending legal matters.
Our
financial results can fluctuate significantly, making it
difficult for us to accurately estimate operating
results.
Impact of fluctuations. Over the years
our revenue, gross margins and operating results have fluctuated
significantly from quarter to quarter and from year to year, and
we expect this to continue in the future. Thus, our operating
results for prior periods may not be effective predictors of our
future performance. These fluctuations make it difficult for us
to accurately forecast operating results. We try to adjust
expenses based in part on our expectations regarding future
revenue, but in the short term expenses are relatively fixed.
This makes it difficult for us to adjust our expenses in time to
compensate for any unexpected revenue shortfall in a given
period.
Volatility in our quarterly financial results may make it more
difficult for us to raise capital in the future or pursue
acquisitions that involve issuances of our stock. If our
quarterly financial results or our predictions of future
financial results fail to meet the expectations of securities
analysts and investors, our stock price could be negatively
affected.
Factors that may cause our revenue, gross margins and other
operating results to fluctuate significantly from period to
period, include, but are not limited to, the following:
Establishment of VSOE. We may in the
future sell products for which we have not established VSOE and
would be required to delay the recognition of revenue. A delay
in the recognition of revenue from sales of products may cause
fluctuations in our quarterly financial results and may
adversely affect our operating margins.
Timing of product orders. A significant
portion of our revenue in any quarter comes from previously
deferred revenue, which is a somewhat predictable component of
our quarterly revenue. However, a meaningful part of revenue
depends on contracts entered into or orders booked and shipped
in the current quarter. Typically we generate the most orders in
the last month of each quarter. Some customers believe they can
enhance their bargaining power by waiting until the end of our
quarter to place their order. Also, personnel limitations and
system processing constraints could adversely impact our ability
to process the large number of orders that typically occur near
the end of a quarter. Any failure or delay in closing
significant new orders in a given quarter could have a material
adverse impact on our results for that quarter.
Reliability and timeliness of expense
data. We increasingly rely upon third-party
manufacturers to manufacture our hardware-based products;
therefore, our reliance on their ability to provide us with
timely and accurate product cost information exposes us to risk,
negatively impacting our ability to accurately and timely report
our operating results.
20
Issues relating to third-party distribution, manufacturing
and fulfillment relationships. We rely
heavily on third parties to manufacture and distribute our
products. Any changes in the performance of these relationships
can impact our operating results. Changes in our supply chain
could result in product fulfillment delays that contribute to
fluctuations in operating results from period to period. We have
in the past and may in the future make changes in our product
delivery network, which 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.
Product mix. Another source of
fluctuations in our operating results and, in particular, gross
profit margins, is the mix of products we sell and services we
offer, including the mix between corporate versus consumer
products; hardware-based compared to software-based products;
perpetual licenses versus subscription licenses; and maintenance
and support services compared to consulting services or product
revenue. Product mix can impact operating expenses as well as
the amount of revenue and the timing of revenue recognition, so
our profitability can fluctuate significantly.
Timing of new products and
customers. The timing of the introduction and
adoption of new products, product upgrades or updates can have a
significant impact on revenue from period to period. For
example, revenue tends to be higher in periods shortly after we
introduce new products compared to periods without new products.
Our revenue may decline after new product introductions by
competitors. In addition, the volume, size, and terms of new
customer licenses can cause fluctuations in our revenue.
Additional cash and non-cash sources of
fluctuations. A number of other factors that
are peripheral to our core business operations also contribute
to variability in our operating results. These include, but are
not limited to, expenses related to our acquisition and
disposition activities, stock-based compensation expense,
unanticipated costs associated with litigation or
investigations, costs related to Sarbanes-Oxley compliance
efforts, costs and charges related to certain extraordinary
events such as restructurings,, substantial declines in
estimated values of long-lived assets below the value at which
they are reflected in our financial statements, and changes in
generally accepted accounting principles.
Material
weaknesses in our internal control and financial reporting
environment may impact the accuracy, completeness and timeliness
of our external financial reporting.
Section 404 of the Sarbanes-Oxley Act requires that
management report annually on the effectiveness of our internal
control over financial reporting and identify any material
weaknesses in our internal control and financial reporting
environment. During the year ended December 31, 2008, our
management completed the corrective actions to remediate a
material weakness in accounting for income taxes discussed in
our 2006
Form 10-K
and 2007
Form 10-K.
These remediation efforts resulted in additional costs and
diverted management attention away from operating our business.
If management identifies any material weaknesses in the future,
their correction could require remedial measures which could be
costly and time-consuming. In addition, the presence of material
weaknesses could result in financial statement errors which in
turn could require us to restate our operating results. This in
turn could damage investor confidence in the accuracy and
completeness of our financial reports, which could affect our
stock price and potentially subject us to litigation.
Our
strategic alliances and our relationships with manufacturing
partners expose us to a range of business risks and
uncertainties that could have a material adverse impact on our
business and financial results.
Uncertainty of realizing anticipated benefit of strategic
alliances. We have entered into strategic
alliances with numerous third parties to support our future
growth plans. For example, these relationships may include
technology licensing, joint technology development and
integration, research cooperation, co-marketing activities and
sell-through arrangements. We face a number of risks relating to
our strategic alliances, including those described below. These
risks may prevent us from realizing the desired benefits from
our strategic alliances on a timely basis or at all, which could
have a negative impact on our business and financial results.
21
Challenges relating to integrated products from strategic
alliances. Strategic alliances require
significant coordination between the parties involved,
particularly if an alliance requires that we integrate their
products with our products. This could involve significant time
and expenditure by our technical staff and the technical staff
of our strategic partner. The integration of products from
different companies may be more difficult than we anticipate,
and the risk of integration difficulties, incompatible products
and undetected programming errors or defects may be higher than
that normally associated with new products. The marketing and
sale of products that result from strategic alliances might also
be more difficult than that normally associated with new
products. Sales and marketing personnel may require special
training, as the new products may be more complex than our other
products.
We invest significant time, money and resources to establish and
maintain relationships with our strategic partners, but we have
no assurance that any particular relationship will continue for
any specific period of time. Generally, our strategic alliance
agreements are terminable without cause with no or minimal
notice or penalties. If we lose a significant strategic partner,
we could lose the benefit of our investment of time, money and
resources in the relationship. In addition, we could be required
to incur significant expenses to develop a new strategic
alliance or to determine and implement an alternative plan to
pursue the opportunity that we targeted with the former partner.
Less control of the manufacturing process and outcome with
third party manufacturing relationships. We
rely on a limited 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 these types of solutions. We also rely on
third parties to replicate and package our boxed software
products. This reliance on third parties involves a number of
risks that could have a negative impact on our business and
financial results. These risks include, but are not limited to,
lack of control over the quality and timing of the manufacturing
process, limited control over the cost of manufacturing, and the
potential absence or unavailability of adequate manufacturing
capacity.
Risk of inadequate capacity with third party manufacturing
relationships. If any of our third-party
manufacturers fails for any reason to manufacture products of
acceptable quality, in required volumes, and in a cost-effective
and timely manner, it could be costly as well as disruptive to
product shipments. We might be required to seek additional
manufacturing capacity, which might not be available on
commercially reasonable terms or at all. Even if additional
capacity was available, the process of qualifying a new vendor
could be lengthy and could cause significant delays in product
shipments and could strain partner and customer relationships.
In addition, supply disruptions or cost increases could increase
our costs of goods sold and negatively impact our financial
performance. Our risk is relatively greater in situations where
our hardware products contain critical components supplied by a
single or a limited number of third parties. Any significant
shortage of components could lead to cancellations of customer
orders or delays in placement of orders, which would adversely
impact revenue.
Risk of hardware obsolescence with third party
manufacturing relationships. Hardware-based
products may face greater obsolescence risks than software
products. We could incur losses or other charges in disposing of
obsolete hardware inventory. In addition, to the extent that our
third-party manufacturers upgrade or otherwise alter their
manufacturing processes, our hardware-based products could face
supply constraints or risks associated with the transition of
hardware-based products to new platforms. This could increase
the risk of losses or other charges associated with obsolete
inventory.
Our
global operations may expose us to tax risk.
We are generally required to account for taxes in each
jurisdiction in which we operate. This process may require us to
make assumptions, interpretations and judgments with respect to
the meaning and application of promulgated tax laws and related
administrative and judicial interpretations. The positions that
we take and our interpretations of the tax laws may differ from
the positions and interpretations of the tax authorities in the
jurisdictions in which we operate. We are presently under
examination in many jurisdictions, including notably the U.S.,
California, Germany and The Netherlands. An adverse outcome in
one or more of these ongoing examinations, or in any future
examinations that may occur, could have a significant negative
impact on our cash position and net income. Although we have
established reserves for these examination contingencies, there
can be no assurance that the reserves will be sufficient to
cover our ultimate liabilities.
22
Our provision for income taxes is subject to volatility and can
be adversely affected by a variety of factors, including but not
limited to changes in tax laws, regulations and accounting
principles (including accounting for uncertain tax positions),
or interpretations of those changes. Significant judgment is
required to determine the recognition and measurement attributes
prescribed in FASB Interpretation No. 48,
Accounting for Income Taxes
(FIN 48). In addition, FIN 48 applies
to all income tax positions, including the potential recovery of
previously paid taxes, which if settled unfavorably could
adversely impact our provision for income taxes or recorded
goodwill.
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 members of executive
management who have at will employment agreements,
our employees are not typically subject to an employment
agreement or non-competition agreement. It could be difficult,
time consuming and expensive to locate, replace and integrate
any key management member or other critical personnel. 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.
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 and we must provide
competitive compensation packages, including equity awards.
Increases in shares available for issuance under our equity
incentive plans require stockholder approval, and there may be
times, as we have seen in the past, where we may not obtain the
necessary approval. Also, we may continue the trend of granting
fewer stock options and more restricted stock awards
(RSAs), restricted stock units (RSUs),
or restricted stock units with performance-based vesting
(PSUs), which could adversely impact our results of
operations due to the accounting charges required in connection
with equity compensation and the dilutive impact on earnings per
share.
Risks relating to senior management changes and new
hires. From 2006 to 2008, we experienced
significant changes in our senior management team as a number of
officers resigned or were terminated and several key management
positions were vacant for a significant period of time. We may
continue to experience changes in senior management going
forward.
We continue to hire in key areas and have added a number of new
employees in connection with our acquisitions. For new
employees, including senior management, there may be reduced
levels of productivity as it takes time for new hires to be
trained or otherwise assimilated into the company.
Increased
customer demands on our technical support services may adversely
affect our relationships with our customers and negatively
impact our financial results.
We offer technical support services with many of our products.
We may be unable to respond quickly enough to accommodate
short-term increases in customer demand for support services. We
also may be unable to modify the format of our support services
to compete with changes in support services provided by
competitors or successfully integrate support for our customers.
Further customer demand for these services, without
corresponding revenue, could increase costs and adversely affect
our operating results.
We have outsourced a substantial portion of our worldwide
consumer support functions to third-party service providers. If
these companies experience financial difficulties, service
disruptions, do not maintain sufficiently skilled workers and
resources to satisfy our contracts, or otherwise fail to perform
at a sufficient level under these contracts, the level of
support services to our customers may be significantly
disrupted, which could materially harm our relationships with
these customers.
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
23
products could be displaced by alternative system and network
protection solutions offered by system integrators that do not
bundle our solutions. Significant product displacements could
negatively impact our revenue and have a material adverse effect
on our business.
If
we fail to effectively upgrade or modify our information
technology system, we may not be able to accurately report our
financial results or prevent fraud.
We may experience difficulties in transitioning to new or
upgraded information technology systems and in applying
maintenance patches to existing systems, including loss of data
and decreases in productivity as personnel become familiar with
new, upgraded or modified systems. Our management information
systems will require modification and refinement as we grow and
as our business needs change, which could prolong the
difficulties we experience with systems transitions, and we may
not always employ the most effective systems for our purposes.
If we experience difficulties in implementing new or upgraded
information systems or experience significant system failures,
or if we are unable to successfully modify our management
information systems and respond to changes in our business
needs, our operating results could be harmed or we may fail to
meet our reporting obligations. We may also experience similar
results if we have difficulty applying routine maintenance
patches to existing systems in a timely manner.
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 web
sites. 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 web sites have been subject to denial of service
attacks, where a web site is bombarded with information requests
eventually causing the web site to overload, resulting in a
delay or disruption of service. If successful, any of these
events could damage users or our own computer systems. In
addition, since we do not control disk duplication by
distributors or our independent agents, media containing our
software may be infected with viruses.
Business
interruptions may impede our operations and the operations of
our customers.
We are continually updating or modifying our accounting and
other internal and external facing business systems.
Modifications of these types of systems are often disruptive to
business and may cause us to incur higher costs than we
anticipate. Failure to properly manage this process could
materially harm our business operations.
In addition, we and our customers face a number of potential
business interruption risks that are beyond our respective
control. Natural disasters or other events could interrupt our
business or the business of our customers, and each of us is
reliant on external infrastructure that may be antiquated. Our
corporate headquarters in California is located near a major
earthquake fault. The potential impact of a major earthquake on
our facilities, infrastructure and overall operations is not
known, but could be quite severe. Despite business interruption
and disaster recovery programs that have been implemented, an
earthquake could seriously disrupt our entire business process.
We are largely uninsured for losses and business disruptions
caused by an earthquake and other natural disasters.
Our
investment portfolio is subject to volatility, losses and
liquidity limitations. Continued negative conditions in the
global credit markets could impair the value of or limit our
access to our investments.
Investment income has been a significant component of our net
income. The ability to achieve our investment objectives is
affected by many factors, some of which are beyond our control.
We invest our cash, cash equivalents and marketable securities
in a variety of investment vehicles in a number of countries
with and in the custody of financial institutions with high
credit ratings. While our investment policy and strategy attempt
to manage interest rate risk, limit credit risk, and only invest
in what we view as very high-quality debt securities, the
outlook for our investment holdings is dependent on general
economic conditions, interest rate trends and volatility in the
financial marketplace, which can all affect the income that we
receive, the value of our investments, and our ability to sell
them. Current economic conditions have had widespread negative
effects on the financial markets and global economies. During
these challenging markets, we are investing new cash in
instruments with short to medium-term
24
maturities of highly-rated issuers, including
U.S. government and FDIC guaranteed investments. We do not
hold any sub-prime mortgages, auction rate securities or
structured investment vehicles.
The outlook for our investment income is dependent on the amount
of any share repurchases or acquisitions that we effect and the
amount of cash flows from operations that are available for
investment. Our investment income is also affected by the yield
on our investments and our recent shift to a larger percentage
of our investment portfolio to shorter-term and
U.S. government and FDIC guaranteed investments. This shift
may negatively impact our income from our investment portfolio
in light of declining yields. Any significant decline in our
investment income or the value of our investments could have an
adverse effect on our results of operations or financial
condition.
During 2008, we recorded an other-than-temporary impairment
charge of $18.5 million related to marketable securities.
We believe that our investment securities are carried at fair
value. However, over time the economic and market environment
may provide additional insight regarding the fair value of
certain securities which could change our judgment regarding
impairment. This could result in realized losses relating to
other-than-temporary declines being charged against future
income. Given the current market conditions involved, there is
continuing risk that further declines in fair value may occur
and additional impairments may be charged to income in future
periods, resulting in realized losses.
Most of our cash and investments held outside the U.S. are
subject to fluctuations in currency exchange rates. A
repatriation of these
non-U.S. investment
holdings to the U.S. under current law could be subject to
foreign and U.S. federal income and withholding taxes, less
any applicable foreign tax credits. These tax limitations, local
regulations and potential further capital market turmoil could
limit our ability to utilize these offshore funds.
Our
historical stock option granting practices have resulted in, and
could continue to result in, continued or new litigation,
regulatory proceedings, government enforcement actions and
remedial actions, all of which have had, and could in the future
have, a negative impact on our business and financial
results.
Shortly after we announced an internal investigation of our
historical stock option granting practices in May 2006, both the
SEC and the United States Department of Justice
(DOJ) commenced investigations of our stock option
practices. We have been engaged in discussions with and have
provided information to the SEC regarding certain of our prior
period consolidated financial statements. The resolution of the
SEC inquiry into our historical stock option granting practices
could require us to file additional restatements of our prior
consolidated financial statements or require that we take other
actions not presently contemplated.
As part of the remedial actions we have taken in connection with
the investigation and restatement of our consolidated financial
statements, we terminated certain employees, including former
executive officers. We are involved in litigation and other
legal proceedings in connection with one such termination. Any
future legal proceedings could require additional management
time and additional expense, and may require us to make
settlement or other related payments in the future. See
Note 18 of our consolidated financial statements for more
details about ongoing legal proceedings.
We cannot predict the outcome of the pending government
inquiries or other lawsuits, and we may face additional
government inquiries and other legal proceedings. Any such
litigation, government inquiry or other legal proceeding could
require us to devote significant management time and to incur
significant accounting, legal, and other expenses and could
adversely affect our financial condition and results of
operations.
Our
stock price has been volatile and is likely to remain
volatile.
During 2008 and up to the date of this filing, our stock price
was highly volatile, ranging from a high of $40.97 to a low of
$24.72. On February 24, 2009, our stocks closing
price was $28.52. Announcements, business developments, such as
a material acquisitions or dispositions, 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 major
competitors related to consumer and corporate security solutions
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.
25
Our stock price may also experience volatility that is
completely unrelated to our performance or that of the security
industry. During 2008 through January 2009, the major
U.S. and international stock markets have been extremely
volatile. Fluctuations in these broad market indices can impact
our stock price regardless of our performance.
Our
charter documents and Delaware law may impede or discourage a
takeover, which could lower our stock price.
Under our certificate of incorporation, our board of directors
has the authority to issue up to 5.0 million shares of
preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders.
The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our
outstanding voting stock and could have the effect of
discouraging a change of control of the company or changes in
management.
Delaware law and other provisions of our certificate of
incorporation and bylaws could also delay or make a merger,
tender offer or proxy contest involving us or changes in our
board of directors and management more difficult. For example,
any stockholder wishing to make a stockholder proposal
(including director nominations) at our 2009 annual meeting must
meet the qualifications and follow the procedures specified
under both the Securities Exchange Act of 1934 and our bylaws.
In addition, we have a classified board of directors, however,
our board of directors will be declassified over the three year
period ending with our annual meeting of stockholders in 2012.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our worldwide headquarters currently occupies approximately
188,000 square feet in facilities located in
Santa Clara, California under leases expiring through 2013
which excludes approximately 20,000 square feet of leased
space that we sublease to a third party. Worldwide, we lease
facilities with approximately 1,291,000 total square feet, with
leases that expire at various times. Total square footage
excludes approximately 47,000 square feet of leased space
in North America and EMEA that we sublease to third parties. Our
primary international facilities are located in India, Ireland,
Japan, The Netherlands, the United Kingdom and Singapore.
Significant domestic sites include California, Oregon, Minnesota
and Texas. We believe that our existing facilities are adequate
for the present and that additional space will be available as
needed.
We own our regional office located in Plano, Texas. The
approximately 170,000 square feet facility opened in
January 2003 and is located on 21.0 acres of owned land.
This facility supports approximately 850 employees working
in our customer support, engineering, accounting and finance,
information technology, internal audit, human resources, legal
and sales groups.
|
|
Item 3.
|
Legal
Proceedings
|
Information with respect to this item is incorporated by
reference to Note 18 to our consolidated financial
statements included in this
Form 10-K,
which information is incorporated into this Part I,
Item 3 by reference.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of stockholders during the
quarter ended December 31, 2008.
26
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(NYSE), under the symbol MFE. Prior to
December 1, 1997, our common stock traded on the NASDAQ
National Market under the symbol MCAF. From December 1,
1997 until February 12, 2002, our common stock traded on
the NASDAQ National Market under the symbol NETA. Our common
stock began trading on the NYSE effective February 12,
2002, and traded under the symbol NET from February 12,
2002 until June 2004, when we changed our name to McAfee, Inc.
and we began trading under the symbol MFE.
The following table sets forth, for the period indicated, the
high and low sales prices for our common stock for the last
eight quarters, all as reported by NYSE. The prices appearing in
the table below do not reflect retail
mark-up,
mark-down or commission.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
37.40
|
|
|
$
|
27.80
|
|
Second Quarter
|
|
|
37.82
|
|
|
|
30.71
|
|
Third Quarter
|
|
|
40.97
|
|
|
|
30.63
|
|
Fourth Quarter
|
|
|
34.98
|
|
|
|
24.72
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
31.80
|
|
|
$
|
27.74
|
|
Second Quarter
|
|
|
37.86
|
|
|
|
28.89
|
|
Third Quarter
|
|
|
38.24
|
|
|
|
31.47
|
|
Fourth Quarter
|
|
|
41.66
|
|
|
|
34.69
|
|
The annual certification to the NYSE attesting to our compliance
with the NYSEs corporate governance listing standards was
submitted by our chief executive officer to the NYSE in December
2008.
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.
27
Stock
Performance
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The following graph shows a five-year comparison of cumulative
total returns for our common stock, the NYSE Market Index,
S&P Information Technology and S&P 500 Index each of
which assumes an initial value of $100 and reinvestment of
dividends. The information presented in the graph and table is
as of the end of each fiscal year ended December 31. The
comparisons in the graph below are based on historical data and
are not intended to forecast the possible future performance of
our common stock.
Comparison
of Five-Year Cumulative Total Returns
COMPARISON
5-YEAR
CUMULATIVE TOTAL RETURN
AMONG MCAFEE, INC., NYSE MARKET INDEX,
S&P 500 INDEX AND S&P INFORMATION TECHNOLOGY
ASSUMES
$100 INVESTED ON JAN. 01, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
|
Dec-06
|
|
|
Dec-07
|
|
|
Dec-08
|
McAfee, Inc.
|
|
|
|
100.0
|
|
|
|
|
192.4
|
|
|
|
|
180.4
|
|
|
|
|
188.7
|
|
|
|
|
249.3
|
|
|
|
|
229.9
|
|
NYSE Market Index
|
|
|
|
100.0
|
|
|
|
|
112.9
|
|
|
|
|
122.3
|
|
|
|
|
143.2
|
|
|
|
|
150.9
|
|
|
|
|
94.8
|
|
S&P Information Technology
|
|
|
|
100.0
|
|
|
|
|
102.6
|
|
|
|
|
103.6
|
|
|
|
|
112.3
|
|
|
|
|
130.6
|
|
|
|
|
74.3
|
|
S&P 500 Index
|
|
|
|
100.0
|
|
|
|
|
110.9
|
|
|
|
|
116.3
|
|
|
|
|
134.7
|
|
|
|
|
142.1
|
|
|
|
|
89.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Performance for 2008 reflects a December 31, 2008 closing
market price on the New York Stock Exchange of $34.57.
Holders
of Common Stock
As of February 24, 2009, there were 617 record owners of
our common stock.
Common
Stock Repurchases
Our board of directors had previously authorized the repurchase
of our common stock in the open market from time to time until
October 2007, depending upon market conditions, share price and
other factors. Beginning in May 2006, we suspended repurchases
of our common stock in the open market due to the announced
investigation into our historical stock option granting
practices. Our authorization to repurchase common stock in the
open market expired in October 2007 prior to our becoming
current on our reporting obligations under the Securities Act of
1934, as amended, on December 21, 2007. Therefore, we had
no repurchases of our common stock under a publicly announced
repurchase program during the fourth quarter of 2007. In January
2008, our board of directors authorized the repurchase of up to
$750.0 million of our common stock from time to time in the
open market or through privately negotiated transactions through
July 2009, depending upon market conditions, share price and
other factors. During 2008, we repurchased approximately
14.5 million shares of our common stock in the open market
for approximately $499.7 million, excluding commissions
paid. During 2008, we repurchased approximately 0.5 million
shares of our common stock for approximately $16.6 million
in connection with our obligation to holders of RSUs, RSAs and
PSUs to withhold the number of shares required to satisfy the
holders tax liabilities in connection with the vesting of
such shares. These shares were not part of the publicly
announced repurchase program.
The table below sets forth all repurchases by us of our common
stock during the three months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares That
|
|
|
|
Number of
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
May Yet Be Purchased
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced Plan or
|
|
|
Under Our Stock
|
|
Period
|
|
Purchased
|
|
|
Per Share
|
|
|
Repurchase Program
|
|
|
Repurchase Program
|
|
|
|
(In thousands, except price per share)
|
|
|
October 1, 2008 through October 31, 2008
|
|
|
17
|
|
|
$
|
31.12
|
|
|
|
|
|
|
$
|
250,290
|
|
November 1, 2008 through November 30, 2008
|
|
|
13
|
|
|
|
26.66
|
|
|
|
|
|
|
|
250,290
|
|
December 1, 2008 through December 31, 2008
|
|
|
5
|
|
|
|
29.01
|
|
|
|
|
|
|
|
250,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35
|
|
|
$
|
29.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Item 6.
|
Selected
Financial Data
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
|
2005(2)
|
|
|
2004(3)
|
|
|
|
(In thousands, except for per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
1,145,158
|
|
|
$
|
981,628
|
|
|
$
|
907,573
|
|
Income from operations
|
|
|
189,571
|
|
|
|
159,813
|
|
|
|
139,028
|
|
|
|
141,407
|
|
|
|
310,252
|
|
Income before provision for income taxes
|
|
|
222,206
|
|
|
|
229,204
|
|
|
|
183,781
|
|
|
|
166,678
|
|
|
|
302,814
|
|
Net income
|
|
|
172,209
|
|
|
|
166,980
|
|
|
|
137,471
|
|
|
|
118,217
|
|
|
|
220,017
|
|
Net income per share, basic
|
|
$
|
1.10
|
|
|
$
|
1.04
|
|
|
$
|
0.85
|
|
|
$
|
0.72
|
|
|
$
|
1.37
|
|
Net income per share, diluted
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
$
|
1.28
|
|
Shares used in per share calculation basic
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
160,945
|
|
|
|
165,042
|
|
|
|
160,510
|
|
Shares used in per share calculation diluted
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
163,052
|
|
|
|
169,249
|
|
|
|
177,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005(2)
|
|
|
2004(3)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
|
$
|
389,627
|
|
|
$
|
728,592
|
|
|
$
|
291,155
|
|
Working capital
|
|
|
76,160
|
|
|
|
230,145
|
|
|
|
146,253
|
|
|
|
688,015
|
|
|
|
260,183
|
|
Total assets(4)
|
|
|
3,457,881
|
|
|
|
3,386,524
|
|
|
|
2,760,834
|
|
|
|
2,608,357
|
|
|
|
2,216,883
|
|
Deferred revenue
|
|
|
1,293,110
|
|
|
|
1,044,513
|
|
|
|
897,525
|
|
|
|
751,806
|
|
|
|
601,485
|
|
Accrued taxes and other long-term liabilities
|
|
|
72,751
|
|
|
|
88,241
|
|
|
|
149,924
|
|
|
|
147,128
|
|
|
|
205,107
|
|
Total equity
|
|
|
1,752,488
|
|
|
|
1,905,325
|
|
|
|
1,427,249
|
|
|
|
1,434,641
|
|
|
|
1,206,242
|
|
|
|
|
(1) |
|
In 2008, we expensed $19.5 million for in-process research
and development related to the acquisition of Secure Computing. |
|
(2) |
|
In 2005, we reserved $50.0 million in connection with a
settlement with the SEC and we deposited $50.0 million in
an escrow account with the SEC as the designated beneficiary. |
|
(3) |
|
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. |
|
(4) |
|
In 2007, 2006, 2005 and 2004, we decreased both prepaid taxes
and accrued income taxes by $27.6 million,
$39.4 million, $27.9 million and $39.3 million,
respectively, related to certain income tax prepayments that
were more properly classified with the related current
liabilities. |
|
|
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.
30
Overview
and Executive Summary
We are a leading dedicated security technology company that
secures systems and networks from known and unknown threats
around the world. We empower home users, businesses, government
agencies, service providers and our partners with the latest
technology available in order to block attacks, prevent
disruptions, and continuously track and improve their security.
We also provide software to manage and enforce security policies
for organizations of all sizes. Finally, we provide expert
services and technical support to ensure that our solutions
actively meet our customers needs. These integrated
solutions help our customers solve problems, enhance security
and reduce costs.
We have one business and operate in one industry: developing,
marketing, distributing and supporting computer security
solutions for large enterprises, governments, small and
medium-sized businesses and consumers either directly or through
a network of qualified distribution partners. We derive our
revenue from three sources: (i) service and support
revenue, which includes maintenance, training and consulting
revenue; (ii) subscription revenue, which consists of
revenue from customers who purchase licenses for products for
the term of the subscription; and (iii) product revenue,
which includes revenue from perpetual licenses (those with a
one-time license fee) and from hardware product sales. In 2008,
service and support revenue accounted for 50% of net revenue,
subscription revenue accounted for 42% and product revenue
accounted for 8% of net revenue.
Operating
Results and Trends
We evaluate our consolidated financial performance utilizing a
variety of indicators. Three of the primary indicators that we
utilize to evaluate the growth and health of our business are
total net revenue, operating income and net income.
Net Revenue. As discussed more fully
below, our net revenue in the 2008 grew by $291.9 million,
or 22%, to $1,600.1 million from $1,308.2 million in
2007. Our net revenue is directly impacted by corporate
information technology, government and consumer spending levels.
Net revenue was positively impacted by $91.9 million from
our 2008 and 2007 acquisitions. Changes in the U.S. Dollar
compared to foreign currencies positively impacted our revenue
growth by $56.9 million in 2008.
Operating Income. The
$29.8 million increase in operating income in 2008 compared
to 2007 was primarily attributable to the overall growth of the
company and a $27.0 million reduction in our SEC and
compliance costs associated with our completed investigation
into our historical stock option granting practices, offset by a
$34.4 million increase in amortization of purchased
technology, patents and intangibles due to recent acquisitions
and a $19.5 million increase in in-process research and
development expense related to the Secure Computing acquisition.
Net Income. The $5.2 million
increase in net income in 2008 compared to 2007 was primarily
attributable to the overall growth of the company and a decrease
in our effective tax rate discussed in Provision for
Income Taxes below, offset by a $29.5 million
decrease in interest income attributable to lower yields and
lower cash and marketable securities and an $18.5 million
impairment recorded on marketable securities.
Acquisitions. We continue to focus our
efforts on building a full line of system and network protection
solutions and technologies that support our multi-platform
strategy of personal computer, internet and mobile security
solutions. In the fourth quarter of 2008, we acquired Secure
Computing for approximately $490.1 million. With the Secure
Computing acquisition, we plan to deliver the industrys
most complete network security solution to businesses of all
sizes. We expect that the acquisition of Secure Computing will
have a dilutive impact in 2009, primarily due to the
amortization of intangibles. During 2007, we acquired SafeBoot
Holding B.V. for approximately $346.6 million. With this
acquisition, we provide customers with endpoint, network, web,
email and data security, including encryption, as well as risk
and compliance solutions.
Net Revenue by Product Groups and Customer
Category. Transactions from our corporate
business include the sale of product offerings intended for
enterprise, mid-market and small business use. Net revenue from
our corporate products increased $194.0 million, or 25%, to
$963.8 million during 2008 from $769.8 million in
2007. The year-over-year increase in revenue was due to a 21%
increase in revenue from our end point solutions, which includes
increased revenue from our system security solutions and new
revenue from data encryption products integrated from our
SafeBoot acquisition, a 41% increase in revenue from our network
offerings and a 28% increase
31
in revenue from our vulnerability and risk management offerings.
During 2007, net revenue from our corporate products increased
$101.2 million, or 15%, to $769.8 million from
$668.6 million in 2006. The year-over-year increase in
revenue was due to increased revenue from our McAfee Total
Protection Solutions and Foundstone product lines, and increased
maintenance renewals.
Transactions from our consumer business include the sale of
product offerings primarily intended for consumer use, as well
as any revenue or activities associated with providing an
overall safe consumer experience on the internet or cellular
networks. Net revenue from our consumer security market
increased $97.9 million, or 18%, to $636.4 million in
2008 from $538.5 million in 2007. During 2007, net revenue
from our consumer security market increased $61.9 million,
or 13%, to $538.5 million from $476.6 million in 2006.
The increase in revenue from our consumer market in both 2008
and 2007 was attributable primarily to our strengthening
relationships with strategic channel partners, such as AOL and
Dell.
Deferred Revenue. Our deferred revenue
balance at December 31, 2008 increased 24% to
$1,293.1 million, compared to $1,044.5 million at
December 31, 2007. The increase was attributable to growing
sales of maintenance renewals from our expanding customer base,
increased sales of subscription-based offerings and acquired
deferred revenue primarily from our acquisition of Secure
Computing. We receive up front payments for maintenance and
subscriptions but we recognize revenue over the service or
subscription term. Approximately 75 85% of our total
net revenue during 2008 came from prior-period deferred revenue.
As with revenue, we believe that deferred revenue is a key
indicator of the growth and health of our business.
Macro Economic Conditions. While we
have recently experienced strong growth in revenue and bookings,
economic conditions and financial markets have become
increasingly negative, and national and global economies and
financial markets have experienced a severe downturn stemming
from a multitude of factors, including adverse credit conditions
impacted by the sub-prime mortgage crisis, slower economic
activity, concerns about inflation and deflation, fluctuating
energy costs, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns and other factors. Economic growth in the
U.S. and many other countries slowed in the fourth quarter
of 2007, remained slow for 2008 and is expected to slow further
or to recede in 2009 in the U.S. and internationally.
During challenging economic times and in tight credit markets,
many customers may delay or reduce technology purchases. This
could result in reductions in sales of our products, longer
sales cycles, difficulties in collection of accounts receivable,
slower adoption of new technologies and increased price
competition. In addition, weakness in the end-user market could
negatively affect the cash flow of our distributors and
resellers who could, in turn, delay paying their obligations to
us. This would increase our credit risk exposure and cause
delays in our recognition of revenue on future sales to these
customers. Specific economic trends, such as declines in the
demand for PCs, servers, and other computing devices, or
softness in corporate information technology spending, could
have a more direct impact on our business. Any of these events
would likely harm our business, including decreasing our
revenues, decreasing cash provided by operating activities and
negatively impacting our liquidity.
Foreign Exchange Fluctuations. We are
unable to predict the extent to which revenue in future periods
will be impacted by changes in foreign exchange rates. If
international sales become a greater portion of our total sales
in the future, changes in foreign currency rates may have a
potentially greater impact on our revenue and operating results.
The Euro and Japanese Yen are the two predominant
non-U.S. currencies
that affect our financial statements. While the U.S. Dollar
has strengthened against the Euro from January 1, 2008 to
December 31, 2008, on an average annual exchange rate basis
the U.S. Dollar weakened against the Euro during 2008, as
compared to 2007. This has resulted in an increase in the
revenue and expense amounts in certain foreign countries in our
statements of income for 2008 as compared to the prior year.
The U.S. Dollar has recently appreciated significantly
against the Euro and many other foreign currencies, including
the local currencies of many of our international customers. As
the U.S. Dollar strengthens against foreign currencies, our
revenues from transactions outside the U.S. and operating
income may be negatively impacted. The U.S. Dollar has
recently depreciated against the Japanese Yen. As the
U.S. Dollar weakens against foreign currencies, our
revenues may be positively impacted.
32
Critical
Accounting Policies and Estimates
In preparing our consolidated financial statements, we make
estimates, assumptions and judgments that can have a significant
impact on our net revenue, income from operations and net
income, as well as the value of certain assets and liabilities
on our consolidated balance sheet. To apply critical accounting
policies we must evaluate a number of complex criteria and make
significant accounting judgments. Management bases its estimates
on historical experience and on various other assumptions that
they believe to be reasonable under the circumstances. These
estimates 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 effect on the
consolidated financial statements. We believe our significant
accounting policies, which are discussed in Note 2,
Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements, involve a high
degree of judgment and complexity. Accordingly, we believe the
following policies are the most critical to aid in fully
understanding and evaluating our financial condition and
operating results.
Revenue
Recognition
We must make significant management judgments and estimates to
determine revenue to be recognized in any accounting period.
Material differences may result in the amount and timing of our
revenue for any period if our management made different
judgments or utilized different estimates. These estimates
affect the deferred revenue on our consolidated balance sheet
and the net revenue on our consolidated statement of income.
Our revenue, which is presented net of sales taxes, is derived
primarily from three sources: (i) service and support
revenue, which includes maintenance, training and consulting
revenue, (ii) subscription revenue, which includes revenue
from subscription-based offerings and (iii) product
revenue, which includes hardware and perpetual licenses revenue.
We apply the provisions of Statement of Position
97-2,
Software Revenue Recognition
(SOP 97-2),
and related interpretations to all transactions involving the
sale of software products and hardware products that include
software. The application of
SOP 97-2
requires judgment, including whether a software arrangement
includes multiple elements, and if so, whether vendor-specific
objective evidence (VSOE) exists for these elements.
For arrangements with multiple elements, including software
licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the VSOE
of fair value for the undelivered elements and recognize the
difference between the total arrangement fee and the amount
deferred for the undelivered elements as product revenue. VSOE
of fair value is based upon the price for which the undelivered
element is sold separately or upon substantive renewal rates
stated in a contract. We determine fair value of the undelivered
elements based on historical evidence of stand-alone sales of
these elements to our customers. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period generally as service and support revenue.
We recognize revenue from the sale of software licenses when
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. For hardware transactions where software is not
incidental, we do not separate the license fee and we do not
apply separate accounting guidance to the hardware and software
elements. For hardware transactions where no software is
involved or software is incidental, we apply the provisions of
Staff Accounting Bulletin 104 Revenue
Recognition (SAB 104).
We enter into perpetual and subscription software license
agreements through direct sales to consumer 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
33
period. Professional services revenue is generally recognized as
services are performed or if required, upon customer acceptance.
In these situations, we defer the direct costs of the
subscription software licensing and professional services
arrangements, and amortize those costs over the same period as
the related revenue is recognized. These costs are identified as
cost of subscription revenue and cost of service and support
revenue on the consolidated statement of income and
comprehensive income.
We also identify the direct and incremental costs associated
with product revenues that have been deferred due to lack of
VSOE on fair value on an undelivered element. These costs are
primarily hardware platform and other hardware component costs.
We defer these costs at the time of delivery and recognize them
as cost of service and support revenue on the consolidated
statement of income and comprehensive income, in proportion to
the product revenue in services and support as it is recognized
over the service period.
We reduce revenue for estimates of sales incentives and sales
returns. We offer sales incentives, including channel rebates,
marketing funds and end-user rebates for products in our
corporate and consumer product lines. Additionally, end users
may return our products, subject to varying limitations, through
distributors and resellers or to us directly for a refund within
a reasonably short period from the date of purchase. We estimate
and record reserves for sales incentives and sales returns based
on our historical experience. In each accounting period, we must
make judgments and estimates of sales incentives and potential
future sales returns related to current period revenue. These
estimates affect our net revenue line item on our consolidated
statement of income and affect our net accounts receivable,
deferred revenue or accrued liabilities line items on our
consolidated balance sheet.
At December 31, 2008, our allowance for sales returns and
incentives was $61.2 million compared to $48.5 million
at December 31, 2007. If our allowance for sales returns
and incentives were to increase by 10%, or $6.1 million,
our net revenue would decrease by $2.3 million and our
deferred revenue would decrease by $3.8 million for the
year ended December 31, 2008.
Stock-based
Compensation Expense
We record compensation expense for stock-based awards issued to
employees and outside directors in exchange for services
provided based on the estimated fair value of the awards on
their grant dates. Stock-based compensation expense is
recognized over the required service or performance period of
the awards. Our stock-based awards include stock options
(options), restricted stock units
(RSUs), restricted stock awards (RSAs),
restricted stock units with performance-based vesting
(PSUs) and employee stock purchase rights issued
pursuant to our Employee Stock Purchase Plan (ESPP
grants). See Note 14 to the consolidated financial
statements for additional information.
We use the Black-Scholes model to estimate the fair value of our
options and ESPP grants. The Black-Scholes model requires
estimates of the expected term of the option, as well as future
volatility and the risk-free interest rate. We derive the
expected term of our options through a lattice model that
factors in historical data on employee exercise and post-vesting
employment termination behavior. The risk-free rate for periods
within the expected life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Since January 1, 2006, we have used the implied volatility
of options traded on our stock with a term of one year or more
to calculate the expected volatility of our option grants. Prior
to that time, the expected volatility was based solely on the
historical volatility of our stock. We have not declared any
dividends on our stock in the past and do not expect to do so in
the foreseeable future.
The assumptions that we have made represent our
managements best estimate, but they are highly subjective
and inherently uncertain. If management had made different
assumptions, our calculation of the options fair value and
the resulting stock-based compensation expense could differ,
perhaps materially, from the amounts recognized in our financial
statements. For example, if we increased the assumption
regarding our stocks volatility for options granted during
2008 by 10%, our stock-based compensation expense would increase
by $5.6 million, net of expected forfeitures. Likewise, if
we increased our assumption of the expected lives of options
granted during 2008 by one year, our stock-based compensation
expense would increase by $2.6 million, net of expected
forfeitures. These notional increased expense amounts would be
amortized over the options 4.0 year vesting period.
34
In addition to the assumptions used to calculate the fair value
of our options, we are required to estimate the expected
forfeiture rate of all stock-based awards and only recognize
expense for those awards we expect to vest. The stock-based
compensation expense recognized in our consolidated statement of
income for the year ended December 31, 2008 has been
reduced for estimated forfeitures. If we were to change our
estimate of forfeiture rates, the amount of stock-based
compensation expense could differ, perhaps materially, from the
amount recognized in our financial statements. For example, if
we had decreased our estimate of expected forfeitures by 50%,
our stock-based compensation expense for the year ended
December 31, 2008, net of expected forfeitures, would have
increased by $8.7 million. This decrease in our estimate of
expected forfeitures would increase the amount of expense for
all unvested awards that have not yet been recognized by
$21.5 million, amortized over a weighted-average period of
2.4 years.
Estimation
of Restructuring Accrual and Litigation
Restructuring accrual. To determine our
restructuring charges and the corresponding liabilities, we 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 develop 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, 2008, our estimated sublease income were to
decrease 10%, the restructuring reserve and related expense
would have increased by $0.1 million.
The estimates regarding our restructuring accruals affect our
current liabilities and other long-term liabilities line items
in our consolidated balance sheet, since these liabilities will
be settled each year through 2013. These estimates affect our
statement of income in the restructuring line item.
Litigation. Managements current
estimated range of liability related to litigation that is
brought against us from time to time is based on claims for
which our management can estimate the amount and range of loss.
We recorded the minimum estimated liability related to those
claims where there is a range of loss, as there is no better
point of estimate. Because of the uncertainties related to an
unfavorable outcome of litigation, and the amount and range of
loss on pending litigation, management is often unable to make a
reasonable estimate of the liability that could result from an
unfavorable outcome. As litigation progresses, we continue to
assess our potential liability and revise our estimates. Such
revisions in our estimates could materially impact our results
of operations and financial position. Estimates of litigation
liability affect our accrued liability line item on our
consolidated balance sheet and our general and administrative
expense line item on our statement of income. See Note 18
in our Notes to the Consolidated Financial Statements.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our
consolidated balance sheet. We must then assess and make
significant estimates regarding the likelihood that our deferred
tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the
statement of income. Estimates related to income taxes affect
the deferred tax asset and liability line items and accrued
liabilities in our consolidated balance sheet and our income tax
expense line item in our consolidated statement of income and
comprehensive income.
Our deferred tax asset is presented net of a valuation
allowance. 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
35
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. The valuation allowance decreased in 2008, which
included a reduction of $33.2 million related to
utilization of foreign tax credits and various other changes in
deferred tax assets, offset by an increase of $33.6 million
related to recording valuation allowance on acquired certain net
operating losses associated with the acquisition of Secure
Computing.
Tax returns are subject to examination by various taxing
authorities. Although we believe that adequate accruals have
been made each period for unsettled issues, additional benefits
or expenses could occur in future years from resolution of
outstanding matters. We record additional expenses each period
relating to the expected interest and penalties we would be
required to pay a tax authority if we do not prevail. 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
When we acquire businesses, we allocate the purchase price to
tangible assets and liabilities and identifiable intangible
assets acquired. Any residual purchase price is recorded as
goodwill. The allocation of the purchase price requires
management to make significant estimates in determining the fair
values of assets acquired and liabilities assumed, especially
with respect to intangible assets. These estimates are based on
historical experience and information obtained from the
management of the acquired companies. These estimates can
include, but are not limited to, the cash flows that an asset is
expected to generate in the future, the appropriate
weighted-average cost of capital, and the cost savings expected
to be derived from acquiring an asset. These estimates are
inherently uncertain and unpredictable. In addition,
unanticipated events and circumstances may occur which may
affect the accuracy or validity of such estimates.
Goodwill. We 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 an equal weighting of the income approach and the market
approach. Under the income approach, we calculate the fair value
of a reporting unit based on the present value of estimated
future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenue or earnings for
comparable companies. We estimate cash flows for these purposes
using internal budgets based on recent and historical trends. We
base these estimates on assumptions we believe to be reasonable,
but which are unpredictable and inherently uncertain. We also
make certain judgments about the selection of comparable
companies used in the market approach in valuing our reporting
units, as well as certain assumptions to allocate shared assets
and liabilities to calculate the carrying value for each of our
reporting units. If an impairment were present, these estimates
would affect an impairment line item on our consolidated
statement of income and comprehensive 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.
Intangibles and Long-lived Assets. 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 and anticipated results and are subject
to many of the other factors, which could change and cause a
material impact to our operating results.
Impairment
of Marketable Securities
All marketable securities are classified as available-for-sale
securities. We assess the value of our available-for-sale
marketable securities on a regular basis to assess whether an
other-than-temporary decline in the fair value has occurred.
This determination requires significant judgment and actual
results may be materially different than our estimate. Factors
which we use to assess whether an other-than-temporary decline
has occurred include, but are not limited to, the likely reason
for the unrealized loss, period of time the fair value was below
amortized cost, changes in underlying collateral,
36
changes in ratings, market trends and conditions, and our intent
and ability to hold until we recover such losses. Any
other-than-temporary decline in value is reported in
earnings and a new cost basis for the marketable security is
established. In 2008, we recorded an impairment of marketable
securities totaling $18.5 million. Of the
$18.5 million impairment, $12.2 million related to
corporate bonds and asset-backed and mortgaged-backed securities
which suffered declines in fair value, $5.0 million related
to a single corporate bond that had a significant decline in
fair value due to the issuers bankruptcy and
$1.3 million related to impairment recorded because we no
longer had the intent and ability to hold these securities for a
period of time sufficient for the fair values to recover due to
funding our acquisition of Secure Computing, which was a
one-time event. We had no impairment of marketable securities in
2007 and 2006. At December 31, 2008, gross unrealized
losses on our marketable securities totaled $1.5 million.
Results
of Operations
Years
Ended December 31, 2008, 2007 and 2006
Net
Revenue
The following table sets forth, for the periods indicated, a
year-over-year comparison of the key components of our net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
805,506
|
|
|
$
|
674,296
|
|
|
$
|
131,210
|
|
|
|
19
|
%
|
|
$
|
633,658
|
|
|
$
|
40,638
|
|
|
|
6
|
%
|
Subscription
|
|
|
661,586
|
|
|
|
552,131
|
|
|
|
109,455
|
|
|
|
20
|
|
|
|
428,296
|
|
|
|
123,835
|
|
|
|
29
|
|
Product
|
|
|
132,973
|
|
|
|
81,793
|
|
|
|
51,180
|
|
|
|
63
|
|
|
|
83,204
|
|
|
|
(1,411
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
291,845
|
|
|
|
22
|
%
|
|
$
|
1,145,158
|
|
|
$
|
163,062
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
844,937
|
|
|
$
|
678,227
|
|
|
$
|
166,710
|
|
|
|
25
|
%
|
|
$
|
633,222
|
|
|
$
|
45,005
|
|
|
|
7
|
%
|
EMEA
|
|
|
502,876
|
|
|
|
426,966
|
|
|
|
75,910
|
|
|
|
18
|
|
|
|
354,592
|
|
|
|
72,374
|
|
|
|
20
|
|
Japan
|
|
|
116,567
|
|
|
|
102,272
|
|
|
|
14,295
|
|
|
|
14
|
|
|
|
87,121
|
|
|
|
15,151
|
|
|
|
17
|
|
Asia-Pacific, excluding Japan
|
|
|
81,109
|
|
|
|
60,913
|
|
|
|
20,196
|
|
|
|
33
|
|
|
|
43,018
|
|
|
|
17,895
|
|
|
|
42
|
|
Latin America
|
|
|
54,576
|
|
|
|
39,842
|
|
|
|
14,734
|
|
|
|
37
|
|
|
|
27,205
|
|
|
|
12,637
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
291,845
|
|
|
|
22
|
%
|
|
$
|
1,145,158
|
|
|
$
|
163,062
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net service and support revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support and maintenance
|
|
$
|
742,876
|
|
|
$
|
644,464
|
|
|
$
|
98,412
|
|
|
|
15
|
%
|
|
$
|
610,061
|
|
|
$
|
34,403
|
|
|
|
6
|
%
|
Consulting, training and other services
|
|
|
62,630
|
|
|
|
29,832
|
|
|
|
32,798
|
|
|
|
110
|
|
|
|
23,597
|
|
|
|
6,235
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total service and support revenue
|
|
$
|
805,506
|
|
|
$
|
674,296
|
|
|
$
|
131,210
|
|
|
|
19
|
%
|
|
$
|
633,658
|
|
|
$
|
40,638
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
57,485
|
|
|
$
|
37,389
|
|
|
$
|
20,096
|
|
|
|
54
|
%
|
|
$
|
52,077
|
|
|
$
|
(14,688
|
)
|
|
|
(28
|
)%
|
Hardware
|
|
|
64,195
|
|
|
|
33,431
|
|
|
|
30,764
|
|
|
|
92
|
|
|
|
31,367
|
|
|
|
2,064
|
|
|
|
7
|
|
Retail and other
|
|
|
11,293
|
|
|
|
10,973
|
|
|
|
320
|
|
|
|
3
|
|
|
|
(240
|
)
|
|
|
11,213
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
132,973
|
|
|
$
|
81,793
|
|
|
$
|
51,180
|
|
|
|
63
|
%
|
|
$
|
83,204
|
|
|
$
|
(1,411
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Calculation not meaningful |
37
Our net revenue in a specific period is an aggregation of
thousands of transactions ranging from high-volume, low-dollar
transactions to high-dollar, multiple-element transactions that
are individually negotiated. The impact of pricing and volume
changes on revenue is complex as substantially all of our
transactions contain multiple elements, primarily software
licenses and post-contract support (PCS).
Additionally, approximately 75 85% of our revenue in
a specific period is derived from prior-period transactions for
which revenue has been deferred and is being amortized into
income over the period of the arrangement. Therefore, the impact
of pricing and volume changes on revenue in a specific period
results from transactions in multiple prior periods.
The increase in net revenue from 2007 to 2008 reflected
(i) a $194.0 million, or 25%, increase in our
corporate business and (ii) a $97.9 million, or 18%,
increase in our consumer business.
Net revenue from our corporate business increased during 2008
compared to 2007 primarily due to (i) a $122.2 million
increase in revenue from our end point solutions, which includes
increased revenue from our system security solutions and new
revenue from data encryption products integrated from our
SafeBoot acquisition, (ii) a $60.1 million increase in
revenue from our network security offerings and (iii) a
$11.7 million increase in our vulnerability and risk
management offerings. In 2008, we experienced an increase in the
sale of our hardware solutions, which resulted in higher upfront
revenue recognition. During 2008, we also experienced an
increase in both the number and size of larger transactions sold
to customers through a solution selling approach which bundles
multiple products and services into suite offerings. This
positively impacted revenue and deferred revenue and will impact
our revenue in future periods. In addition, our total net
revenue in 2008 was positively impacted by $19.2 million
from products integrated from our Secure Computing acquisition.
This impacted all of our net revenue product lines.
Net revenue from our consumer market increased during 2008
compared to 2007 primarily due to (i) an increase in our
customer base and (ii) increased percentage of suite sales
from McAfee Internet Security Suites to McAfee Total Protection
Suites. We continued to strengthen our relationships with
strategic partners, such as Acer, Dell, Sony Computer and
Toshiba.
Net revenue from our corporate business increased during 2007
compared to 2006 primarily due to an 11% increase in our system
security products, a 26% increase in our network security
products and a 35% increase in our McAfee Foundstone offerings.
Net revenue from our system security products, McAfee Network
Security product line and Foundstone product line, increased by
$58.1 million, $30.6 million and $11.5 million,
respectively. During 2007, we experienced an increase in both
the number and the size of larger transactions sold to customers
through a solution selling approach which bundles multiple
products and services. Net revenue from our consumer business
increased during 2007 compared to 2006 primarily due to
(i) online subscriber growth due partly to an increase in
our customer base and expansion to additional countries and
(ii) increased online renewal subscriptions. These
increases reflected our strengthening relationships with
strategic channel partners such as AOL and Dell.
Net
Revenue by Geography
Net revenue outside of North America accounted for 47%, 48%, and
45% of net revenue for 2008, 2007 and 2006, respectively. Net
revenue from North America and EMEA has historically comprised
between 80% and 90% of our business.
The increase in net revenue in North America during 2008 was
primarily related to (i) a $103.8 million increase in
corporate revenue in North America due to increased revenue from
our network security offerings, our end point solutions and our
vulnerability and risk management offerings and (ii) a
$62.9 million increase in consumer revenue due to an
increase in our customer base and increased percentage of suite
sales from lower-priced suites to higher-priced suites. We also
experienced an increase in U.S. government spending on our
product offerings and larger transactions sold to customers
through a solution selling approach.
The increase in net revenue in North America during 2007
primarily related to (i) a $38.2 million increase in
corporate revenue in North America due to increased corporate
spending on McAfee security products and increased revenue from
our Foundstone, McAfee Network Security and Webshield product
lines and, to a lesser extent, increased consumer revenue in
North America.
38
The increase in net revenue in EMEA during 2008 was attributable
to (i) a $59.2 million increase in corporate revenue
due to increased revenue from our network security offerings,
our end point solutions, and our vulnerability and risk
management offerings and (ii) a $16.7 million increase
in consumer revenue due to an increase in our customer base,
expansion to additional countries and an increased percentage of
suite sales from lower-priced suites to higher-priced suites.
Net revenue from EMEA was also positively impacted by the
strengthening Euro against the U.S. Dollar, which resulted
in an approximate $45.1 million impact to EMEA net revenue
in 2008 compared to 2007 and is included in the corporate and
consumer business increases above.
The increase in total net revenue in EMEA during 2007 was
attributable to (i) a $51.1 million increase in
corporate revenue due to increased corporate spending on McAfee
security products and increased revenue from our Foundstone and
McAfee Network Security product lines and (ii) a
$21.2 million increase in consumer revenue from online
subscriber growth due to our increased customer base. Net
revenue from our consumer business in both North America and in
EMEA increased during 2007 primarily due to online subscriber
growth due to our increased customer base and expansion to
additional countries. Net revenue from EMEA was also positively
impacted by the strengthening Euro against the U.S. Dollar,
which resulted in an approximate $35.4 million impact to
EMEA net revenue in 2007 compared to 2006 and is included in the
corporate and consumer business increases above.
Our Japan, Latin America and Asia-Pacific operations combined
have historically comprised less than 20% of our total net
revenue and we expect this trend to continue. In 2008, revenue
in Japan was positively impacted by the stronger Japanese Yen
against the U.S. Dollar, which resulted in an approximate
$12.0 million increase to Japanese net revenue in 2008
compared to 2007. Although total net revenue from Japan
increased in 2007 compared to 2006, the weakening Japanese Yen
against the U.S. Dollar in 2007 compared to 2006 resulted
in a modestly negative impact to Japanese net revenue.
Service
and Support Revenue
Service and support revenue includes revenue from software
support and maintenance contracts, training, consulting and
other services. The increase in service and support revenue in
2008 compared 2007 was attributable to an increase in support
and maintenance primarily due to amortization of previously
deferred revenue from support arrangements and an increase in
sales of support renewals. In addition, revenue from consulting
increased due to more consultants providing integration and
implementation services.
The increase in service and support revenue in 2007 compared to
2006 was attributable to an increase in support and maintenance
primarily due to amortization of previously deferred revenue
from support arrangements and an increase in sales of support
renewals. In addition, revenue from consulting increased due to
both our Foundstone Consulting Services, which includes threat
modeling, security assessments and education, and McAfee
Consulting Services, which provides product design and
deployment support.
Although we expect our service and support revenue to continue
to increase, our growth rate and net revenue depend
significantly on renewals of support arrangements as well as our
ability to respond successfully to the pace of technological
change and expand our customer base. If our renewal rate or our
pace of new customer acquisition slows, our net revenue and
operating results would be adversely affected.
Subscription
Revenue
Subscription revenue includes revenue from online subscription
arrangements. The increase in subscription revenue in 2008
compared to 2007 was attributable to (i) increases in our
online subscription arrangements due to our continued
relationships with strategic partners, such as Acer, Dell, Sony
Computer and Toshiba, (ii) increases in revenue from our
McAfee Total Protection Service for small and mid-market
businesses and (iii) increases in royalties from sales by
our strategic partners. Subscription revenue continues to be
positively impacted by McAfee Consumer Suites, including McAfee
VirusScan Plus, McAfee Internet Security, and McAfee Total
Protection Solutions, as these suites utilize a
subscription-based model.
The increase in subscription revenue in 2007 compared to 2006
was attributable to (i) an increase in our online
subscription arrangements due to our continued relationships
with strategic channel partners, such as AOL and Dell,
(ii) an increase in revenue from our McAfee Total
Protection Service for small and medium-sized businesses,
39
(iii) an increase in royalties from sales by our strategic
channel partners, which have increased in number from 2006, and
(iv) an increase due to our launch of McAfee Consumer
Suites.
Product
Revenue
Product revenue includes revenue from perpetual software
licenses, hardware sales and retail product sales. The increase
in product revenue in 2008 compared to 2007 was attributable to
(i) increased revenue from our data protection solutions
and upgrade initiatives related to our total protection
solutions and (ii) increased revenue from our network
security solutions which have a higher hardware content and,
therefore, more upfront revenue realization.
The decrease in product revenue from 2007 compared to 2006 was
primarily attributable to a decrease in license revenue as a
result of the launch of our McAfee Consumer Suites in September
2006 when we switched from a perpetual model, where more revenue
was being recognized up-front to a subscription licensing model,
which resulted in more revenue being recognized ratably over the
term of the agreement. Although product revenue as a whole
decreased as a result of our launch of McAfee Consumer Suites,
retail and other revenue increased due to the launch.
Cost
of Net Revenue
The following table sets forth, for the periods indicated, a
comparison of cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
66,108
|
|
|
$
|
49,285
|
|
|
$
|
16,823
|
|
|
|
34
|
%
|
|
$
|
51,904
|
|
|
$
|
(2,619
|
)
|
|
|
(5
|
)%
|
Subscription
|
|
|
187,975
|
|
|
|
165,297
|
|
|
|
22,678
|
|
|
|
14
|
|
|
|
110,267
|
|
|
|
55,030
|
|
|
|
50
|
|
Product
|
|
|
72,634
|
|
|
|
55,872
|
|
|
|
16,762
|
|
|
|
30
|
|
|
|
60,957
|
|
|
|
(5,085
|
)
|
|
|
(8
|
)
|
Amortization of purchased technology
|
|
|
56,811
|
|
|
|
35,290
|
|
|
|
21,521
|
|
|
|
61
|
|
|
|
23,712
|
|
|
|
11,578
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
$
|
383,528
|
|
|
$
|
305,744
|
|
|
$
|
77,784
|
|
|
|
25
|
|
|
$
|
246,840
|
|
|
$
|
58,904
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
739,398
|
|
|
$
|
625,011
|
|
|
|
|
|
|
|
|
|
|
$
|
581,754
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
473,611
|
|
|
|
386,834
|
|
|
|
|
|
|
|
|
|
|
|
318,029
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
60,339
|
|
|
|
25,921
|
|
|
|
|
|
|
|
|
|
|
|
22,247
|
|
|
|
|
|
|
|
|
|
Amortization of purchased technology
|
|
|
(56,811
|
)
|
|
|
(35,290
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
1,216,537
|
|
|
$
|
1,002,476
|
|
|
|
|
|
|
|
|
|
|
$
|
898,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage
|
|
|
76
|
%
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Service and Support Revenue
Cost of service and support revenue consists principally of
salaries, benefits and stock-based compensation related to
employees, as well as expenses related to professional service
subcontractors, customer support, training and consulting
services. During 2008, we recognized for the first time costs
related to delivering annotation, scanning and search services
associated with ScanAlert and SiteAdvisor. In addition, the cost
of service and support revenue increased during 2008 compared to
2007 due to increased professional services costs related to
McAfee Consulting Services. The cost of service and support
revenue as a percentage of service and support revenue for 2008
remained consistent when compared to 2007.
The cost of service and support revenue decreased in 2007
compared to 2006 due to the shift in focus from perpetual
retail-boxed products to our McAfee Consumer Suites subscription
model for consumers. For 2007, a
40
larger percentage of total cost of service and support revenue
relates to subscription-based consumer licenses. The decrease in
cost for 2007 compared to 2006 was slightly offset by an
increase in consulting service costs as a result of increased
consulting activity. The cost of service and support revenue as
a percentage of service and support revenue for 2007 remained
consistent when compared to 2006.
We anticipate the cost of service and support revenue will
increase in absolute dollars driven primarily by additional
growth in our McAfee Consulting Services, which provide end
users with product design, user training, and deployment support
and the expected impact related to the acquisition of Secure
Computing.
Cost of
Subscription Revenue
Cost of subscription revenue consists primarily of costs related
to the sale of online subscription arrangements, the majority of
which include revenue-share arrangements and royalties paid to
our strategic partners, and the costs of media, manuals and
packaging related to McAfee Consumer Suites, as these suites
utilize a subscription-based model. The increase in subscription
costs for 2008 compared to 2007 was primarily attributable to an
increase in the volume of online subscription arrangements and
royalties paid to our online strategic partners. The cost of
subscription revenue as a percentage of subscription revenue
decreased in 2008 compared to 2007 due to increases in higher
margin royalty transactions originating from sales by our
strategic partners.
The increase in subscription costs for 2007 compared to 2006 was
primarily attributable to (i) an increase in the volume of
online subscription arrangements and royalties paid to our
on-line strategic channel partners and (ii) an increase in
the cost to support subscription-based consumer licenses. These
increased costs are also the cause for the increase in cost of
subscription revenue as a percentage of subscription revenue,
when comparing the same periods.
We anticipate that the cost of subscription revenue will
increase in absolute dollars due to increased demand for our
subscription-based products with associated revenue-sharing
costs.
Cost of
Product Revenue
Cost of product revenue consists primarily of the cost of media,
manuals and packaging for products distributed through
traditional channels and, with respect to hardware-based
security products, the cost of computer platforms, other
hardware and embedded third-party components and technologies.
The cost of product revenue for 2008 increased from 2007 due
primarily to increased sales of network protection solutions.
Cost of product revenue for 2008 decreased as a percentage of
product revenue compared to 2007, due primarily to increased
margins on corporate revenue resulting from an increase in both
the number and size of larger transactions sold to customers
through a solution selling approach.
The cost of product revenue for 2007 decreased from 2006 due to
a decrease in product units sold, consistent with our shift in
focus from retail-boxed products to our online subscription
model, and to a decrease in costs associated with product
warranties and obsolete inventory. Cost of product revenue for
2007 decreased as a percentage of product revenue compared to
2006, due primarily to decreased costs as a percentage of
revenue in our consumer business.
We anticipate that cost of product revenue will increase in
absolute dollars due to the expected impact of the acquisition
of Secure Computing.
Amortization
of Purchased Technology
The increase in amortization of purchased technology and patents
in 2008 compared to 2007 was driven by the acquisitions of
Secure Computing in November 2008, Reconnex in August 2008,
ScanAlert in January 2008 and SafeBoot in November 2007.
Amortization for the purchased technology and patents related to
these acquisitions was $31.3 million in 2008.
The increase in amortization of purchased technology and patents
in 2007 was due to the acquisitions of SiteAdvisor in April
2006, Preventsys in June 2006, Onigma in October 2006, Citadel
in December 2006 and SafeBoot in November 2007. Amortization for
these items was $20.6 million in 2007 compared to
$6.1 million in 2006. The purchased technology is being
amortized over estimated useful lives of up to seven years.
41
We expect amortization of purchased technology to increase in
absolute dollars in 2009 as a result of our recent acquisitions.
Gross
Margin
Our gross margins decreased slightly for the year ended 2008
compared to the year ended 2007 due mostly to the increase in
amortization of purchased technology related to acquisitions
made during the year. Our gross margins were also relatively
flat for the year ended 2007 compared to the year ended 2006.
Gross margins may fluctuate in the future due to various
factors, including the mix of products sold, upfront revenue
realization, sales discounts, revenue-sharing arrangements,
material and labor costs, warranty costs and amortization of
purchased technology and patents.
Stock-based
Compensation Expense
Stock-based compensation expense consists of expense associated
with all stock-based awards made to our employees and outside
directors. Our stock-based awards include options, RSUs, RSAs,
PSUs and ESPP grants.
The following table sets forth, for the periods indicated, a
comparison of our stock-based compensation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Stock-based compensation expense
|
|
$
|
76,881
|
|
|
$
|
59,017
|
|
|
$
|
17,864
|
|
|
|
30
|
%
|
|
$
|
57,761
|
|
|
$
|
1,256
|
|
|
|
2
|
%
|
The $17.9 million increase in stock-based compensation
expense during 2008 compared to 2007 was primarily attributable
to (i) a $21.0 million increase in expense relating to
increased grants of PSUs, of which a significant portion were
granted in February 2008, (ii) a $4.9 million increase
in expense relating to increased grants of RSUs and assumed RSAs
and RSUs from the 2008 acquisition of Secure Computing,
(iii) a $3.4 million increase in expense relating to
ESPP grants due to reinstating our Employee Stock Purchase Plan
(ESPP) in June 2008, (iv) a $3.0 million
increase in expense relating to assumed options from the 2007
acquisition of SafeBoot and (v) increases in various other
expenses associated with stock-based awards, partially offset by
a $17.3 million decrease in expense relating to the
extension of post-termination exercise period and cash
settlement of options. See Note 14 to the consolidated
financial statements for additional information.
The $1.3 million increase in stock-based compensation
expense during 2007 compared to 2006 was primarily attributable
to (i) a $9.7 million increase in expense relating to
the extension of post-termination exercise period and
(ii) a $4.9 million increase in expense relating to
RSUs that were granted in the first quarter of 2006, partially
offset by (i) a $11.3 million decrease in expense
relating to fewer grants of stock options in 2007 and 2006 as
compared to prior periods and (ii) decreases in various
other expenses associated with stock-based awards. See
Note 14 to the consolidated financial statements for
additional information.
Operating
Costs
Research
and development
The following table sets forth, for the periods indicated, a
comparison of our research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development(1)
|
|
$
|
252,020
|
|
|
$
|
217,934
|
|
|
$
|
34,086
|
|
|
|
16
|
%
|
|
$
|
193,447
|
|
|
$
|
24,487
|
|
|
|
13
|
%
|
Percentage of net revenue
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $18.5 million,
$14.0 million and $15.0 million in 2008, 2007 and
2006, respectively. |
Research and development expenses consist primarily of salary,
benefits, and stock-based compensation for our development and a
portion of our technical support staff, contractors fees
and other costs associated with the
42
enhancement of existing products and services and development of
new products and services. The increase in research and
development expenses in 2008 compared to 2007 was primarily
attributable to (i) a $20.3 million increase in salary
and benefit expense for individuals performing research and
development activities due to an increase in average headcount
and salary increases and (ii) increases in the use of
third-party contractors, stock-based compensation expense in
2008 and in various other expenses associated with research and
development activities.
The increase in research and development expenses in 2007 was
primarily attributable to a $25.4 million increase in
salary and benefit expense for individuals performing research
and development activities due to an increase in average
headcount and salary increases, partially offset by decreases in
the use of third-party contractors, stock-based compensation
expense in 2007 and in various other expenses associated with
research and development activities.
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 during 2009.
Sales and
marketing
The following table sets forth, for the periods indicated, a
comparison of our sales and marketing expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and marketing(1)
|
|
$
|
525,942
|
|
|
$
|
388,213
|
|
|
$
|
137,729
|
|
|
|
35
|
%
|
|
$
|
366,454
|
|
|
$
|
21,759
|
|
|
|
6
|
%
|
Percentage of net revenue
|
|
|
33
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $32.6 million,
$21.8 million and $24.3 million in 2008, 2007 and
2006, respectively. |
Sales and marketing expenses consist primarily of salary,
commissions, stock-based compensation and benefits and costs
associated with travel for sales and marketing personnel,
advertising and promotions. The increase in sales and marketing
expenses during 2008 compared to 2007 reflected (i) a
$71.7 million increase in salary and benefit expense,
including commissions, for individuals performing sales and
marketing activities due to an increase in average headcount and
salary increases, (ii) a $34.7 million increase
related to agreements with certain PC OEM partners, (iii) a
$10.8 million increase in stock-based compensation expense,
(iv) a $9.3 million increase due to the average Euro
and Japanese Yen exchange rate strengthening against the
U.S. Dollar during 2008 in comparison to 2007, (v) a
$9.0 million increase in travel expense primarily
attributable to increased average headcount and
(vi) increases in marketing and promotion expenses, the use
of third-party contractors and in various other expenses
associated with sales and marketing activities.
The increase in sales and marketing expenses during 2007
compared to 2006 principally reflected (i) a
$12.5 million increase in salary, commission and benefit
expense for individuals performing sales and marketing
activities due to an increase in average headcount and salary
increases, (ii) an increase of $6.8 million in
contract labor and (iii) a $7.0 million increase due
to the strengthening Euro against the U.S. Dollar during
the year, partially offset by a decrease in stock-based
compensation expense in 2007 and decreases in various other
expenses associated with sales and marketing activities.
We anticipate that sales and marketing expenses will increase in
absolute dollars primarily due to agreements with our strategic
partners, primarily our PC OEM partners, where we have seen
growth in volume and an increase in the number of partner
agreements, our planned branding initiatives and our additional
investment in sales capacity.
43
General
and administrative
The following table sets forth, for the periods indicated, a
comparison of our general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative(1)
|
|
$
|
204,786
|
|
|
$
|
214,164
|
|
|
$
|
(9,378
|
)
|
|
|
(4
|
)%
|
|
$
|
187,777
|
|
|
$
|
26,387
|
|
|
|
14
|
%
|
Percentage of net revenue
|
|
|
13
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense of $22.1 million,
$20.1 million and $15.0 million in 2008, 2007 and
2006, respectively. |
General and administrative expenses consist principally of
salary, stock-based compensation and benefit costs for executive
and administrative personnel, professional services and other
general corporate activities. The decrease in general and
administrative expenses during 2008 compared to 2007 reflected
(i) a $27.0 million decrease in costs arising as a
result of our completed investigation into our historical stock
option granting practices as the investigation was completed
prior to the restatement of our historical financial results on
December 21, 2007 and (ii) a $14.2 million
benefit related to the change in fair value of certain stock
options accounted for as liability awards, partially offset by
(i) a $14.5 million increase in salary and benefit
expense for individuals performing general and administrative
activities due to an increase in average headcount and salary
increases, (ii) a $6.2 million increase in the use of
third-party contractors and (iii) increases in expense due
to the average Euro and Japanese Yen exchange rate strengthening
against the U.S. Dollar during 2008 in comparison to 2007,
acquisition-related costs, legal costs and various other
expenses associated with general and administrative activities.
The increase in general and administrative expenses in 2007
compared to 2006 reflected (i) a $19.0 million
increase in expense related to the investigation into our stock
option granting practices and expense associated with the
restatement of our financial statements, partially offset by a
decrease in costs related to independent consultants engaged in
2006 to examine and recommend improvements to our internal
controls to ensure compliance with federal securities laws as
required by our previous settlement with the SEC, (ii) a
$13.2 million increase in salary and benefit expense for
individuals performing general and administrative activities due
to an increase in average headcount and salary increases,
(iii) an $8.7 million increase related to the change
in fair value of certain stock options accounted for as
liability awards and (iv) a $5.1 million increase in
stock-based compensation expense in 2007, partially offset by a
$12.5 million decrease in legal fees, which in 2006
included expenses related to our offer to settle a derivative
class action lawsuit, a commercial settlement, indemnification
costs for former directors and officers and decreases in various
other expenses associated with general and administrative
activities.
We anticipate that general and administrative expenses will
increase in absolute dollars during 2009.
Amortization
of intangibles
The following table sets forth, for the periods indicated, a
comparison of the amortization of intangibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Amortization of intangibles
|
|
$
|
26,470
|
|
|
$
|
13,583
|
|
|
$
|
12,887
|
|
|
|
95
|
%
|
|
$
|
10,682
|
|
|
$
|
2,901
|
|
|
|
27
|
%
|
Intangibles consist of identifiable intangible assets such as
trademarks and customer lists. The increases in amortization of
intangibles were attributable to our 2008 and 2007 acquisitions,
in which we acquired $110.0 million of intangible assets
related to the Secure Computing, SafeBoot, ScanAlert, and
Reconnex acquisitions.
The increase in amortization of intangibles from 2006 to 2007
was primarily attributable to increased amortization associated
with intangible assets acquired in the 2006 acquisitions and the
SafeBoot acquisition in 2007.
44
We expect amortization of intangibles to increase in absolute
dollars in 2009 as a result of our recent acquisitions.
Restructuring
(benefit) charges
The following table sets forth, for the periods indicated, a
comparison of our restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Restructuring (benefit) charges
|
|
$
|
(1,752
|
)
|
|
$
|
8,769
|
|
|
$
|
(10,521
|
)
|
|
|
|
*
|
|
$
|
470
|
|
|
$
|
8,299
|
|
|
|
|
*
|
|
|
|
* |
|
Calculation not meaningful |
Restructuring benefit in 2008 totaled $1.8 million. We
recorded an $8.4 million benefit, net of accretion, related
primarily to changes in previous estimates of base rent and
sublease income for the Santa Clara lease which was
restructured in 2003 and 2004 offset by a charge of
$6.6 million related to the elimination of certain
positions at SafeBoot and Secure Computing that were redundant
to positions at McAfee, the realignment of our sales force, and
the realignment of staffing across all departments. See
Note 7 to our consolidated financial statements for a
description of restructuring activities.
During 2007, we completed restructuring activities when we
permanently vacated several leased facilities and recorded a
$0.3 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. We also recorded a restructuring charge of
$2.6 million related to a reduction in headcount of
33 employees. Restructuring charges were increased by
$5.4 million in 2007 as a result of revisions related
primarily to previous estimates of base rent, sublease income,
property taxes and insurance for the Santa Clara lease
which was restructured in 2003 and 2004. Accretion on prior year
restructurings totaled $0.5 million.
In-process
research and development
During 2008, we recorded $19.5 million for in-process
research and development related to the acquisition of Secure
Computing in November 2008, which was fully expensed upon
purchase because technological feasibility had not been achieved
and there was no alternative use for the projects under
development. The in-process research and development included
new releases of the Firewall Sidewinder, Webwasher and Mail
products, the fair value at acquisition was $7.6 million,
$9.5 million and $2.4 million, respectively, and the
percent complete as of December 31, 2008 was 30%, 80% and
80%, respectively. As of December 31, 2008, we estimate
$6.1 million to complete the remaining development efforts
in 2009. The fair values were determined using the excess
earnings method under the income approach using a discount rate
reflective of the risk associated with the stage of completion
and financial risk of the projects. During 2006, we expensed
$0.5 million of in-process research and development related
to the acquisition of Preventsys, Inc. in June 2006. See
Note 3 to the consolidated financial statements for
additional information.
Interest
and Other Income
The following table sets forth, for the periods indicated, a
comparison of our interest and other income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Interest and other income
|
|
$
|
45,687
|
|
|
$
|
68,287
|
|
|
$
|
(22,600
|
)
|
|
|
(33
|
)%
|
|
$
|
44,397
|
|
|
$
|
23,890
|
|
|
|
54
|
%
|
Interest and other income includes interest earned on
investments, as well as net foreign currency transaction gains
or losses and net forward contract gains or losses. The decrease
in interest income in 2008 compared to 2007 was partially due to
(i) a lower average rate of annualized return on our
investments from approximately 5% in 2007 to approximately 4% in
2008 and (ii) a decrease in our average cash, cash
equivalents and marketable securities of approximately
$300 million in 2008 compared to 2007.
45
The increase in 2007 interest and other income as compared to
2006 was partially due to the rising average rate of annualized
return on our investments from 4% in 2006 to 5% in 2007. In
addition, our average cash, marketable securities and restricted
cash in 2007 compared to 2006 increased approximately
$160 million.
During 2008 and 2007, we recorded net foreign currency
transaction gains of $6.4 million and $1.0 million,
respectively. During 2006, we recorded a net foreign currency
transaction loss of $8.5 million.
We anticipate that interest and other income will decrease
during 2009 as a result of lower cash balances due to
acquisitions and our stock repurchase program, the declining
interest rate environment and our shifting a large percentage of
our investment portfolio to shorter-term and
U.S. government and FDIC guaranteed investments which have
a lower yield.
Impairment
of Marketable Securities
During 2008, we recorded impairments on certain of our
marketable securities of $18.5 million. Current economic
conditions have had widespread negative effects on the markets
for debt securities in 2008. Factors which we use to assess
whether an other-than- temporary decline has occurred include,
but are not limited to, the likely reason for the unrealized
loss, period of time the fair value was below amortized cost,
changes in underlying collateral, changes in ratings, market
trends and conditions, and our intent and ability to hold until
we recover such losses. We did not have any impairments of
securities in 2007 or 2006.
Gain on
investments, net
In 2008, 2007 and 2006, we recognized net gains on the sale of
marketable securities of $5.5 million, $1.1 million
and $0.4 million, respectively. Our investments are
classified as
available-for-sale
and we may sell securities from time to time to move funds into
investments with more lucrative yields, for liquidity purposes,
or in the case of 2008, given the current economic environment,
into investments that are considered more conservative, thus
resulting in gains and losses on sale.
Provision
for income taxes
The following table sets forth, for the periods indicated, a
year-over-year
comparison of our provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
2007 vs. 2006
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2006
|
|
$
|
|
%
|
|
|
(Dollars in thousands)
|
|
Provision for income taxes
|
|
$
|
49,997
|
|
|
$
|
62,224
|
|
|
$
|
(12,227
|
)
|
|
|
(20
|
)%
|
|
$
|
46,310
|
|
|
$
|
15,914
|
|
|
|
34
|
%
|
Effective tax rate
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
Tax expense was 23%, 27% and 25% of income before income taxes
for 2008, 2007 and 2006, respectively. The effective tax rate
for 2008 differs from the U.S. statutory rate due to a
benefit of releasing valuation allowance on our foreign tax
credit and research and development credit, as well as the
benefit of lower tax rates in certain jurisdictions. These
benefits are partially offset by tax on deemed repatriations of
earnings from foreign subsidiaries, tax effects of stock
compensation, and the expensing of $19.5 million in-process
research and development related to the Secure Computing
acquisition. In October of 2008, we were granted administrative
relief by the U.S. Internal Revenue Service from the
negative tax consequences associated with certain acquisition
integration activities. As a result, we reversed previously
recorded tax expense in the fourth quarter 2008. We recorded a
tax benefit of $28.9 million for the fourth quarter and
$3.0 million for the year. The decrease in the 2008 tax
rate as compared to 2007 is primarily related to release of
valuation allowance in 2008 offset by the tax effect of a shift
in jurisdictional earnings.
The effective tax rates for 2007 and 2006 differ from the
statutory rate generally due to the benefit of research and
development tax credits, foreign tax credits, lower tax rates in
certain foreign jurisdictions, adjustments to tax reserves and
valuation allowances, and the tax effects of stock compensation
and deemed repatriations of earnings from foreign subsidiaries.
For further detail see Note 15 to our consolidated
financial statements. Our future
46
effective tax rates could be adversely affected if pretax
earnings are proportionately less than amounts in prior years in
countries where we have lower statutory rates or by unfavorable
changes in tax laws and regulations.
The earnings from our foreign operations in India are subject to
a tax holiday. In May 2008, the Indian government extended the
period through which the holiday would be effective to
March 31, 2010. The tax holiday provides for zero percent
taxation on certain classes of income and requires certain
conditions to be met. We were in compliance with these
conditions as of December 31, 2008.
We concluded a limited scope examination of our
U.S. federal income tax returns for the calendar years
2002, 2003, 2004 and 2005 with the Internal Revenue Service.
There was no material impact on the financial statements
resulting from this examination. The Internal Revenue Service is
now examining the federal tax return for calendar tax years 2006
and 2007. We cant reasonably determine if this examination
will have a material impact on the financial statements.
In October 2008, President Bush signed the Emergency Economic
Stabilization Act of 2008 (The Act). The Act
extended the research and development credit for both 2008 and
2009. We have recorded the benefit of the research and
development credit for all of 2008 in the fourth quarter and it
was not material.
Acquisitions
Secure
Computing
In November 2008, we acquired Secure Computing for
$490.1 million. With this acquisition, we plan to deliver
the industrys most complete network security portfolio
covering intrusion prevention, firewall, web security, email
security and data protection, and network access control to
organizations of all sizes. The results of operations for Secure
Computing have been included in our results of operations since
the date of acquisition.
SafeBoot
Holding B.V.
In November 2007, we acquired SafeBoot Holding B.V.
(Safeboot), an enterprise security software vendor
for data protection via encryption and access control, for
$346.6 million, of which $6.0 million was paid in
2008. With this acquisition, we provide our customers with
comprehensive data protection, including endpoint, network, web,
email and data security, as well as risk and compliance
solutions. The results of operations of Safeboot have been
included in our results of operations since the date of
acquisition.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
$
|
308,322
|
|
|
$
|
393,415
|
|
|
$
|
290,489
|
|
Net cash provided by (used in) investing activities
|
|
$
|
200,226
|
|
|
$
|
(436,770
|
)
|
|
$
|
(452,339
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(371,962
|
)
|
|
$
|
10,689
|
|
|
$
|
(197,711
|
)
|
Overview
At December 31, 2008, our cash, cash equivalents and
marketable securities totaled $593.7 million. Our principal
sources of liquidity were our existing cash, cash equivalents
and short-term marketable securities of $510.8 million and
our operating cash flows. Our principal uses of cash were
acquisitions, repurchases of our common stock, and operating
costs, which consist primarily of employee-related expenses,
such as compensation and benefits, as well as other general
operating expenses.
During 2008, we received $801.7 million net proceeds from
the purchase, sale or maturity of marketable securities. We
classify 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, U.S. government agency fixed income,
mortgage-backed and investment grade corporate fixed income
securities to maturity; however, we may sell an investment at
any time if the quality rating of the investment declines, the
yield on the investment is no longer attractive or we are in
need of cash. We expect to
47
continue our investing activities, including holding investment
securities of a short-term and long-term nature. During these
challenging markets, we are investing new cash in instruments
with short to medium-term maturities of highly-rated issuers,
including U.S. government and FDIC guaranteed investments.
During 2008, we paid $447.4 million, net of cash acquired,
to purchase Secure Computing; we paid $46.2 million, net of
cash acquired, to purchase Reconnex Corporation; and we paid
$49.0 million, net of cash acquired, to purchase ScanAlert,
Inc. In addition, we used $516.6 million for repurchases of
our common stock, including commissions and $48.7 million
for purchases of property and equipment. Of the
$516.6 million used for stock repurchases,
$500.0 million was used for share repurchases in the open
market and $16.6 million was used to repurchase shares of
our common stock in connection with our obligation to holders of
RSUs, RSAs and PSUs to withhold the number of shares required to
satisfy the holders tax liabilities in connection with the
vesting of such shares.
On December 22, 2008, we entered into a credit agreement by
and among us, McAfee Ireland Holdings Limited, certain of our
subsidiaries as guarantors, the lenders from time to time party
thereto and Bank of America, N.A., as administrative agent and
letter of credit issuer (Credit Facility). The
Credit Facility provides for a $100.0 million unsecured
term loan and a $100.0 million unsecured revolving credit
facility with a $25.0 million letter of credit sublimit.
The Credit Facility also contains an expansion option permitting
us to arrange up to an aggregate of $200.0 million in
additional commitments from existing lenders
and/or new
lenders.
Our management continues to monitor the financial markets and
general global economic conditions as a result of the recent
distress in the financial markets. As we monitor market
conditions, our liquidity position and strategic initiatives, we
may seek either short-term or long-term financing from external
credit sources in addition to the credit facilities discussed
herein. Our ability to raise funds may be adversely affected by
a number of factors, including factors beyond our control, such
as the current weakness in the economic conditions in the
markets in which we operate and into which we sell our products,
and increased uncertainty in the financial, capital and credit
markets. There can be no assurance that additional financing
would be available on terms acceptable to us, if at all.
Our management plans to use our cash and cash equivalents for
future operations, potential acquisitions and repurchases of our
common stock on the open market. We believe that our cash and
cash equivalent balances and cash that we generate over time
from operations, along with amounts available for borrowing
under the Credit Facility, will be sufficient to satisfy our
anticipated cash needs for working capital and capital
expenditures for at least the next 12 months and the
foreseeable future.
Operating
Activities
Net cash provided by operating activities in 2008, 2007 and 2006
was primarily the result of our net income of
$172.2 million, $167.0 million and
$137.5 million, respectively, net of non-cash related
expenses. During 2008, our primary working capital source was
increased deferred revenue which was attributable to growing
sales of maintenance renewals from our expanding customer base
and increased sales of subscription-based offerings. Working
capital uses of cash included increased accounts receivable
primarily due to increased invoicing over collections at the end
of the year, increased prepaid expenses and other assets, and
decreased accrued taxes and other liabilities primarily due to a
tax settlement payment of approximately $30.0 million. In
addition, during 2008, payments to our partners for
distribution-related agreements were higher than in 2007.
During 2007, primary working capital sources were increases in
deferred revenue, accrued taxes and other liabilities and
accounts payable. The increase in deferred revenue in 2007 was
due to increased sales of subscription and support contracts.
The increase in accrued liabilities is primarily due to the
classification of certain equity awards to liability awards as a
result of modifications and additional accruals for legal
settlements. Primary working capital uses were increases in
accounts receivable primarily attributable to increased
invoicing over collections at the end of the year and increases
in prepaid expenses, prepaid taxes and other assets primarily
attributable to prepayments to our partners.
During 2006, primary working capital sources were increases in
deferred revenue and accrued taxes and other liabilities. The
increase in deferred revenue in 2006 was due to increased sales
of subscription and support contracts.
48
The primary working capital use was an increase in prepaid
expenses, prepaid taxes and other assets primarily related to
prepayments of royalties.
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, 2008 and
2007, $364.5 million and $342.3 million, respectively,
were held outside the United States. We utilize a variety of tax
planning and financing strategies to ensure that our worldwide
cash is available in the locations in which it is needed.
We incurred material expenses in 2007 and 2006 as a direct
result of the investigation into our stock option grant
practices and related accounting. These costs primarily related
to professional services for legal, accounting and tax guidance.
In addition, we incurred costs related to litigation, the
informal investigation by the SEC, the grand jury subpoena from
the U.S. Attorneys Office for the Northern District
of California and the preparation and review of our restated
consolidated financial statements for 2006. We expect that we
may be subject to certain fines
and/or
penalties resulting from the findings of the investigation. We
cannot reasonably estimate the range of fines
and/or
penalties, if any, that might be incurred as a result of the
investigation. We expect to pay for these obligations with
available cash.
We expect to meet our obligations as they become due through
available cash, borrowings under the Credit Facility and
internally generated funds. We expect to continue generating
positive working capital through our operations. However, we
cannot predict whether current trends and conditions will
continue or what the effect on our business might be from the
competitive environment in which we operate. In addition, we
currently cannot predict the outcome of the litigation described
in Note 18.
Investing
Activities
Net cash provided by investing activities was
$200.2 million in 2008 compared to net cash used in
investing activities of $436.8 million in 2007.
In 2008, the primary source of cash from investing activities
was $801.7 million of net proceeds from sales or maturities
of marketable securities, net of purchases. The primary uses of
cash in investing activities included three acquisitions and
purchases of property and equipment and leasehold improvements.
Our cash used for acquisitions increased to $550.6 in 2008
compared to $333.4 million in 2007. During 2008, we paid
$447.4 million, net of cash acquired, to purchase Secure
Computing, $46.2 million, net of cash acquired, to purchase
Reconnex, and $49.0 million, net of cash acquired, to
purchase ScanAlert. In 2007, including the amount placed in
escrow, we paid $328.9 million, net of the
$9.8 million cash acquired, for the purchase of SafeBoot.
Our cash used for purchases of property and equipment increased
to $48.7 million in 2008 compared to $33.6 million in
2007. The $48.7 million of property and equipment purchased
during 2008 was primarily for upgrades of our existing systems
and purchases of computers, equipment and software, and for
leasehold improvements at various offices. The
$33.6 million of property and equipment purchased during
2007 was primarily for upgrades of our existing systems and
purchases of computers, equipment and software for ongoing
projects, for leasehold improvements primarily related to our
expanded research and development facility in Beaverton, Oregon,
and for the purchase of a generator to
back-up
servers and all corporate computer systems at our Plano, Texas
facility.
In addition, during 2007, we purchased patents for
$9.3 million.
Net cash used in investing activities decreased slightly to
$436.8 million in 2007 from $452.3 million in 2006.
During 2006, we paid $146.1 million, net of cash acquired,
for four acquisitions and purchased $43.8 million of
property and equipment. In 2006, the SEC entered the final
judgment for settlement related to our investigation into our
accounting practices that commenced in March 2002. The
$50.0 million that we placed in escrow in 2005 for the SEC
settlement was released from escrow for payment to the SEC and
was reflected as cash provided by investing activities.
49
Financing
Activities
Net cash used in financing activities was $372.0 million in
2008 compared to net cash provided by financing activities of
$10.7 million in 2007. During 2008, we used
$500.0 million to repurchase approximately
14.5 million shares of our common stock in the open market,
including commissions paid on these transactions. We had no
purchases in the open market or through privately negotiated
transactions in 2007. During 2008 and 2007, we used
$16.6 million and $0.2 million, respectively, to
repurchase shares of our common stock in connection with our
obligation to holders of RSUs, RSAs and PSUs to withhold the
number of shares required to satisfy the holders tax
liabilities in connection with the vesting of such shares. These
shares were not part of the publicly announced repurchase
program.
The primary source of cash provided by financing activities is
proceeds from the issuance of common stock under our stock
option plans and ESPP. In 2008, we received proceeds of
$130.0 million compared to $9.8 million in 2007 and
$32.0 million in 2006 from issuance of stock under such
plans. Beginning in July 2006, we suspended purchases under our
ESPP and prohibited our employees from exercising stock options
due to the announced investigation into our historical stock
option granting practices and our inability to become current on
our reporting obligations under the Securities Exchange Act of
1934, as amended. On December 21, 2007, we became current
on our reporting obligations and our employees were able to
exercise stock options for the first time in over
16 months. Therefore, proceeds from the issuance of common
stock under our stock option plans and ESPP were significantly
lower in 2007 and 2006 as compared to 2008.
Net cash used in financing activities was $197.7 million in
2006. This reflects cash used to repurchase our common stock in
the open market, offset by proceeds from the issuance of common
stock under our stock option plans and ESPP.
We had no repurchases of our common stock in the open market
during the fourth quarter of 2008. Pursuant to a stock
repurchase program that has been authorized by our board of
directors, we may repurchase up to an additional
$250.3 million of our common stock in the open market or
through privately negotiated transactions through July 2009,
depending upon market conditions, share price and other factors.
While we expect to continue to receive proceeds from our stock
option plans and ESPP in future periods, the timing and amount
of such proceeds are difficult to predict and are contingent on
a number of factors including the type of equity awards grants
to our employees, the price of our common stock, the number of
employees participating in the plans and general market
conditions.
Contractual
Obligations
A summary of our fixed contractual obligations and commitments
at December 31, 2008 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)
|
|
$
|
107,588
|
|
|
$
|
26,622
|
|
|
$
|
38,695
|
|
|
$
|
24,537
|
|
|
$
|
17,734
|
|
Other commitments(2)
|
|
|
168,460
|
|
|
|
147,144
|
|
|
|
21,076
|
|
|
|
240
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
7,482
|
|
|
|
7,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 obligations, including interest and penalties
|
|
|
5,585
|
|
|
|
5,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
289,115
|
|
|
$
|
186,833
|
|
|
$
|
59,771
|
|
|
$
|
24,777
|
|
|
$
|
17,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 most significant of our lease contractual
obligations relate to the following four leases:
$28.6 million for the Santa Clara, California facility
lease, $22.0 million for two St. Paul, Minnesota facility
leases, $10.7 million for the Slough, United Kingdom
facility lease. |
50
|
|
|
(2) |
|
Other commitments are minimum contractual commitments including
telecom contracts, software licensing, royalty and
distribution-related agreements. |
|
(3) |
|
Purchase obligations consist of purchase orders to our contract
manufacturers, which typically have delivery dates from four to
six weeks from the purchase order date. |
As of December 31, 2008, we had approximately
$84.1 million of tax liabilities, including interest and
penalties, related to uncertain tax positions. Because of the
high degree of uncertainty regarding the settlement of these
liabilities, we are unable to estimate the years in which future
cash outflows may occur other than the amount included in the
table above.
In addition to the contractual obligations above and as
permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
director and officer insurance coverage that reduces our
exposure and may enable us to recover a portion or all of any
future amounts paid. We believe the estimated fair value of
these indemnification agreements in excess of applicable
insurance coverage is minimal.
Off-Balance
Sheet Arrangements
We do not have off-balance sheet arrangements or special purpose
entities.
Credit
Facilities
On December 22, 2008, we entered into a credit facility
(Credit Facility) that provides for a
$100.0 million unsecured term loan and a
$100.0 million unsecured revolving credit facility with a
$25.0 million letter of credit sublimit. The Credit
Facility also contains an expansion option permitting us to
arrange up to an aggregate of $200.0 million in additional
commitments from existing lenders
and/or new
lenders.
The principal of, together with accrued interest on, the term
loan is due on December 22, 2009. The revolving credit
facility terminates on December 22, 2011, on which date all
outstanding principal of, together with accrued interest on, any
revolving loans will be due. We may prepay the loans and
terminate the commitments at any time, without premium or
penalty, subject to reimbursement of certain costs in the case
of eurocurrency loans.
Loans may be made in U.S. Dollars, Euros or other
currencies agreed to by the lenders. Loans will bear interest at
our election at the prime rate or at an adjusted LIBOR rate plus
a margin (ranging from 2.00% to 2.50%) that varies with our
consolidated leverage ratio (a eurocurrency loan).
Interest on the loans is payable quarterly in arrears with
respect to prime rate loans and at the end of an interest period
(or at each three month intervals in the case of loans with
interest periods greater than three months) in the case of
eurocurrency loans. In December 2008, we paid $2.0 million
of debt issuance costs related to the Credit Facility.
Commitment fees range from 0.25% to 0.45% of the unused portion
on the credit facility depending on our consolidated leverage
ratio. The Credit Facility contains financial covenants,
measured at the end of each of our quarters, providing that our
consolidated leverage ratio (as defined in the credit agreement)
cannot exceed 2.0 to 1.0 and our consolidated interest coverage
ratio (as defined in the credit agreement) cannot be less than
3.0 to 1.0. Additionally, the Credit Facility contains
affirmative covenants, including covenants regarding the payment
of taxes, maintenance of insurance, reporting requirements and
compliance with applicable laws. The Credit Facility contains
negative covenants, among other things, limiting our ability and
our subsidiaries ability to incur debt, liens, make
acquisitions, make certain restricted payments and sell assets.
The events of default under the Credit Facility include payment
defaults, cross defaults with certain other indebtedness,
breaches of covenants, judgment defaults, bankruptcy events and
the occurrence of a change in control (as defined in the credit
agreement). At December 31, 2008, we had $3.0 million
of restricted cash deposited at one of our lenders. This amount
will be reduced to $1.5 million when the term loan is
repaid in full. The deposit will be restricted until we have
repaid the outstanding balance on the term loan and on the
expiration of the revolving credit facility.
No balances were outstanding under the Credit Facility as of
December 31, 2008; however, we borrowed $100.0 million
under the term loan portion of the Credit Facility on
January 9, 2009.
51
In addition, we have a 14.0 million Euro credit facility
with a bank, (the Euro Credit Facility). The Euro
Credit Facility is available on an offering basis, meaning that
transactions under the Euro 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 Euro Credit Facility is intended to be used for
short-term credit requirements, with terms of one year or less.
The Euro Credit Facility can be canceled at any time. No
balances were outstanding under the Euro Credit Facility as of
December 31, 2008.
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. Our functional currency is typically
the currency of the local country. Our primary exposures are
related to non U.S. Dollar-denominated sales and operating
expenses in Europe, Latin America and Asia. At the present time,
we hedge only those currency exposures associated with certain
assets and liabilities denominated in nonfunctional currencies
and do not generally hedge anticipated foreign currency cash
flows or transact in foreign currencies for trading or other
speculative purposes. The success of this activity depends upon
estimates of transaction activity denominated in various
currencies, primarily the Euro, the British Pound and the
Canadian Dollar. To the extent that these estimates are
incorrect, we could experience unanticipated currency gains or
losses.
To reduce exposures associated with certain nonfunctional
monetary assets and liabilities, we enter into forward
contracts. Our foreign exchange contracts typically range from
one to three months in original maturity. The forward contracts
do not qualify for hedge accounting and accordingly are marked
to market at the end of each reporting period with any
unrealized gain or loss being recognized in the statement of
income as interest and other income.
During 2008 and 2007, net realized gains arising from the
settlement of our forward foreign exchange contracts were
$2.0 million and $1.0 million, respectively. Net
realized losses arising from the settlement of our forward
foreign exchange contracts were $1.1 million in 2006.
Forward contracts outstanding at December 31, 2008 are
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Notional U.S. Dollar
|
|
|
|
|
|
|
Equivalent
|
|
|
Fair Value
|
|
|
Euro
|
|
$
|
31,944
|
|
|
$
|
(701
|
)
|
British Pound
|
|
|
8,503
|
|
|
|
(1,633
|
)
|
Canadian Dollar
|
|
|
2,954
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,401
|
|
|
$
|
(2,389
|
)
|
|
|
|
|
|
|
|
|
|
A sensitivity analysis performed on our hedging portfolio as of
December 31, 2008 indicated that a hypothetical 5% and 10%
appreciation of the U.S. Dollar or currency being hedged
from its value at December 31, 2008 would decrease the fair
value of our forward contracts by $1.7 million and
$3.5 million, respectively. A 5% and 10% depreciation of
the U.S. Dollar from its value at December 31, 2008
would increase the fair value of our forward contracts by
$1.8 million and $3.6 million, respectively.
Interest
Rate Risk
We maintain balances in cash, cash equivalents and investment
securities. All financial instruments used are in accordance
with our investment policy. We maintain our investment
securities in portfolio holdings of various issuers, types and
maturities including money market, government agency,
mortgage-backed, asset-backed and investment grade corporate
bonds. These securities are classified as
available-for-sale
and consequently are
52
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.
During 2008, there were significant disruptions in the financial
markets. A number of large financial institutions failed, were
supported by the U.S. government or were merged into other
organizations. The market disruption has resulted in a lack of
liquidity in the credit markets and a decline in the market
value of debt securities. As a result of these effects, during
2008 we recorded an
other-than-temporary
impairment charge of $18.5 million related to marketable
securities. We had a net unrealized gain of $0.6 million on
marketable securities at December 31, 2008, compared with a
net unrealized gain of $1.0 million at December 31,
2007. Of the $18.5 million impairment, $12.2 million
related to corporate bonds and asset-backed and mortgaged-backed
securities which suffered declines in fair value,
$5.0 million related to a single corporate bond that had a
significant decline in fair value due to the issuers
bankruptcy and $1.3 million related to impairment recorded
because we no longer had the intent and ability to hold these
securities for a period of time sufficient for the fair values
to recover due to funding our acquisition of Secure Computing
which was a one-time event. We had no impairment of marketable
securities in 2007 and 2006.
The following tables present the hypothetical changes in fair
values in the securities held at December 31, 2008 that are
sensitive to the changes in interest rates. The modeling
technique used measures the change in fair values arising from
hypothetical parallel shifts in the yield curve of plus or minus
50 basis points (BPS), 100 BPS and 150 BPS over
a twelve-month time horizon. Beginning fair values represent the
market principal plus accrued interest and dividends at
December 31, 2008. Ending fair values are the market
principal plus accrued interest, dividends and reinvestment
income over a twelve-month time horizon.
The following table estimates the fair value of the portfolio at
a twelve-month time horizon (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
|
|
Valuation of Securities Given
|
|
|
|
an Interest Rate Decrease of
|
|
|
No
|
|
|
an Interest Rate Increase of
|
|
|
|
X Basis Points
|
|
|
Change in
|
|
|
X Basis Points
|
|
Issuer
|
|
150 BPS
|
|
|
100 BPS
|
|
|
50 BPS
|
|
|
Interest Rate
|
|
|
50 BPS
|
|
|
100 BPS
|
|
|
150 BPS
|
|
|
U.S. Government notes and bonds
|
|
$
|
128.0
|
|
|
$
|
127.2
|
|
|
$
|
126.5
|
|
|
$
|
125.7
|
|
|
$
|
124.9
|
|
|
$
|
124.1
|
|
|
$
|
123.3
|
|
Corporate notes and bonds
|
|
|
33.3
|
|
|
|
33.2
|
|
|
|
33.0
|
|
|
|
32.9
|
|
|
|
32.7
|
|
|
|
32.5
|
|
|
|
32.4
|
|
Asset-backed securities
|
|
|
19.0
|
|
|
|
18.8
|
|
|
|
18.6
|
|
|
|
18.4
|
|
|
|
18.2
|
|
|
|
18.0
|
|
|
|
17.8
|
|
Mortgage-backed securities
|
|
|
16.1
|
|
|
|
16.1
|
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
16.0
|
|
Cash and cash equivalents
|
|
|
30.7
|
|
|
|
30.3
|
|
|
|
30.0
|
|
|
|
29.6
|
|
|
|
29.2
|
|
|
|
28.9
|
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
227.1
|
|
|
$
|
225.6
|
|
|
$
|
224.1
|
|
|
$
|
222.6
|
|
|
$
|
221.0
|
|
|
$
|
219.5
|
|
|
$
|
218.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newly
Adopted and Recently Issued Accounting Pronouncements
See Note 2 of the consolidated financial statements for a
full description of recent accounting pronouncements, including
the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Quantitative and qualitative disclosure about market risk is set
forth at Managements Discussion and Analysis of
Financial Condition and Results of Operations
Financial Risk Management under Item 7.
53
|
|
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,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
423,987
|
|
|
$
|
409,679
|
|
|
$
|
396,758
|
|
|
$
|
369,641
|
|
|
$
|
356,526
|
|
|
$
|
321,986
|
|
|
$
|
314,830
|
|
|
$
|
314,878
|
|
Gross margin
|
|
|
318,637
|
|
|
|
311,170
|
|
|
|
307,025
|
|
|
|
279,705
|
|
|
|
270,084
|
|
|
|
244,121
|
|
|
|
243,446
|
|
|
|
244,825
|
|
Income from operations
|
|
|
32,564
|
|
|
|
49,363
|
|
|
|
54,397
|
|
|
|
53,247
|
|
|
|
33,002
|
|
|
|
46,640
|
|
|
|
38,751
|
|
|
|
41,420
|
|
Income before provision for income taxes
|
|
|
34,683
|
|
|
|
53,912
|
|
|
|
64,867
|
|
|
|
68,744
|
|
|
|
49,282
|
|
|
|
66,461
|
|
|
|
57,617
|
|
|
|
55,844
|
|
Net income
|
|
$
|
45,406
|
|
|
$
|
48,808
|
|
|
$
|
47,826
|
|
|
$
|
30,169
|
|
|
$
|
12,185
|
|
|
$
|
63,401
|
|
|
$
|
48,044
|
|
|
$
|
43,350
|
|
Net income per share basic(1)
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.30
|
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
$
|
0.40
|
|
|
$
|
0.30
|
|
|
$
|
0.27
|
|
Net income per share diluted(1)
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
$
|
0.30
|
|
|
$
|
0.18
|
|
|
$
|
0.07
|
|
|
$
|
0.39
|
|
|
$
|
0.29
|
|
|
$
|
0.27
|
|
|
|
|
(1) |
|
Net income per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net
income per share may not equal the annual net income per share
due to rounding differences. |
We believe that
period-to-period
comparisons of our financial results should not be relied upon
as an indication of future performance.
Our revenue and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and
our revenue and results of operations could fluctuate
significantly quarter to quarter and year to year. Causes of
such fluctuations may include the volume and timing of new
orders and renewals, the sales cycle for our products, the
introduction of new products, return rates, product upgrades or
updates by us or our competitors, changes in product mix,
changes in product prices and pricing models, the portion of our
licensing fees and product revenue deferred or 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. Fourth quarter 2008
operating income was negatively impacted primarily by in-process
research and development expense recorded for Secure Computing.
Fourth quarter net income was negatively impacted by the
decrease to operating income, offset by a benefit for income
taxes of $10.7 million. In October 2008, we were granted
administrative relief by the U.S. Internal Revenue Service
from the negative tax consequences associated with certain
acquisition integration activities. The ruling resulted in the
tax benefit in the fourth quarter. Significant quarterly
fluctuations in revenue will cause significant fluctuations in
our cash flows and the cash and cash equivalents, accounts
receivable and deferred revenue accounts on our consolidated
balance sheet. In addition, the operating results of many
software companies reflect seasonal trends, and our business,
financial condition and results of operations may be affected by
such trends in the future. These trends may include higher net
revenue in the fourth quarter as many customers complete annual
budgetary cycles, and lower net revenue in the summer months
when many businesses experience lower sales, particularly in the
European market.
Our financial statements and supplementary data required by this
item are set forth at the pages indicated at Item 15(a).
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
54
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer and our chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) and
concluded that our disclosure controls and procedures were
effective as of December 31, 2008.
A control system, no matter how well conceived and operated, can
provide only reasonable assurance that the objectives of the
control system are met. Our management, including our chief
executive officer and chief financial officer, does not expect
that our disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues within our company have been detected. These inherent
limitations include the reality that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple errors or mistakes. The design of any control
system is also based, in part, upon certain assumptions about
the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a control system,
misstatements due to error or fraud may occur and not be
detected.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
of the Exchange Act. We have designed our internal controls to
provide reasonable, but not absolute, assurance that our
financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America.
We assess the effectiveness of our internal controls based on
the criteria set forth in the Internal Control
Integrated Framework developed by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Our
management has concluded that, as of December 31, 2008, our
internal control over financial reporting was effective based on
these criteria.
On November 18, 2008, we completed the acquisition of
Secure Computing, as discussed elsewhere in this report under
Overview and Executive Summary,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 3 to
our consolidated financial statements. Therefore, in making
managements assessment of the effectiveness of our
internal control over financial reporting, we have excluded
Secure Computing, whose financial statements reflect 18% of
total assets and 1% of total revenues of the related
consolidated financial statement amounts as of and for the year
ended December 31, 2008, from our report on internal
control over financial reporting as management did not have
sufficient time to make an assessment of the Secure Computing
internal controls using the COSO criteria in accordance with
Section 404 of the Sarbanes-Oxley Act.
Deloitte & Touche LLP, as auditor of our consolidated
financial statements for the year ended December 2008, has
issued an attestation report dated March 2, 2009,
concerning our internal control over financial reporting, which
is contained in this Annual Report.
Changes
in Internal Control over Financial Reporting
There have been changes in our internal control over financial
reporting in the fourth quarter of 2008, as described below,
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Remediation
of Material Weakness in Accounting for Income
Taxes
During the year ended December 31, 2008, our management
completed the corrective actions to remediate a material
weakness in accounting for income taxes discussed in our 2006
Form 10-K
and 2007
Form 10-K.
During
55
the fourth quarter of 2008, our managements testing of
controls over accounting for income taxes indicated that each of
the actions put in place to remediate the material weakness in
accounting for income taxes has been implemented. Therefore, we
believe the previously reported material weakness related to
accounting for income taxes has been remediated as of
December 31, 2008. In the fourth quarter of 2008, we
completed the following remedial actions:
|
|
|
|
|
We completed additional improvements to our redesigned income
tax reconciliation process to further enhance data analysis and
timely resolution of open items.
|
|
|
|
We enhanced the precision of our interim and annual review
processes for various calculations, including the tax provision
computation process.
|
We also completed the following remedial actions during 2008:
|
|
|
|
|
We hired more tax accounting personnel, with an emphasis on
hiring personnel with tax provision and international tax
expertise.
|
|
|
|
We implemented our redesigned income tax reconciliation process
to facilitate improved data collection, analysis and timely
resolution of open items.
|
|
|
|
We automated key elements of the calculation of the provision
for income taxes.
|
|
|
|
We provided training to our tax accounting personnel and will
continue to enhance our training programs in the future.
|
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.
We have audited the internal control over financial reporting of
McAfee, Inc. and subsidiaries (the Company) as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in Managements Report on Internal
Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at
Secure Computing Corp., which was acquired on November 18,
2008, and whose financial statements constitute 18% of total
assets and 1% of total revenues of the consolidated financial
statement amounts as of and for the year ended December 31,
2008. Accordingly, our audit did not include the internal
control over financial reporting at Secure Computing Corp. 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, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
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.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, 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, 2008, of
the Company and our report dated March 2, 2009, expressed
an unqualified opinion on those financial statements and
financial statement schedule.
/s/ Deloitte &
Touche LLP
San Jose, California
March 2, 2009
57
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2008.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2008.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2008.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2008.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference to our Proxy Statement for our 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after
the end of the year ended December 31, 2008.
58
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
65
|
|
|
|
|
66
|
|
(a)(2) Consolidated Financial Statement
Schedule
The following financial statement schedule of McAfee, Inc. for
the years ended December 31, 2008, 2007, and 2006 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, 2008, 2007 and 2006
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 108. The Exhibits listed on the accompanying Index of
Exhibits are filed or incorporated by reference as part of this
report.
59
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of McAfee, Inc.
Santa Clara, California
We have audited the accompanying consolidated balance sheets of
McAfee, Inc. and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of income and comprehensive income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on 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 consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2008 and 2007, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Effective January 1, 2007, the Company adopted the
provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109.
As discussed in Note 2, effective January 1, 2006, the
Company adopted the provisions of FASB Statement
No. 123(R), Share Based Payment.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, 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 March 2, 2009 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
San Jose, California
March 2, 2009
60
MCAFEE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
Short-term marketable securities
|
|
|
27,449
|
|
|
|
338,770
|
|
Accounts receivable
|
|
|
322,986
|
|
|
|
232,056
|
|
Prepaid expenses and prepaid taxes
|
|
|
221,900
|
|
|
|
134,995
|
|
Deferred income taxes
|
|
|
310,870
|
|
|
|
256,188
|
|
Other current assets
|
|
|
38,281
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,404,788
|
|
|
|
1,380,167
|
|
Long-term marketable securities
|
|
|
82,974
|
|
|
|
585,874
|
|
Property and equipment, net
|
|
|
114,435
|
|
|
|
94,670
|
|
Deferred income taxes
|
|
|
303,937
|
|
|
|
321,342
|
|
Intangible assets, net
|
|
|
315,803
|
|
|
|
220,126
|
|
Goodwill
|
|
|
1,169,616
|
|
|
|
750,089
|
|
Other assets
|
|
|
66,328
|
|
|
|
34,256
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,457,881
|
|
|
$
|
3,386,524
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
41,529
|
|
|
$
|
45,858
|
|
Accrued income taxes
|
|
|
20,675
|
|
|
|
51,974
|
|
Accrued compensation
|
|
|
82,648
|
|
|
|
99,652
|
|
Other accrued liabilities
|
|
|
194,680
|
|
|
|
150,961
|
|
Deferred revenue
|
|
|
989,096
|
|
|
|
801,577
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,328,628
|
|
|
|
1,150,022
|
|
Deferred revenue, less current portion
|
|
|
304,014
|
|
|
|
242,936
|
|
Accrued taxes and other long-term liabilities
|
|
|
72,751
|
|
|
|
88,241
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,705,393
|
|
|
|
1,481,199
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9, 10 and 11)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized: 5,000,000 shares; Issued and outstanding: none
in 2008 and 2007
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized: 300,000,000 shares; Issued:
181,133,439 shares at December 31, 2008 and
173,148,853 shares at December 31, 2007
|
|
|
|
|
|
|
|
|
Outstanding: 153,534,594 shares at December 31, 2008
and 160,545,422 shares at December 31, 2007
|
|
|
1,812
|
|
|
|
1,732
|
|
Treasury stock, at cost: 27,598,845 shares at
December 31, 2008 and 12,603,431 shares at
December 31, 2007
|
|
|
(819,861
|
)
|
|
|
(303,270
|
)
|
Additional paid-in capital
|
|
|
2,053,245
|
|
|
|
1,810,290
|
|
Accumulated other comprehensive (loss) income
|
|
|
(18,992
|
)
|
|
|
32,498
|
|
Retained earnings
|
|
|
536,284
|
|
|
|
364,075
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,752,488
|
|
|
|
1,905,325
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,457,881
|
|
|
$
|
3,386,524
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
MCAFEE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
$
|
805,506
|
|
|
$
|
674,296
|
|
|
$
|
633,658
|
|
Subscription
|
|
|
661,586
|
|
|
|
552,131
|
|
|
|
428,296
|
|
Product
|
|
|
132,973
|
|
|
|
81,793
|
|
|
|
83,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
1,600,065
|
|
|
|
1,308,220
|
|
|
|
1,145,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and support
|
|
|
66,108
|
|
|
|
49,285
|
|
|
|
51,904
|
|
Subscription
|
|
|
187,975
|
|
|
|
165,297
|
|
|
|
110,267
|
|
Product
|
|
|
72,634
|
|
|
|
55,872
|
|
|
|
60,957
|
|
Amortization of purchased technology
|
|
|
56,811
|
|
|
|
35,290
|
|
|
|
23,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenue
|
|
|
383,528
|
|
|
|
305,744
|
|
|
|
246,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
252,020
|
|
|
|
217,934
|
|
|
|
193,447
|
|
Sales and marketing
|
|
|
525,942
|
|
|
|
388,213
|
|
|
|
366,454
|
|
General and administrative
|
|
|
204,786
|
|
|
|
214,164
|
|
|
|
187,777
|
|
Amortization of intangibles
|
|
|
26,470
|
|
|
|
13,583
|
|
|
|
10,682
|
|
Restructuring (benefit) charges
|
|
|
(1,752
|
)
|
|
|
8,769
|
|
|
|
470
|
|
In-process research and development
|
|
|
19,500
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs
|
|
|
1,026,966
|
|
|
|
842,663
|
|
|
|
759,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
189,571
|
|
|
|
159,813
|
|
|
|
139,028
|
|
Interest and other income, net
|
|
|
45,687
|
|
|
|
68,287
|
|
|
|
44,397
|
|
Impairment of marketable securities
|
|
|
(18,533
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of investments, net
|
|
|
5,481
|
|
|
|
1,104
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
222,206
|
|
|
|
229,204
|
|
|
|
183,781
|
|
Provision for income taxes
|
|
|
49,997
|
|
|
|
62,224
|
|
|
|
46,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
|
$
|
137,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities, net
|
|
$
|
(215
|
)
|
|
$
|
1,257
|
|
|
$
|
1,344
|
|
Foreign currency translation loss
|
|
|
(51,275
|
)
|
|
|
(231
|
)
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
120,719
|
|
|
$
|
168,006
|
|
|
$
|
135,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
1.10
|
|
|
$
|
1.04
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
160,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
163,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
MCAFEE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(Loss) Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances, January 1, 2006
|
|
|
167,688
|
|
|
$
|
1,705
|
|
|
|
2,765
|
|
|
$
|
(68,395
|
)
|
|
$
|
1,443,743
|
|
|
$
|
(8,146
|
)
|
|
$
|
33,923
|
|
|
$
|
31,811
|
|
|
$
|
1,434,641
|
|
Issuance of common stock under our employee stock option plans
and employee stock purchase plan
|
|
|
2,059
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
32,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,170
|
|
Interest on Employee Stock Purchase Plans due to restrictions on
share issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
Repurchase of common stock
|
|
|
(9,812
|
)
|
|
|
|
|
|
|
9,812
|
|
|
|
(234,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,679
|
)
|
Forfeiture of restricted stock awards
|
|
|
(20
|
)
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred compensation into additional
paid-in capital due to adoption of FAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,146
|
)
|
|
|
8,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,369
|
|
Stock-based compensation related to option extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,326
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
Tax benefits from exercise of non-qualified stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,958
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
(3,795
|
)
|
Net increase in unrealized gains on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,344
|
|
|
|
|
|
|
|
1,344
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,471
|
|
|
|
137,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
159,915
|
|
|
|
1,726
|
|
|
|
12,597
|
|
|
|
(303,074
|
)
|
|
|
1,527,843
|
|
|
|
|
|
|
|
31,472
|
|
|
|
169,282
|
|
|
|
1,427,249
|
|
Cumulative adjustment for the implementation of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,225
|
|
|
|
|
|
|
|
|
|
|
|
27,813
|
|
|
|
129,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balances, January 1, 2007
|
|
|
159,915
|
|
|
|
1,726
|
|
|
|
12,597
|
|
|
|
(303,074
|
)
|
|
|
1,629,068
|
|
|
|
|
|
|
|
31,472
|
|
|
|
197,095
|
|
|
|
1,556,287
|
|
Issuance of common stock upon exercise of stock options
|
|
|
636
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
12,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,817
|
|
Repurchase of common stock
|
|
|
(6
|
)
|
|
|
|
|
|
|
6
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,118
|
|
Stock-based compensation related to option extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
Reduction of prior tax benefit from stock option activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(820
|
)
|
Recognition of tax benefit related to acquisition accounted for
as a pooling of interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,379
|
|
Fair value of options assumed in acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
Modification of stock options reclassification from
equity to liability awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,272
|
)
|
Exercise of stock options reclassification from
liability to equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,535
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
(231
|
)
|
Net increase in unrealized gains on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,257
|
|
|
|
|
|
|
|
1,257
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,980
|
|
|
|
166,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
160,545
|
|
|
|
1,732
|
|
|
|
12,603
|
|
|
|
(303,270
|
)
|
|
|
1,810,290
|
|
|
|
|
|
|
|
32,498
|
|
|
|
364,075
|
|
|
|
1,905,325
|
|
63
MCAFEE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS
EQUITY (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(Loss) Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Issuance of common stock under our employee stock option plans
and employee stock purchase plan
|
|
|
7,986
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
127,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,318
|
|
Repurchase of common stock
|
|
|
(14,974
|
)
|
|
|
|
|
|
|
14,974
|
|
|
|
(516,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(516,591
|
)
|
Forfeiture of restricted stock awards
|
|
|
(22
|
)
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,662
|
|
Reclassification of fair value charge as liability for tender
offer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,223
|
)
|
Fair value of options assumed in prior year acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,672
|
)
|
Cash payable in excess of exercise price related to exchange of
McAfee.com options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984
|
)
|
Fair value of RSAs and RSUs assumed in acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
Tax benefits from stock-based awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,729
|
|
Exercise of stock options reclassification from
liability to equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,994
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,275
|
)
|
|
|
|
|
|
|
(51,275
|
)
|
Net increase in unrealized losses on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
(215
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,209
|
|
|
|
172,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008
|
|
|
153,535
|
|
|
$
|
1,812
|
|
|
|
27,599
|
|
|
$
|
(819,861
|
)
|
|
$
|
2,053,245
|
|
|
$
|
|
|
|
$
|
(18,992
|
)
|
|
$
|
536,284
|
|
|
$
|
1,752,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
MCAFEE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
|
$
|
137,471
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
123,894
|
|
|
|
84,427
|
|
|
|
70,271
|
|
Impairment of marketable securities
|
|
|
18,533
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
19,500
|
|
|
|
|
|
|
|
460
|
|
Deferred income taxes
|
|
|
(10,724
|
)
|
|
|
151
|
|
|
|
(34,975
|
)
|
Non-cash restructuring (benefit) charge
|
|
|
(7,471
|
)
|
|
|
6,035
|
|
|
|
559
|
|
(Decrease) increase in fair value of options accounted for as
liabilities
|
|
|
(5,483
|
)
|
|
|
8,745
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
76,662
|
|
|
|
56,132
|
|
|
|
54,695
|
|
Excess tax benefit from stock-based awards
|
|
|
(17,693
|
)
|
|
|
(1,092
|
)
|
|
|
(4,960
|
)
|
Other non-cash items
|
|
|
(3,688
|
)
|
|
|
(5,076
|
)
|
|
|
(6,789
|
)
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(68,208
|
)
|
|
|
(33,295
|
)
|
|
|
(2,097
|
)
|
Prepaid expenses, prepaid taxes and other assets
|
|
|
(77,300
|
)
|
|
|
(34,655
|
)
|
|
|
(66,973
|
)
|
Accounts payable
|
|
|
(7,775
|
)
|
|
|
6,769
|
|
|
|
(531
|
)
|
Accrued taxes and other liabilities
|
|
|
(33,493
|
)
|
|
|
47,413
|
|
|
|
33,214
|
|
Deferred revenue
|
|
|
129,359
|
|
|
|
90,881
|
|
|
|
110,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
308,322
|
|
|
|
393,415
|
|
|
|
290,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(252,031
|
)
|
|
|
(927,257
|
)
|
|
|
(1,315,407
|
)
|
Proceeds from sales of marketable securities
|
|
|
587,587
|
|
|
|
404,106
|
|
|
|
338,329
|
|
Proceeds from maturities of marketable securities
|
|
|
466,101
|
|
|
|
458,142
|
|
|
|
664,590
|
|
(Increase) decrease in restricted cash
|
|
|
(2,036
|
)
|
|
|
379
|
|
|
|
49,989
|
|
Purchase of patents
|
|
|
|
|
|
|
(9,300
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(48,747
|
)
|
|
|
(33,568
|
)
|
|
|
(43,751
|
)
|
Acquisitions, net of cash acquired
|
|
|
(550,648
|
)
|
|
|
(333,377
|
)
|
|
|
(146,089
|
)
|
Proceeds from sale of assets and technology
|
|
|
|
|
|
|
4,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
200,226
|
|
|
|
(436,770
|
)
|
|
|
(452,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under stock option and
stock purchase plans
|
|
|
129,990
|
|
|
|
9,793
|
|
|
|
32,008
|
|
Excess tax benefit from stock-based awards
|
|
|
17,693
|
|
|
|
1,092
|
|
|
|
4,960
|
|
Repurchase of common stock
|
|
|
(516,591
|
)
|
|
|
(196
|
)
|
|
|
(234,679
|
)
|
Other financing activities
|
|
|
(3,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(371,962
|
)
|
|
|
10,689
|
|
|
|
(197,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
(47,442
|
)
|
|
|
37,197
|
|
|
|
20,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
89,144
|
|
|
|
4,531
|
|
|
|
(338,965
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
394,158
|
|
|
|
389,627
|
|
|
|
728,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
|
$
|
389,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities, net
|
|
$
|
(215
|
)
|
|
$
|
1,257
|
|
|
$
|
1,344
|
|
Fair value of assets acquired in business combinations,
excluding cash acquired
|
|
$
|
756,836
|
|
|
$
|
384,287
|
|
|
$
|
166,099
|
|
Fair value of acquired intangibles
|
|
$
|
2,000
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities assumed in business combinations
|
|
$
|
226,328
|
|
|
$
|
46,794
|
|
|
$
|
20,012
|
|
Accrued purchase price
|
|
$
|
1,268
|
|
|
$
|
|
|
|
$
|
|
|
Accrual for purchase of property, equipment and leasehold
improvements
|
|
$
|
2,953
|
|
|
$
|
4,133
|
|
|
$
|
2,694
|
|
Modification of stock options reclassification from
equity to liability awards
|
|
$
|
|
|
|
$
|
18,271
|
|
|
$
|
|
|
Exercise of stock options reclassification from
liability to equity awards
|
|
$
|
16,994
|
|
|
$
|
4,535
|
|
|
$
|
|
|
Issuance of common stock under stock option plans
|
|
$
|
|
|
|
$
|
3,024
|
|
|
$
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
60,494
|
|
|
$
|
27,320
|
|
|
$
|
54,919
|
|
Cash received from income tax refunds
|
|
$
|
5,072
|
|
|
$
|
11,964
|
|
|
$
|
7,032
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
MCAFEE,
INC. AND SUBSIDIARIES
|
|
1.
|
Organization
and Business
|
McAfee, Inc. and our wholly owned subsidiaries (we,
us or our) are a global dedicated
security technology company that secures systems and networks
from known and unknown threats. We empower home users,
businesses, government agencies, service providers and our
partners with the ability to block attacks, prevent disruptions,
and continuously track and improve their security and
compliance. We operate our business in five geographic regions:
North America; Europe, Middle East and Africa
(EMEA); Japan; Asia-Pacific, excluding Japan; and
Latin America.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include our
accounts and the accounts of our wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reported
period. Significant estimates include those required in the
valuation of intangible assets acquired in business
acquisitions, impairment analysis of goodwill and intangible
assets, the estimated useful life of property and equipment,
allowances for doubtful accounts, sales returns and allowances,
vendor specific objective evidence of the fair value of the
various undelivered elements of our multiple element software
transactions, projections of future cash flows related to
certain revenue share agreements, stock-based compensation,
restructuring and litigation accruals, and valuation allowances
for deferred tax assets and tax accruals. Although we believe
that adequate accruals have been made for unsettled issues,
additional gains or losses could occur in future periods from
resolution of outstanding matters. Actual results could differ
materially from original estimates.
Certain
Risks and Concentrations
We derive a majority of our net revenue from our system
security, network security and vulnerability and risk management
solutions. The market in which we operate is highly competitive
and rapidly changing. Significant technological changes, changes
in customer requirements, or the emergence of competitive
products with new capabilities or technologies could adversely
affect operating results.
We sell a significant amount of our products through
intermediaries such as distributors, resellers and others. Our
top ten distributors represented 35% to 55% of net sales during
2008, 2007 and 2006.
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. Accounts receivable are written
off on a case by case basis, considering the probability that
any amounts can be collected. At December 31, 2008 and
2007, our allowance for doubtful accounts was $3.9 million
and $4.1 million, respectively.
We maintain the majority of cash balances and all of our
short-term investments with four financial institutions. We
invest with financial institutions believed to have high quality
credit and, by policy, limit the amount of deposit exposure to
any one financial institution.
We receive certain of our critical components from sole
suppliers. Additionally, we rely on a limited number of contract
manufacturers and suppliers to provide manufacturing services
for our products. The inability of any contract manufacturer or
supplier to fulfill supply requirements could materially impact
future operating results.
66
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency Translation
The assets and liabilities of subsidiaries that are denominated
in functional currencies other than the U.S. Dollar are
translated using the exchange rate on the balance sheet date.
Revenue and expenses are translated at average exchange rates
prevailing during the period. Translation adjustments resulting
from this process are charged or credited to accumulated other
comprehensive income.
Occasionally, a subsidiary enters into transactions that are
denominated in currencies other than its functional currency. In
these cases, the assets and liabilities and revenue and expenses
related to the transactions are translated into the functional
currency and any resulting gains or losses are recorded in the
consolidated statements of income and comprehensive income.
During 2008 and 2007, we recorded net foreign currency
transaction gains of $6.4 million and $1.0 million,
respectively. During 2006, we recorded a net foreign currency
transaction loss of $8.5 million.
Derivatives
We recognize derivatives included in other current assets and
other accrued liabilities on the consolidated balance sheet at
fair value. Derivatives that are not hedges are adjusted to fair
value through the consolidated statement of income and
comprehensive income. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivatives change in fair value is
immediately recognized in earnings. Our use of derivative
financial instruments is discussed in Note 5.
Cash
and Cash Equivalents
Cash equivalents are comprised of highly liquid debt instruments
with original maturities or remaining maturities at date of
purchase of 90 days or less.
Restricted
Cash
Current restricted cash totaled $9.1 million at
December 31, 2008 and is included in the other
current assets line item on the consolidated balance sheet
and consists of restricted cash deposited at one of our lenders
and $7.6 million in an escrow account pursuant to Secure
Computing Corporations (Secure Computing)
divestiture of a product line in September 2008. The escrow
funds will be released in September 2009. We had no current
restricted cash at December 31, 2007.
Non-current restricted cash of $3.0 million at
December 31, 2008 and $0.6 million at
December 31, 2007 is included in the other
non-current assets line item on the consolidated balance
sheets and consists primarily of restricted cash deposited at
one of our lenders and cash collateral related to leases in the
United States and India.
At December 31, 2008, we had $3.0 million of
restricted cash deposited at one of our lenders consisting of
both current and non-current restricted cash. This amount will
be reduced to $1.5 million when the term loan is repaid in
full. The deposit will be restricted until we have repaid the
outstanding balance on the term loan and on the expiration of
the revolving credit facility.
Marketable
Securities
All marketable securities are classified as
available-for-sale
securities.
Available-for-sale
securities are carried at fair value with resulting unrealized
gains and losses, net of related taxes, reported as a component
of accumulated other comprehensive income. Premium and discount
on debt securities recorded at the date of purchase are
amortized and accreted, respectively, to interest income using
the effective interest method. Short-term marketable securities
are those with remaining maturities at the balance sheet date of
less than one year. Long-term marketable
67
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securities have remaining maturities at the balance sheet date
of one year or greater. Realized gains and losses on sales of
all such investments are reported in earnings and computed using
the specific identification cost method.
We assess the value of our
available-for-sale
marketable securities on a regular basis to assess whether an
other-than-temporary
decline in the fair value has occurred. Factors which we use to
assess whether an
other-than-temporary
decline has occurred include, but are not limited to, the likely
reason for the unrealized loss, period of time the fair value
was below amortized cost, changes in underlying collateral,
changes in ratings, market trends and conditions, and our intent
and ability to hold until we recover such losses. Any
other-than-temporary
decline in value is reported in earnings and a new cost
basis for the marketable security is established. In 2008, we
recorded an impairment of marketable securities totaling
$18.5 million. Of the $18.5 million impairment,
$12.2 million related to corporate bonds and asset-backed
and mortgaged-backed securities which suffered declines in fair
value, $5.0 million related to a single corporate bond that
had a significant decline in fair value due to the issuers
bankruptcy and $1.3 million related to impairment recorded
because we no longer had the intent and ability to hold these
securities for a period of time sufficient for the fair values
to recover due to our funding our acquisition of Secure
Computing which was a one-time event. We had no impairment of
marketable securities in 2007 and 2006.
Inventory
Inventory, which consists primarily of finished goods held at
our warehouse and other fulfillment partner locations and
finished goods sold to our channel partners but not yet sold
through to the end user, is stated at lower of cost or market.
Cost is computed using standard cost, which approximates actual
cost on a first in, first out basis. Inventory balances are
included in other current assets on our consolidated balance
sheets and were $10.2 million at December 31, 2008 and
$3.0 million at December 31, 2007.
Deferred
Costs of Revenue
Deferred costs of revenue, which consist primarily of costs
related to revenue-sharing and royalty arrangements, and the
direct cost of materials that are associated with product and
subscription revenues deferred over a service period, including
arrangements that are deferred due to lack of the
vendor-specific objective evidence (VSOE) of fair
value on an undelivered element, are included in the prepaid
expenses and prepaid taxes line item and the other assets line
item on our consolidated balance sheets. We recognize such
deferred costs ratably as revenue is recognized. At
December 31, 2008, our deferred costs were
$184.6 million compared to $97.0 million at
December 31, 2007.
Property
and Equipment
Property and equipment are presented at cost less accumulated
depreciation and amortization (see Note 6). Depreciation
and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives as
follows:
|
|
|
|
|
building interior seven years;
exterior twenty years;
|
|
|
|
office furniture and equipment three to five years;
|
|
|
|
computer hardware, networking hardware and software
three to five years; and
|
|
|
|
leasehold improvements the shorter of the lease
term, including assumed lease renewal periods that are
reasonably assured, or the estimated useful life of the asset.
|
The costs associated with projects eligible for capitalization
are accumulated on the consolidated balance sheet until the
project is substantially complete and is placed into service.
68
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When assets are disposed, we remove the asset and accumulated
depreciation from our records and recognize the related gain or
loss in earnings.
Repairs and maintenance expenditures, which are not considered
improvements and do not extend the useful life of property and
equipment, are expensed as incurred.
Internal
Use Software
Software development costs, including costs incurred to purchase
third-party software, are capitalized beginning when we have
determined factors are present, including among others, that
indicate technology exists to achieve the performance
requirements, buy versus internal development decisions have
been made and our management has authorized the funding for the
project. Capitalization of software costs ceases when the
software is substantially complete and is ready for its intended
use and capitalized costs are amortized over their estimated
useful life of three years using the straight-line method.
When events or circumstances indicate the carrying value of
internal use software might not be recoverable, we assess the
recoverability of these assets by determining whether the
amortization of the asset balance over its remaining life can be
recovered through undiscounted future operating cash flows. The
amount of impairment, if any, is recognized to the extent that
the carrying value exceeds the projected discounted future
operating cash flows and is recognized as a write down of the
asset. Capitalized internal use software at December 31,
2008 and December 31, 2007 were $9.5 million and
$13.4 million, respectively.
Goodwill
and Other Intangible Assets
Goodwill and identifiable intangible assets with indefinite
useful lives are tested for impairment at least annually. We
perform our annual goodwill impairment review as of October 1 of
each fiscal year or earlier if indicators of impairment exist.
The fair value of the reporting units was estimated using the
average of the present value of estimated future cash flows and
of the market multiple value. Our reporting units are consistent
with the operating geographies discussed in Note 17. No
impairment has been recognized for any period presented.
Finite-Lived
Intangibles, Long-Lived Assets and Assets Held for
Sale
Purchased technology and other identifiable intangible assets
are carried at cost less accumulated amortization. We amortize
purchased technology and other identifiable intangibles on a
straight-line or accelerated basis over their estimated useful
lives, depending on the pattern in which the economic benefits
are obtained or used. The range of estimated useful lives of our
identifiable intangibles is one to seven years (see Note 8).
Finite-lived intangibles or long-lived assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets
may not be recoverable. No impairment has been recognized for
any period presented.
Fair
Value of Financial Instruments
Carrying amounts of our financial instruments including accounts
receivable, accounts payable and accrued liabilities approximate
fair value due to their short maturities. The fair values of our
investments in marketable securities are disclosed in
Note 4. The fair value of our derivative instruments is
disclosed in Note 5.
Revenue
Recognition
We must make significant management judgments and estimates to
determine revenue to be recognized in any accounting period.
Material differences may result in the amount and timing of our
revenue for any period if our management makes different
judgments or utilizes different estimates. These estimates
affect the deferred revenue line item on our consolidated
balance sheets and the net revenue line item on our consolidated
statements of income.
69
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our revenue, which is presented net of sales taxes, is derived
from primarily three sources (i) product revenue, which
includes hardware and perpetual licenses revenue,
(ii) subscription revenue, which includes revenue from
subscription-based offerings and (iii) services and support
revenue, which includes maintenance, training and consulting
revenue.
Revenue is recognized when persuasive evidence of an arrangement
exists, the product or service has been delivered, the fee is
fixed or determinable, and collectibility is reasonably assured.
For hardware transactions where software is not incidental, we
do not separate the license fee and we do not apply separate
accounting guidance to the hardware and software elements. For
hardware transactions where no software is involved or software
is incidental, we apply the provisions of Staff Accounting
Bulletin 104 Revenue Recognition
(SAB 104).
Persuasive evidence is generally a binding purchase order or
license agreement. Delivery generally occurs when product is
delivered to a common carrier or upon delivery of a grant letter
and license key, if applicable. If a significant portion of a
fee is due after our normal payment terms of typically 30 to
90 days, we recognize revenue as the fees become due. If we
determine that collection of a fee is not reasonably assured, we
defer the fees and recognize revenue upon cash receipt, provided
all other revenue recognition criteria are met.
We enter into perpetual and subscription software license
agreements through direct sales to consumer 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. In these situations, we defer the
direct costs of the subscription software licensing and
professional services arrangements, and amortize those costs
over the same period as the related revenue is recognized. These
costs are identified as cost of subscription revenue and cost of
service and support revenue on the consolidated statements of
income and comprehensive income.
For arrangements with multiple elements, including software
licenses, maintenance
and/or
services, we allocate and defer revenue equivalent to the VSOE
of fair value for the undelivered elements and recognize the
difference between the total arrangement fee and the amount
deferred for the undelivered elements as product revenue. VSOE
of fair value is based upon the price for which the undelivered
element is sold separately or upon substantive renewal rates
stated in a contract. We determine fair value of the undelivered
elements based on historical evidence of stand-alone sales of
these elements to our customers. When VSOE does not exist for
undelivered elements such as maintenance and support, the entire
arrangement fee is recognized ratably over the performance
period generally as services and support revenue.
We also identify the direct and incremental costs associated
with product revenues that have been deferred due to lack of
VSOE on fair value on an undelivered element. These costs are
primarily hardware platform and other hardware component costs.
We defer these costs at the time of delivery and recognize them
as cost of service and support revenue on the consolidated
statements of income and comprehensive income, in proportion to
the product revenue as it is recognized over the service period.
We reduce revenue for estimates of sales incentives and sales
returns. We offer channel rebates and marketing funds and
end-user rebates for products in our corporate and consumer
product lines. Additionally, end users may return our products,
subject to varying limitations, through distributors and
resellers or to us directly for a refund within a reasonably
short period from the date of purchase. We estimate and record
reserves for promotional and rebate programs and sales returns
based on our historical experience.
Research
and Development
Costs incurred in the research and development of new software
products are expensed as incurred until technological
feasibility is established. Research and development costs
include salaries and benefits of
70
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
researchers, supplies and other expenses incurred with research
and development efforts. Development costs are capitalized
beginning when a products technological feasibility has
been established and ending when the product is available for
general release to customers. Technological feasibility is
reached when the product reaches the working model stage. To
date, products and enhancements have generally reached
technological feasibility and have been released for sale at
substantially the same time and all research and development
costs have been expensed.
Advertising
Costs
Advertising costs are expensed as incurred. Media (television
and print) placement costs are expensed in the period the
advertising appears. Total advertising expenses were
$16.6 million, $18.0 million and $18.8 million
for 2008, 2007 and 2006, respectively.
Stock-based
Compensation Expense
We record compensation expense for stock-based awards issued to
employees and outside directors in exchange for services
provided based on the estimated fair value of the awards on
their grant dates. Stock-based compensation expense is
recognized over the required service or performance period of
the awards. Our stock-based awards include stock options
(options), restricted stock units
(RSUs), restricted stock awards (RSAs),
restricted stock units with performance-based vesting
(PSUs) and employee stock purchase rights issued
pursuant to our Employee Stock Purchase Plan (ESPP
grants).
We adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-Based
Payment (SFAS 123(R)) using the
modified prospective transition method, which requires the
application of the accounting standard to all stock-based awards
issued on or after January 1, 2006, and any outstanding
stock-based awards that were issued but not vested as of
January 1, 2006. See Note 14 to the consolidated
financial statements for additional information.
The estimated fair value underlying our calculation of
stock-based compensation expense for options and ESPP grants is
based on the Black-Scholes pricing model. Upon adoption of
SFAS 123(R), we changed our method of attributing the value
of stock-based compensation to the single-option, straight-line
method. Stock-based compensation expense for all options granted
prior to January 1, 2006, will continue to be recognized
using the accelerated method.
Accounting
for Income Taxes
We account for income taxes in accordance with the liability
method of accounting for income taxes. Under the liability
method, deferred assets and liabilities are recognized based
upon anticipated future tax consequences attributable to
differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases. The
provision for income taxes is comprised of the current tax
expense and the change in deferred tax assets and liabilities.
We establish a valuation allowance to the extent that it is more
likely than not that deferred tax assets will not be recoverable
against future taxable income.
Computation
of Net Income Per Share
Basic net income per share is computed using the
weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed using the
weighted-average number of common shares and dilutive potential
common shares outstanding during the period using the treasury
stock method. Dilutive potential common shares include options,
RSUs, RSAs, PSUs and ESPP grants.
71
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty
We offer a warranty on our software and hardware products and
record a liability for the estimated future costs associated
with warranty claims, which is based upon historical experience
and our estimate of the level of future costs.
Reclassifications
In the consolidated statements of cash flows for 2007 and 2006,
we have reclassified $244.2 million and
$293.5 million, respectively, within investing activities
to properly reflect partial pay downs received on asset-backed
investments, calls and redemptions as proceeds from
maturities of marketable securities rather than
proceeds from sales of marketable securities.
In the consolidated balance sheet for December 31, 2007, we
decreased both prepaid taxes and accrued income taxes by
$27.6 million related to certain income tax prepayments
that were more properly classified with the related current
liabilities. We had decreases of $39.4 million and
$27.9 million to both prepaid taxes and accrued income
taxes to our December 31, 2006 and December 31, 2005
consolidated balance sheets, respectively. As a result, within
operating activities in our consolidated statements of cash
flows for 2007 and 2006, cash flows from changes in
prepaid expenses, prepaid taxes and other assets
decreased by $11.8 million and $11.5 million in 2007
and 2006, respectively, and cash flows from changes in
accrued taxes and other liabilities increased by
$11.8 million and $11.5 million in 2007 and 2006,
respectively. Total operating cash flows for 2008, 2007 and 2006
were not impacted by these adjustments.
Other
Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities and
foreign currency translation adjustments are included in our
components of comprehensive income (loss), which are excluded
from net income.
For 2008, 2007 and 2006 other comprehensive income (loss) is
comprised of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
Net of
|
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
Income Tax
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities, net
|
|
$
|
(13,410
|
)
|
|
$
|
5,364
|
|
|
$
|
(8,046
|
)
|
Reclassification adjustment for net loss on marketable
securities recognized during the period
|
|
|
13,052
|
|
|
|
(5,221
|
)
|
|
|
7,831
|
|
Foreign currency translation loss
|
|
|
(51,275
|
)
|
|
|
|
|
|
|
(51,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(51,633
|
)
|
|
$
|
143
|
|
|
$
|
(51,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities, net
|
|
$
|
3,198
|
|
|
$
|
(1,279
|
)
|
|
$
|
1,919
|
|
Reclassification adjustment for net gain on marketable
securities recognized during the period
|
|
|
(1,104
|
)
|
|
|
442
|
|
|
|
(662
|
)
|
Foreign currency translation loss
|
|
|
(231
|
)
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
1,863
|
|
|
$
|
(837
|
)
|
|
$
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities, net
|
|
$
|
2,596
|
|
|
$
|
(1,038
|
)
|
|
$
|
1,558
|
|
Reclassification adjustment for net gain on marketable
securities recognized during the period
|
|
|
(356
|
)
|
|
|
142
|
|
|
|
(214
|
)
|
Foreign currency translation loss
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
(3,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(1,555
|
)
|
|
$
|
(896
|
)
|
|
$
|
(2,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive (loss) income is comprised of
the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Unrealized gain on available-for-sale securities
|
|
$
|
364
|
|
|
$
|
579
|
|
Cumulative translation adjustment
|
|
|
(19,356
|
)
|
|
|
31,919
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(18,992
|
)
|
|
$
|
32,498
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
On January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value and expands
disclosure requirements regarding fair value measurement. We
hold financial assets, such as available-for-sale securities and
foreign currency contracts, subject to valuation under
SFAS 157. The following table details the fair value
measurements within the fair value hierarchy of our financial
assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Using Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
2008
|
|
|
Assets (Level 1) (1)
|
|
|
(Level 2) (2)
|
|
|
(Level 3) (3)
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government notes and bonds(4)
|
|
$
|
49,798
|
|
|
$
|
46,558
|
|
|
$
|
3,240
|
|
|
$
|
|
|
Corporate notes and bonds(4)
|
|
|
21,632
|
|
|
|
|
|
|
|
21,632
|
|
|
|
|
|
Asset-backed securities(4)
|
|
|
26,361
|
|
|
|
|
|
|
|
26,361
|
|
|
|
|
|
Mortgage-backed securities(4)
|
|
|
12,632
|
|
|
|
|
|
|
|
12,632
|
|
|
|
|
|
Cash and cash equivalents(5)
|
|
|
81,823
|
|
|
|
|
|
|
|
81,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
192,246
|
|
|
|
46,558
|
|
|
|
145,688
|
|
|
|
|
|
Foreign exchange derivatives(6)
|
|
|
(2,389
|
)
|
|
|
(2,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189,857
|
|
|
$
|
44,169
|
|
|
$
|
145,688
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Level 1 classification is applied to any asset that has a
readily available quoted price from an active market where there
is significant transparency in the executed/quoted price. |
|
(2) |
|
Level 2 classification is applied to assets that have
evaluated prices received from fixed income vendors where the
data inputs to these valuations, which are observable either
directly or indirectly, but do not represent quoted prices from
an active market for each individual security. |
|
(3) |
|
Level 3 classification is applied to assets when prices are
not derived from existing market data. |
|
(4) |
|
Included in both short-term and long-term marketable securities
on our consolidated balance sheets. |
|
(5) |
|
Included in cash and cash equivalents on our consolidated
balance sheets. |
|
(6) |
|
Included in other current assets and other accrued liabilities
on our consolidated balance sheets. |
In February 2008, the Financial Accounting Standard Board
(FASB) issued FASB Staff Position (FSP)
No. 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-2
delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities that are not remeasured at
fair value on a recurring basis (at least annually) until fiscal
years beginning after November 15, 2008.
FSP 157-2
is effective for us beginning January 1, 2009 and will be
applied prospectively. We continue to assess the impact that
FSP 157-2
may have on our consolidated financial position and results of
operations.
73
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2008, the FASB issued FSP
No. 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS 157 in a market that is
not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP 157-3
is effective for us beginning October 10, 2008, the date of
issuance.
FSP 157-3
did not have a material impact on our consolidated financial
position, results of operations and cash flows.
Recent
Accounting Pronouncements
Useful
Life of Intangible Assets
In April 2008, the FASB issued FSP
No. 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible
Assets and the period of expected cash flows used to
measure the fair value under FASB Statement No. 141,
Business Combinations.
FSP 142-3
is effective for us beginning January 1, 2009. We currently
are assessing the impact that
FSP 142-3
may have on our consolidated financial position, results of
operations or cash flows.
Derivative
Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS 161).
SFAS 161 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133), to expand disclosures about an
entitys derivative instruments and hedging activities, but
does not change SFAS 133s scope of accounting.
SFAS 161 is effective for us beginning January 1, 2009.
Noncontrolling
Interests
In December 2007, the Financial Accounting Standards Board
(FASB), issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting
Research Bulletin No. 51
(SFAS 160). SFAS 160 amends Accounting
Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 is effective for us beginning January 1,
2009. We do not expect the adoption of SFAS 160 to have a
material impact on our consolidated financial position, results
of operations or cash flows.
Business
Combinations
In December 2007, the FASB revised SFAS No. 141,
Business Combinations
(SFAS 141(R)), to improve the relevance,
representational faithfulness, and comparability of the
information that a reporting entity provides in its financial
reports about a business combination and its effects.
SFAS 141(R) changes the accounting for business
combinations by requiring that an acquiring entity measures and
recognizes identifiable assets acquired and liabilities assumed
at the acquisition date fair value with limited exceptions. The
changes include the treatment of acquisition related transaction
costs, the valuation of any noncontrolling interest at the
acquisition date fair value, the recording of acquired
contingent liabilities at acquisition date fair value and the
subsequent re-measurement of such liabilities after acquisition
date, the recognition of capitalized in-process research and
development, the accounting for acquisition-related
restructuring cost accruals subsequent to the acquisition date
and the recognition of changes in the acquirers income tax
valuation allowance (see Note 15). SFAS 141(R) is
effective for us beginning January 1, 2009. We will apply
the provisions of SFAS 141(R) to any acquisition completed
subsequent to December 31, 2008. We expect SFAS 141(R)
will have an impact on our consolidated financial statements,
but the nature and magnitude of the specific effects will depend
upon the nature, terms and size of acquisitions we consummate
after January 1, 2009. At December 31, 2008,
$20.4 million of the $102.7 million liability for
74
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrecognized tax benefits relate to tax positions of acquired
entities taken prior to our acquisition. Liabilities settled for
lesser amounts will affect the income tax expense in the period
of reversal.
2008
Acquisitions
In 2008, we acquired 100% of the outstanding shares of
ScanAlert, Inc. (ScanAlert) for $54.9 million,
100% of the outstanding shares of Reconnex Corporation
(Reconnex) for $46.6 million and 100% of the
outstanding shares of Secure Computing for $490.1 million.
The purchase price for these acquisitions consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
ScanAlert
|
|
|
Reconnex
|
|
|
Secure Computing
|
|
|
Acquisitions
|
|
|
Acquisition date
|
|
|
January 2008
|
|
|
|
August 2008
|
|
|
|
November 2008
|
|
|
|
|
|
Cash paid to shareholders and employees, including escrow
deposits
|
|
$
|
48,480
|
|
|
$
|
40,318
|
|
|
$
|
484,497
|
|
|
$
|
573,295
|
|
Payment in 2007 to third party for use of patent
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
Payment to third party for outstanding debt
|
|
|
|
|
|
|
4,460
|
|
|
|
|
|
|
|
4,460
|
|
Direct acquisition costs
|
|
|
660
|
|
|
|
1,782
|
|
|
|
4,003
|
|
|
|
6,445
|
|
Purchase price recorded as a liability
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
1,268
|
|
Fair value of assumed RSAs and RSUs
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
|
|
2,211
|
|
Reduction in our historical net liabilities to Secure Computing
due to acquisition
|
|
|
|
|
|
|
|
|
|
|
(611
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
54,908
|
|
|
$
|
46,560
|
|
|
$
|
490,100
|
|
|
$
|
591,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ScanAlert purchase agreement provides for two earn-out
payments totaling $29.5 million contingent upon the
achievement of certain ScanAlert financial targets during the
three-year period subsequent to the close of the acquisition.
The first earn-out payment is $12.5 million, and the second
earn-out payment is $17.0 million. We have not accrued any
portion of the earn-out payments as purchase price.
Approximately $1.3 million and $1.8 million of the
first and second earn-out payments, respectively, are subject to
certain employees providing future service, which is expensed as
earned.
At the close of the Reconnex acquisition, a retention plan,
which provides for the payment of up to $5.0 million based
on continued employment service
and/or
achievement of certain financial targets, was established. At
December 31, 2008, $0.5 million has been expensed, and
no amounts have been paid.
75
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the assets acquired and
liabilities assumed in the acquisition of ScanAlert, Reconnex
and Secure Computing, which is based on our preliminary
allocation and subject to adjustment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
ScanAlert
|
|
|
Reconnex
|
|
|
Secure Computing
|
|
|
Acquisitions
|
|
|
Technology
|
|
$
|
4,759
|
|
|
$
|
9,800
|
|
|
$
|
99,200
|
|
|
$
|
113,759
|
|
Other intangibles
|
|
|
14,505
|
|
|
|
2,500
|
|
|
|
51,200
|
|
|
|
68,205
|
|
Goodwill
|
|
|
42,133
|
|
|
|
20,143
|
|
|
|
365,474
|
|
|
|
427,750
|
|
Cash
|
|
|
107
|
|
|
|
363
|
|
|
|
41,090
|
|
|
|
41,560
|
|
Accounts receivable
|
|
|
982
|
|
|
|
661
|
|
|
|
25,386
|
|
|
|
27,029
|
|
Fixed assets
|
|
|
443
|
|
|
|
|
|
|
|
16,261
|
|
|
|
16,704
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
9,458
|
|
|
|
9,458
|
|
Prepaid license fees
|
|
|
3,627
|
|
|
|
|
|
|
|
|
|
|
|
3,627
|
|
Other assets
|
|
|
194
|
|
|
|
487
|
|
|
|
12,702
|
|
|
|
13,383
|
|
Deferred tax assets
|
|
|
1,970
|
|
|
|
21,247
|
|
|
|
89,477
|
|
|
|
112,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
68,720
|
|
|
|
55,201
|
|
|
|
710,248
|
|
|
|
834,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
8,733
|
|
|
|
3,136
|
|
|
|
60,177
|
|
|
|
72,046
|
|
Deferred revenue
|
|
|
5,079
|
|
|
|
596
|
|
|
|
119,151
|
|
|
|
124,826
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
4,909
|
|
|
|
60,320
|
|
|
|
65,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
13,812
|
|
|
|
8,641
|
|
|
|
239,648
|
|
|
|
262,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
54,908
|
|
|
|
46,560
|
|
|
|
470,600
|
|
|
|
572,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development expensed
|
|
|
|
|
|
|
|
|
|
|
19,500
|
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition cost
|
|
$
|
54,908
|
|
|
$
|
46,560
|
|
|
$
|
490,100
|
|
|
$
|
591,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our management determined the purchase price allocations for
these acquisitions based on estimates of the fair values of the
tangible and intangible assets acquired and liabilities assumed.
These estimates were arrived at utilizing recognized valuation
techniques. Goodwill for ScanAlert resulted primarily from our
expectation that we will be able to provide ScanAlerts
service offerings to our customers and enhance our existing
products with those of ScanAlert. We have incorporated
ScanAlerts technology into our existing SiteAdvisor web
rating system. Goodwill for Reconnex resulted primarily from our
expectation that we will now be able to provide our customers
with automated, centrally managed and adaptive data protection.
We intend to incorporate Reconnexs technologies into our
data protection business, integrating it with our McAfee ePolicy
Orchestrator in 2009. Goodwill for Secure Computing resulted
primarily from our expectation that we will deliver the
industrys most complete network security portfolio
covering intrusion prevention, firewall, web security, email
security and data protection, and network access control to
organizations of all sizes. The goodwill recorded for ScanAlert
is deductible for tax purposes, and the goodwill recorded for
Reconnex and Secure Computing is not deductible for tax
purposes. We are continuing to assess uncertain tax positions as
well as continuing to assess measurement of certain deferred tax
assets and liabilities of Secure Computing.
For the ScanAlert acquisition, the intangible assets, other than
goodwill, are being amortized over their useful lives of 1.0 to
6.0 years or a weighted-average period of 5.5 years.
For the Reconnex acquisition, the intangible assets, other than
goodwill, are being amortized over their useful lives of 4.0 to
6.0 years or a weighted-average period of 4.4 years.
For the Secure Computing acquisition, the intangible assets,
other than goodwill, are being amortized over their useful lives
of 3.0 to 7.0 years or a weighted-average period of
4.1 years. The Secure
76
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Computing customer-related intangible assets are being amortized
using an accelerated method, which would reduce the
weighted-average period.
As part of the Secure Computing acquisition, we assumed
0.6 million outstanding RSAs and RSUs. We did not assume
any stock-based awards as part of the ScanAlert and Reconnex
acquisitions.
We recorded $19.5 million for in-process research and
development, which was fully expensed upon purchase because
technological feasibility had not been achieved and there was no
alternative use for the projects under development. The
in-process research and development included new releases of the
Firewall Sidewinder, Webwasher and Hosted Mail products, and the
fair value at acquisition related to these projects was
$7.6 million, $9.5 million and $2.4 million,
respectively. The fair values were determined using the excess
earnings method under the income approach.
For the Secure Computing acquisition, we accrued
$6.1 million for facilities planned to be vacated through
the third quarter of 2009. The accrual will be fully utilized by
2015, the end of the original lease terms. Accretion on this
accrual is being recognized as restructuring expense. See
Note 7.
In October 2008, Secure Computing acquired 100% of the
outstanding shares of Securify, Inc. (Securify). Secure
Computing paid $8.5 million upon the close of the
acquisition, agreed to pay an additional $5.0 million in
July 2009 and another $5.0 million in January 2010. The
$10.0 million in future consideration is reflected in the
Secure Computing purchase price allocation at its net present
value. The Securify purchase agreement provides for an earn-out
payment of up to $5.0 million based on the achievement of
certain Securify financial targets in 2009.
The results of operations for these acquisitions have been
included in our results of operations since their respective
acquisition dates.
The following unaudited pro forma financial information presents
our combined results with Secure Computing and Reconnex as if
the acquisitions had occurred at the beginning of 2008 and 2007
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Pro forma net revenue
|
|
$
|
1,792,657
|
|
|
$
|
1,512,323
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
98,851
|
|
|
$
|
53,318
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share basic
|
|
$
|
0.63
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share diluted
|
|
$
|
0.62
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
|
|
|
|
|
|
|
The above unaudited pro forma financial information includes
adjustments for amortization of identifiable intangible assets
that were acquired, adjustments to interest income, adjustments
for incremental stock-based compensation expense related to the
unearned portion of Secure Computings RSAs and RSUs
assumed and converted, eliminations of intercompany transactions
and related tax effects. The pro forma financial information
excludes the effects of the SafeWord product line sold by Secure
Computing in 2008, the effects of the in-process research and
development charge for Secure Computing that was expensed
immediately upon acquisition and the effects of the goodwill
impairment charge recorded by Secure Computing in 2008. No
effect has been given to cost reductions or synergies in this
presentation. In managements opinion, the unaudited pro
forma combined results of operations are not indicative of the
actual results that would have occurred had the acquisitions
been consummated at the beginning of 2008 or 2007, nor are they
indicative of future operations of the combined companies.
77
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007
Acquisition
In November 2007, we acquired SafeBoot Holding B.V.
(SafeBoot), an enterprise security software company
for data protection via encryption and access control, for
$346.6 million. The purchase price consisted of the
following (in thousands):
|
|
|
|
|
Cash paid as of December 31, 2007
|
|
$
|
294,887
|
|
Escrow deposit
|
|
|
43,750
|
|
Direct acquisition and other costs paid in 2008
|
|
|
6,007
|
|
Fair value of options assumed
|
|
|
1,939
|
|
|
|
|
|
|
Total purchase price before imputed interest
|
|
|
346,583
|
|
Imputed interest
|
|
|
(1,002
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
345,581
|
|
|
|
|
|
|
For convenience, we designated October 31, 2007, as the
effective date for this acquisition and have recorded
$1.0 million of imputed interest as a charge to results of
operations.
Our management determined the purchase price allocation based on
estimates of the fair values of the tangible and intangible
assets acquired and liabilities assumed. These estimates were
arrived at utilizing recognized valuation techniques. On the
acquisition date, we recorded $215.8 million of goodwill,
which is deductible for tax purposes. Goodwill resulted
primarily from our expectation that we will now be able to
provide our customers with comprehensive data protection,
including endpoint, network, web, email and data security, as
well as risk and compliance solutions. We have integrated
SafeBoot technology into our centralized management console for
enterprise customers.
The intangible assets, other than goodwill, are being amortized
over their useful lives of 1.0 to 8.0 years or a
weighted-average period of 4.5 years. As part of the
acquisition, we assumed approximately 0.5 million
outstanding options.
The following is a summary of the assets acquired and
liabilities assumed in the acquisition of SafeBoot, as adjusted
for subsequent purchase price adjustments (in thousands).
|
|
|
|
|
Technology
|
|
$
|
102,340
|
|
Other intangibles
|
|
|
41,800
|
|
Goodwill
|
|
|
215,871
|
|
Cash
|
|
|
9,760
|
|
Other assets
|
|
|
23,853
|
|
|
|
|
|
|
Total assets acquired
|
|
|
393,624
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
26,847
|
|
Deferred revenue
|
|
|
9,394
|
|
Deferred tax liabilities
|
|
|
11,802
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
48,043
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
345,581
|
|
|
|
|
|
|
78
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma financial information presents
our combined results with SafeBoot as if the acquisition had
occurred at the beginning of 2007 and 2006 (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Pro forma net revenue
|
|
$
|
1,346,470
|
|
|
$
|
1,175,535
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
137,339
|
|
|
$
|
111,023
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share basic
|
|
$
|
0.86
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share diluted
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
159,819
|
|
|
|
160,945
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
164,126
|
|
|
|
163,052
|
|
|
|
|
|
|
|
|
|
|
The above unaudited pro forma financial information includes
adjustments for amortization of identifiable intangible assets
that were acquired. In managements opinion, the unaudited
pro forma combined results of operations are not indicative of
the actual results that would have occurred had the acquisition
been consummated at the beginning of 2007 or 2006, nor are they
indicative of future operations of the combined companies.
2006
Acquisitions
During 2006, we acquired three companies, SiteAdvisor, Inc.
(SiteAdvisor), Preventsys, Inc.
(Preventsys), and Onigma Ltd. (Onigma),
and substantially all of the assets of a fourth, Citadel
Security Software Inc. (Citadel), to enhance and
complement our current offerings for an aggregate of
$140.4 million, plus $3.9 million in working capital
reimbursement and $2.0 million in direct acquisition costs.
The goodwill recorded for Citadel is deductible for tax
purposes, and the goodwill recorded for SiteAdvisor is not
deductible for tax purposes. Goodwill resulted primarily from
our expectation that Citadel would broaden our capabilities for
security policy compliance enforcement and vulnerability
remediation. The results of operations for the acquired
companies have been included in our results of operations since
their respective acquisition dates. The following is a summary
of the assets acquired and liabilities assumed in these
acquisitions as adjusted for purchase price valuation procedures
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
SiteAdvisor
|
|
|
Preventsys
|
|
|
Onigma
|
|
|
Citadel
|
|
|
Acquisitions
|
|
|
Acquisition date
|
|
|
April 2006
|
|
|
|
June 2006
|
|
|
|
October 2006
|
|
|
|
December 2006
|
|
|
|
|
|
Technology
|
|
$
|
15,450
|
|
|
$
|
3,540
|
|
|
$
|
23,139
|
|
|
$
|
15,900
|
|
|
$
|
58,029
|
|
Other intangibles
|
|
|
420
|
|
|
|
677
|
|
|
|
1,889
|
|
|
|
6,500
|
|
|
|
9,486
|
|
Goodwill
|
|
|
50,397
|
|
|
|
|
|
|
|
|
|
|
|
42,055
|
|
|
|
92,452
|
|
Cash
|
|
|
29
|
|
|
|
23
|
|
|
|
125
|
|
|
|
|
|
|
|
177
|
|
Other assets
|
|
|
485
|
|
|
|
661
|
|
|
|
281
|
|
|
|
1,103
|
|
|
|
2,530
|
|
Deferred tax assets
|
|
|
587
|
|
|
|
2,820
|
|
|
|
530
|
|
|
|
|
|
|
|
3,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
67,368
|
|
|
|
7,721
|
|
|
|
25,964
|
|
|
|
65,558
|
|
|
|
166,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
37
|
|
|
|
1,384
|
|
|
|
372
|
|
|
|
426
|
|
|
|
2,219
|
|
Deferred revenue
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
3,937
|
|
|
|
4,140
|
|
Deferred tax liabilities
|
|
|
6,269
|
|
|
|
1,750
|
|
|
|
6,429
|
|
|
|
|
|
|
|
14,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
6,306
|
|
|
|
3,337
|
|
|
|
6,801
|
|
|
|
4,363
|
|
|
|
20,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
61,062
|
|
|
|
4,384
|
|
|
|
19,163
|
|
|
|
61,195
|
|
|
|
145,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development expensed
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition cost
|
|
$
|
61,062
|
|
|
$
|
4,844
|
|
|
$
|
19,163
|
|
|
$
|
61,195
|
|
|
$
|
146,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our management determined the purchase price allocation based on
estimates of the fair values of the tangible and intangible
assets acquired and liabilities assumed. These estimates were
arrived at utilizing recognized valuation techniques. The
intangible assets, other than goodwill, are being amortized over
their useful lives of 2.0 to 5.0 years. We did not assume
any outstanding stock-based awards or warrants related to these
acquisitions. The in-process research and development recorded
on the Preventsys acquisition was fully expensed upon purchase
because technological feasibility had not been achieved and
there was no alternative use for the projects under development.
The in-process research and development included the development
of a new version of the security risk management system that
will include increased functionality and new features. We
introduced this version during the fourth quarter of 2006. At
the date of acquisition, we estimated that 40% of the
development effort had been completed and that the remaining 60%
of development would take two months to complete. As of
December 31, 2006, all development was completed and costs
were $0.5 million.
Performance and retention plans were established at the close of
each acquisition. Total payments expected under these plans were
$11.2 million, which were fully expensed and paid as of
December 31, 2008.
We have incorporated Citadel, Onigma and Preventsys technologies
into our existing corporate security products. We have bundled
the SiteAdvisor technology with our existing consumer and small
and medium business product offerings.
The following unaudited pro forma financial information presents
our combined results with Citadel and Preventsys as if the
acquisitions had occurred at the beginning of 2006 (in
thousands, except per share data):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
Pro forma net revenue
|
|
$
|
1,157,986
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
119,371
|
|
|
|
|
|
|
Pro forma net income per share basic
|
|
$
|
0.74
|
|
|
|
|
|
|
Pro forma net income per share diluted
|
|
$
|
0.73
|
|
|
|
|
|
|
Shares used in per share calculation basic
|
|
|
160,945
|
|
|
|
|
|
|
Shares used in per share calculation diluted
|
|
|
163,052
|
|
|
|
|
|
|
The above unaudited pro forma financial information includes
adjustments for amortization of identifiable intangible assets
that were acquired. The pro forma financial information excludes
the effects of the in-process research and development totaling
$0.5 million that was expensed immediately. In
managements opinion, the unaudited pro forma combined
results of operations are not indicative of the actual results
that would have occurred had the acquisition been consummated at
the beginning of 2006, nor are they indicative of future
operations of the combined companies.
Pro forma results of operations for other 2006 acquisitions have
not been presented because the effects of these acquisitions,
individually or in the aggregate, were not material to our
results of operations.
80
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Marketable
Securities and Cash and Cash Equivalents
|
Marketable securities, which are classified as
available-for-sale, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Purchase/
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
U.S. Treasury Notes
|
|
$
|
10,032
|
|
|
$
|
148
|
|
|
$
|
|
|
|
$
|
10,180
|
|
Corporate and government-sponsored agency debt securities
|
|
|
99,785
|
|
|
|
1,972
|
|
|
|
(1,514
|
)
|
|
|
100,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,817
|
|
|
$
|
2,120
|
|
|
$
|
(1,514
|
)
|
|
$
|
110,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Purchase/
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
U.S. Treasury Notes
|
|
$
|
53,759
|
|
|
$
|
498
|
|
|
$
|
(3
|
)
|
|
$
|
54,254
|
|
Corporate and government-sponsored agency debt securities
|
|
|
829,900
|
|
|
|
3,501
|
|
|
|
(3,031
|
)
|
|
|
830,370
|
|
Time deposits
|
|
|
40,020
|
|
|
|
|
|
|
|
|
|
|
|
40,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
923,679
|
|
|
$
|
3,999
|
|
|
$
|
(3,034
|
)
|
|
$
|
924,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, $27.4 million of marketable debt
securities had scheduled maturities of less than one year and
are classified as current assets. Marketable securities of
$83.0 million have maturities ranging from greater than one
year to less than three years and are classified as non current
assets.
The following table summarizes the components of the cash and
cash equivalents balance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash and money market funds, at cost which approximates fair
value
|
|
$
|
483,302
|
|
|
$
|
358,579
|
|
Corporate debt securities, primarily commercial paper
|
|
|
|
|
|
|
35,579
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
483,302
|
|
|
$
|
394,158
|
|
|
|
|
|
|
|
|
|
|
We recognized gains (losses) upon the sale of investments using
the specific identification cost method. The following table
summarizes the gross realized gains (losses) for the years
ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Realized gains
|
|
$
|
6,738
|
|
|
$
|
1,486
|
|
|
$
|
596
|
|
Realized losses
|
|
|
(1,257
|
)
|
|
|
(382
|
)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain
|
|
$
|
5,481
|
|
|
$
|
1,104
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the fair value and gross
unrealized losses related to those available-for-sale securities
that have unrealized losses, aggregated by investment category
and length of time that the individual securities have been in a
continuous unrealized loss position, at December 31, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Corporate debt securities
|
|
$
|
12,691
|
|
|
$
|
(44
|
)
|
|
$
|
4,726
|
|
|
$
|
(22
|
)
|
|
$
|
17,417
|
|
|
$
|
(66
|
)
|
Mortgage-backed securities
|
|
|
3,237
|
|
|
|
(2
|
)
|
|
|
6,139
|
|
|
|
(252
|
)
|
|
|
9,376
|
|
|
|
(254
|
)
|
Asset-backed securities
|
|
|
10,870
|
|
|
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
|
10,870
|
|
|
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,798
|
|
|
$
|
(1,240
|
)
|
|
$
|
10,865
|
|
|
$
|
(274
|
)
|
|
$
|
37,663
|
|
|
$
|
(1,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market values were determined for each individual security in
the investment portfolio. Generally, for assets reported at fair
value, quoted market prices or valuation models that utilize
observable market data inputs are used to estimate fair value.
Many factors are used to estimate the market values, including,
but not limited to, interest rates, prepayment rates, amount and
timing of credit losses, supply and demand, liquidity, cash
flows and other market factors. These factors are applied to our
portfolio as appropriate in order to determine market values.
Forward
Exchange Contracts
We conduct business globally. As a result, we are exposed to
movements in foreign currency exchange rates. From time to time
we enter into forward exchange contracts to reduce exposures
associated with certain nonfunctional monetary assets and
liabilities such as accounts receivable and accounts payable
denominated in the Euro, British Pound, and Canadian Dollar. The
forward contracts typically range from one to three months in
original maturity. In general, we do not hedge anticipated
foreign currency cash flows, nor do we enter into forward
contracts for trading purposes. We do not use any foreign
exchange derivatives for trading or speculative purposes.
The forward contracts do not qualify for hedge accounting and
accordingly are marked to market at the end of each reporting
period with any unrealized gain or loss being recognized in the
statement of income as interest and other income.
Forward contracts outstanding at December 31, 2008, are
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Notional U.S. Dollar
|
|
|
|
|
|
|
Equivalent
|
|
|
Fair Value
|
|
|
Euro
|
|
$
|
31,944
|
|
|
$
|
(701
|
)
|
British Pound
|
|
|
8,503
|
|
|
|
(1,633
|
)
|
Canadian Dollar
|
|
|
2,954
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,401
|
|
|
$
|
(2,389
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the fair value of our forward
contracts outstanding was less than $0.1 million
82
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Consolidated
Balance Sheet Detail (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
22,190
|
|
|
$
|
21,390
|
|
Furniture and fixtures
|
|
|
25,499
|
|
|
|
23,782
|
|
Computers, equipment and software
|
|
|
250,643
|
|
|
|
222,506
|
|
Leasehold improvements
|
|
|
38,451
|
|
|
|
33,690
|
|
Construction in progress
|
|
|
4,229
|
|
|
|
3,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341,012
|
|
|
|
304,401
|
|
Accumulated depreciation
|
|
|
(233,494
|
)
|
|
|
(216,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
107,518
|
|
|
|
87,753
|
|
Land
|
|
|
6,917
|
|
|
|
6,917
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
114,435
|
|
|
$
|
94,670
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for 2008, 2007 and 2006 was
$40.6 million, $35.6 million and $35.9 million,
respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued legal and professional fees
|
|
$
|
39,725
|
|
|
$
|
30,968
|
|
Accrued marketing
|
|
|
38,069
|
|
|
|
36,264
|
|
Other accrued expenses
|
|
|
116,886
|
|
|
|
83,729
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194,680
|
|
|
$
|
150,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued taxes and other long-term liabilities:
|
|
|
|
|
|
|
|
|
Accrued income taxes, long-term
|
|
$
|
47,106
|
|
|
$
|
69,246
|
|
Other
|
|
|
25,645
|
|
|
|
18,995
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,751
|
|
|
$
|
88,241
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities represent accruals for which we believe
related cash flows will occur after December 31, 2009.
We have initiated certain restructuring actions to reduce our
cost structure and enable us to invest in certain strategic
growth initiatives to enhance our competitive position.
During 2008 (the 2008 Restructuring), we took the
following measures: (i) eliminated redundant positions
related to the SafeBoot and Secure Computing acquisitions,
(ii) realigned our sales force and (iii) realigned
staffing across various departments.
83
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006 (the 2006 Restructuring), we took the
following measures: (i) reduced our workforce and
(ii) continued our efforts to consolidate and dispose of
excess facilities.
During 2004 and 2003 (the 2004 and 2003
Restructurings), we took the following measures:
(i) reduced our workforce, (ii) consolidated and
disposed of excess facilities, (iii) moved our European
headquarters to Ireland and vacated a leased facility in
Amsterdam, (iv) consolidated operations formerly housed in
three leased facilities in Dallas, Texas, into our regional
headquarters facility in Plano, Texas, (v) relocated
employees from the Santa Clara, California, headquarters
site to our Plano facility as part of the consolidation
activities and (vi) sold our Sniffer and Magic product
lines in 2004.
Restructuring benefit in 2008 totaled $1.8 million,
consisting of a $6.6 million charge related to 2008
Restructuring, offset by a $8.4 million benefit, net of
accretion, related primarily to changes in previous estimates of
base rent and sublease income for the Santa Clara lease which
was restructured in 2003 and 2004. We have moved back into three
floors and intend to move back into the other floors in early
2009.
2008
Restructuring
Activity and liability balances related to our 2008
restructuring are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Total
|
|
|
Balance, January 1, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
6,142
|
|
|
|
6,621
|
|
|
|
12,763
|
|
Cash payments
|
|
|
|
|
|
|
(5,419
|
)
|
|
|
(5,419
|
)
|
Adjustment to liability
|
|
|
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Effects of foreign currency exchange
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Accretion
|
|
|
29
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
6,171
|
|
|
$
|
1,175
|
|
|
$
|
7,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, we recorded restructuring charges of $1.9 million
related to the elimination of certain positions at Secure
Computing and SafeBoot that were redundant to positions at
McAfee. We also recorded a $4.7 million restructuring
charge related to the realignment of our sales force and the
realignment of staffing across all departments. Of the total
2008 restructuring charge, $4.0 million, $2.4 million
and $0.2 million was recorded in EMEA, North America and
Latin America, respectively. We recorded a $6.1 million
accrual on the opening balance sheet for Secure Computing for
estimated lease related costs associated with permanently
vacated facilities. The 2008 accretion relates to these lease
termination costs.
84
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006
Restructuring
Activity and liability balances related to our 2006
restructuring are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Severance and
|
|
|
|
|
|
|
Costs
|
|
|
Other Benefits
|
|
|
Total
|
|
|
Balance, January 1, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring accrual
|
|
|
|
|
|
|
2,404
|
|
|
|
2,404
|
|
Cash payments
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
|
2,390
|
|
|
|
2,390
|
|
Restructuring accrual
|
|
|
330
|
|
|
|
2,634
|
|
|
|
2,964
|
|
Cash payments
|
|
|
(233
|
)
|
|
|
(4,542
|
)
|
|
|
(4,775
|
)
|
Adjustment to liability
|
|
|
(24
|
)
|
|
|
(196
|
)
|
|
|
(220
|
)
|
Effects of foreign currency exchange
|
|
|
4
|
|
|
|
7
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
77
|
|
|
|
293
|
|
|
|
370
|
|
Cash payments
|
|
|
(51
|
)
|
|
|
(65
|
)
|
|
|
(116
|
)
|
Adjustment to liability
|
|
|
(7
|
)
|
|
|
(37
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
19
|
|
|
$
|
191
|
|
|
$
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2006, we recorded a $2.4 million
restructuring charge related to a reduction of primarily sales
and marketing employees. This charge related to the severance of
75 employees, of which $1.0 million,
$1.1 million, $0.1 million and $0.2 million was
recorded in North America, EMEA, Japan and Asia-Pacific,
respectively.
During 2007, we completed these restructuring activities when we
permanently vacated several leased facilities. Lease termination
costs will be paid through 2009. We also recorded a
restructuring charge of $2.6 million in 2007 related to a
reduction in headcount of 33 sales and marketing employees, of
which $0.2 million, $2.3 million and $0.1 million
was recorded in North America, EMEA and Asia-Pacific,
respectively. The remaining severance and benefits will be paid
in 2009.
85
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004
and 2003 Restructurings
A reconciliation of lease termination costs recorded in our 2004
and 2003 restructurings follows (in thousands):
|
|
|
|
|
|
|
Lease
|
|
|
|
Termination
|
|
|
|
Costs
|
|
|
Balance, December 31, 2005
|
|
$
|
18,083
|
|
Cash payments
|
|
|
(4,071
|
)
|
Adjustment to liability
|
|
|
(2,506
|
)
|
Effects of foreign currency exchange
|
|
|
97
|
|
Accretion
|
|
|
645
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
12,248
|
|
Cash payments
|
|
|
(2,235
|
)
|
Adjustment to liability
|
|
|
5,552
|
|
Effects of foreign currency exchange
|
|
|
99
|
|
Accretion
|
|
|
431
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
16,095
|
|
Cash payments
|
|
|
(2,495
|
)
|
Adjustment to liability
|
|
|
(8,632
|
)
|
Reclassification to deferred rent liability
|
|
|
(2,573
|
)
|
Effects of foreign currency exchange
|
|
|
(12
|
)
|
Accretion
|
|
|
378
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
2,761
|
|
|
|
|
|
|
Lease termination costs included vacating several leased
facilities, net of estimated sublease income, and costs
associated with subleasing the vacated facilities, primarily in
our North America operating segment. Lease termination costs
will be paid through 2013.
The adjustment in 2008 primarily relates to (i) changes in
previous estimates of base rent and sublease income for the
Santa Clara lease and (ii) terminating sublease
agreements for three floors in our Santa Clara facility
which were previously included in our 2003 and 2004
restructuring activities.
|
|
8.
|
Goodwill
and Other Intangible Assets
|
Goodwill by geographic region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
January 1,
|
|
|
Goodwill
|
|
|
|
|
|
Currency
|
|
|
December 31,
|
|
|
Goodwill
|
|
|
|
|
|
Currency
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
Exchange
|
|
|
2007
|
|
|
Acquired
|
|
|
Adjustments
|
|
|
Exchange
|
|
|
2008
|
|
|
North America
|
|
$
|
412,453
|
|
|
$
|
95,877
|
|
|
$
|
1,840
|
|
|
$
|
1,321
|
|
|
$
|
511,491
|
|
|
$
|
297,270
|
|
|
$
|
(54
|
)
|
|
$
|
(1,667
|
)
|
|
$
|
807,040
|
|
EMEA
|
|
|
75,445
|
|
|
|
86,537
|
|
|
|
584
|
|
|
|
(392
|
)
|
|
|
162,174
|
|
|
|
97,188
|
|
|
|
20
|
|
|
|
(5,634
|
)
|
|
|
253,748
|
|
Japan
|
|
|
18,771
|
|
|
|
6,921
|
|
|
|
95
|
|
|
|
|
|
|
|
25,787
|
|
|
|
9,813
|
|
|
|
7
|
|
|
|
|
|
|
|
35,607
|
|
Asia-Pacific (excluding Japan)
|
|
|
11,960
|
|
|
|
22,201
|
|
|
|
56
|
|
|
|
|
|
|
|
34,217
|
|
|
|
18,197
|
|
|
|
|
|
|
|
|
|
|
|
52,414
|
|
Latin America
|
|
|
11,848
|
|
|
|
4,251
|
|
|
|
57
|
|
|
|
264
|
|
|
|
16,420
|
|
|
|
5,282
|
|
|
|
|
|
|
|
(895
|
)
|
|
|
20,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
530,477
|
|
|
$
|
215,787
|
|
|
$
|
2,632
|
|
|
$
|
1,193
|
|
|
$
|
750,089
|
|
|
$
|
427,750
|
|
|
$
|
(27
|
)
|
|
$
|
(8,196
|
)
|
|
$
|
1,169,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill was acquired during 2008 as a result of the purchase of
Secure Computing, Reconnex, and ScanAlert and during 2007 as a
result of the purchase of SafeBoot (see Note 3). The net
adjustment to goodwill in 2007 of $2.6 million included
purchase price adjustments which decreased goodwill by
$0.8 million related to Citadel, Entercept, Preventsys,
Foundstone and SiteAdvisor, primarily for research and
development tax credits, and adjustments which increased
goodwill by $3.4 million related to certain historical
acquisitions resulting from our adoption of FIN 48 on
January 1, 2007.
The components of intangible assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
(Including Effects
|
|
|
|
|
|
|
|
|
(Including Effects
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
of Foreign
|
|
|
Net
|
|
|
Gross
|
|
|
of Foreign
|
|
|
Net
|
|
|
|
Useful
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Currency
|
|
|
Carrying
|
|
|
|
Life
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Amount
|
|
|
Exchange)
|
|
|
Amount
|
|
|
Other Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies
|
|
4.1 years
|
|
$
|
385,915
|
|
|
$
|
(176,072
|
)
|
|
$
|
209,843
|
|
|
$
|
282,293
|
|
|
$
|
(129,082
|
)
|
|
$
|
153,211
|
|
Trademarks and patents
|
|
5.0 years
|
|
|
42,282
|
|
|
|
(35,639
|
)
|
|
|
6,643
|
|
|
|
42,922
|
|
|
|
(33,956
|
)
|
|
|
8,966
|
|
Customer base and other intangibles
|
|
5.5 years
|
|
|
182,282
|
|
|
|
(82,965
|
)
|
|
|
99,317
|
|
|
|
117,731
|
|
|
|
(59,782
|
)
|
|
|
57,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
610,479
|
|
|
$
|
(294,676
|
)
|
|
$
|
315,803
|
|
|
$
|
442,946
|
|
|
$
|
(222,820
|
)
|
|
$
|
220,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expenses for the intangible assets
listed above totaled $83.3 million, $48.9 million and
$34.4 million for 2008, 2007, and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Gross intangible assets, beginning of year
|
|
$
|
442,946
|
|
|
$
|
305,395
|
|
Add: Purchased technologies (amortized over one to seven years)
|
|
|
113,759
|
|
|
|
102,825
|
|
Add: Trademarks and patents (amortized over one to seven years)
|
|
|
397
|
|
|
|
9,905
|
|
Add: Customer base and other intangibles (amortized over one to
seven years)
|
|
|
67,808
|
|
|
|
41,195
|
|
Add: Change in value due to foreign exchange
|
|
|
(12,358
|
)
|
|
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612,552
|
|
|
|
461,777
|
|
Dispositions
|
|
|
(2,073
|
)
|
|
|
(18,831
|
)
|
|
|
|
|
|
|
|
|
|
Gross intangible assets, end of year
|
|
$
|
610,479
|
|
|
$
|
442,946
|
|
|
|
|
|
|
|
|
|
|
The additions in 2008 are a result of the Secure Computing,
Reconnex, and ScanAlert acquisitions. The additions in 2007 are
a result of the SafeBoot acquisition. The dispositions in 2008
are primarily related to the write-off of Wireless Security
Corporation assets. The dispositions in 2007 were primarily
related to the write-off of Traxess assets.
87
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected future intangible asset amortization expense is as
follows (in thousands):
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
2009
|
|
$
|
111,785
|
|
2010
|
|
|
93,531
|
|
2011
|
|
|
69,067
|
|
2012
|
|
|
31,239
|
|
2013
|
|
|
6,168
|
|
Thereafter
|
|
|
4,013
|
|
|
|
|
|
|
|
|
$
|
315,803
|
|
|
|
|
|
|
Leases
We lease most of our operating facilities under non-cancelable
operating leases, which expire at various times ranging from
2009 through 2018. Our operating leases for facilities typically
include renewal periods, which are at our option, and annual
contractual escalations in lease payments. Several of our
significant leases are subject to rent increases to market rates
based on periodic rent reviews. A description of our significant
operating leases is as follows:
|
|
|
|
|
|
|
Lease Expiration
|
|
Renewal Option
|
|
Corporate Headquarters, Santa Clara, California
|
|
March 2013
|
|
10-year renewal
|
St. Paul, Minnesota
|
|
May 2018
|
|
two 5-year renewals
|
Slough, England
|
|
September 2017
|
|
None
|
In addition, we have leased certain office equipment with
various lease expiration dates through 2012.
Future minimum lease payments, including contractual and
reasonably assured escalations in future lease payments, and
sublease rental income under non-cancelable operating leases are
as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease
|
|
|
|
Payments
|
|
|
Income
|
|
|
2009
|
|
$
|
26,622
|
|
|
$
|
(854
|
)
|
2010
|
|
|
20,817
|
|
|
|
(762
|
)
|
2011
|
|
|
17,878
|
|
|
|
(286
|
)
|
2012
|
|
|
15,638
|
|
|
|
(294
|
)
|
2013
|
|
|
8,899
|
|
|
|
(174
|
)
|
Thereafter
|
|
|
17,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,588
|
|
|
$
|
(2,370
|
)
|
|
|
|
|
|
|
|
|
|
Rent expense for 2008, 2007 and 2006 was $25.8 million,
$18.9 million and $17.6 million, respectively.
Sublease rental income under non-cancelable subleases was
$2.1 million, $2.7 million and $2.3 million for
2008, 2007 and 2006, respectively.
88
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum contractual commitments for telecom contracts and
software licensing agreements having an initial or remaining
non-cancelable term in excess of one year, as well as royalty
and distribution agreements and purchase obligations are as
follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
Purchase
|
|
|
|
Obligations
|
|
|
|
and Other
|
|
|
|
Commitments
|
|
|
2009
|
|
$
|
154,626
|
|
2010
|
|
|
20,352
|
|
2011
|
|
|
724
|
|
2012
|
|
|
180
|
|
2013
|
|
|
60
|
|
|
|
|
|
|
Total
|
|
$
|
175,942
|
|
|
|
|
|
|
Some of our commitments have variable components associated with
the obligation, which are not included in the minimum
contractual commitments above. These variable components are
usually based on incremental sales of our product offerings by
the partners exceeding certain minimum requirements.
|
|
10.
|
Warranty
Accrual and Guarantees
|
We offer a 90 day warranty on our hardware and software
products and record a liability for the estimated future costs
associated with warranty claims, which is based upon historical
experience and our estimate of the level of future costs. A
reconciliation of the change in our warranty obligation for the
years ended December 31 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Warranty balance, beginning of year
|
|
$
|
489
|
|
|
$
|
662
|
|
|
$
|
1,083
|
|
Additional accruals
|
|
|
4,236
|
|
|
|
1,546
|
|
|
|
1,937
|
|
Costs incurred during the period
|
|
|
(3,615
|
)
|
|
|
(1,719
|
)
|
|
|
(2,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty balance, end of year
|
|
$
|
1,110
|
|
|
$
|
489
|
|
|
$
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of certain guarantee and
indemnification agreements as of December 31, 2008:
|
|
|
|
|
Under the terms of our software license agreements with our
customers, we agree that in the event the software sold
infringes upon any patent, copyright, trademark, or any other
proprietary right of a third party, we will indemnify our
customer licensees against any loss, expense or liability from
any damages that may be awarded against our customer. We include
this infringement indemnification in our software license
agreements and selected managed service arrangements. In the
event the customer cannot use the software or service due to
infringement and we can not obtain the right to use, replace or
modify the license or service in a commercially feasible manner
so that it no longer infringes then we may terminate the license
and provide the customer a pro-rata refund of the fees paid by
the customer for the infringing license or service. We have
recorded no liability associated with this indemnification, as
we are not aware of any pending or threatened infringement
actions that are probable losses. We believe the estimated fair
value of these intellectual property indemnification clauses is
minimal.
|
|
|
|
Under the terms of certain vendor agreements, in particular,
vendors used as part of our managed services, we have agreed
that in the event the service provided to the customer by the
vendor on behalf of us infringes upon any patent, copyright,
trademark or any other proprietary right of a third party, we
will indemnify our vendor against any loss, expense, or
liability from any damages that may be awarded against our
vendor. No
|
89
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
maximum liability is stipulated in these vendor agreements. We
have recorded no liability associated with this indemnification,
as we are not aware of any pending or threatened infringement
actions or claims that are probable losses. We believe the
estimated fair value of these indemnification clauses is minimal.
|
|
|
|
|
|
As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
director and officer insurance coverage that reduces our
exposure and may enable us to recover a portion or all of any
future amounts paid. We cannot estimate the fair value of these
indemnification agreements in excess of applicable insurance
coverage due to the fact that the insurers are denying coverage
in many instances where we believe coverage should apply. We
believe we will prevail in these insurance coverage disputes.
|
|
|
|
Under the terms of our agreements to sell Magic in January 2004,
Sniffer in July 2004 and McAfee Labs assets in December 2004, we
agreed to indemnify the purchasers for any breach of
representations or warranties in the agreement as well as for
any liabilities related to the assets prior to sale that were
not included in the purchaser assumed liabilities (undiscovered
liabilities). Subject to limited exceptions, the maximum
potential loss related to the indemnifications is
$10.0 million, $200.0 million and $1.5 million,
respectively. To date, we have paid no amounts under the
representations and warranties indemnifications. We have not
recorded any accruals related to these agreements.
|
|
|
|
Under the terms of the agreement entered into by Secure
Computing in July 2008 to sell its SafeWord assets, we are
obligated to indemnify the purchaser for any breach of
representations or warranties in the agreement as well as for
any liabilities related to the assets prior to sale that were
not included in the purchaser assumed liabilities (undiscovered
liabilities). Subject to limited exceptions, the maximum
potential loss related to the indemnification is
$64.3 million. To date, we have paid no amounts under the
representations and warranties indemnifications. We have not
recorded any accruals related to this agreement.
|
If we believe a liability associated with any of the
aforementioned indemnifications becomes probable and the amount
of the liability is reasonably estimable or the minimum amount
of a range of loss is reasonably estimable, then an appropriate
liability will be established.
On December 22, 2008, we entered into a credit agreement
with a financial institution (the Credit Facility).
The Credit Facility provides for a $100.0 million unsecured
term loan and a $100.0 million unsecured revolving credit
facility with a $25.0 million letter of credit sublimit.
The term loan was available for draw from January 5, 2009
through January 9, 2009 (see Note 20). The Credit
Facility also contains an expansion option permitting us to
arrange up to an aggregate of $200.0 million in additional
commitments from existing lenders
and/or new
lenders.
The principal of, together with accrued interest on, the term
loan is due on December 22, 2009. The revolving credit
facility, which is subject to certain quarterly financial
covenants, terminates on December 22, 2011, on which date
all outstanding principal of, together with accrued interest on,
any revolving loans will be due. We may prepay the loans and
terminate the commitments at any time, without premium or
penalty, subject to reimbursement of certain costs in the case
of eurocurrency loans.
Loans may be made in U.S. Dollars, Euros or other
currencies agreed to by the lenders. Loans will bear interest at
our election at the prime rate or at an adjusted LIBOR rate plus
a margin (ranging from 2.00% to 2.50%) that varies with our
consolidated leverage ratio (a eurocurrency loan).
Interest on the loans is payable quarterly in arrears with
respect to prime rate loans and at the end of an interest period
(or at each three month interval in the case of loans with
interest periods greater than three months) in the case of
eurocurrency loans.
90
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
No balances were outstanding under the Credit Facility as of
December 31, 2008; however, we borrowed $100.0 million
under the term loan portion of the Credit Facility on
January 9, 2009. Commitment fees range from 0.25% to 0.45%
of the unused portion on the credit facility depending on our
consolidated leverage ratio. See Note 20 to the
consolidated financial statements for additional information
with respect to borrowings against the Credit Facility.
In addition, we have a 14.0 million Euro credit facility
with a bank (the Euro Credit Facility). The Euro
Credit Facility is available on an offering basis, meaning that
transactions under the Euro 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 Euro Credit Facility is intended to be used for
short-term credit requirements, with terms of one year or less.
The Euro Credit Facility can be canceled at any time. No
balances were outstanding under the Euro Credit Facility as of
December 31, 2008 and 2007.
|
|
12.
|
Employee
Benefit Plan
|
Our 401(k) and Profit Sharing Plan in the U.S. covers
substantially all full-time employees. Our employees in Japan
and Canada can participate in plans similar to the 401(k) Plan
in the U.S. Our contributions to these plans are similar to
those in the U.S. Annual amounts contributed by us under
these plans were $5.4 million, $4.2 million and
$4.0 million in 2008, 2007 and 2006, respectively.
Common
Stock
In April 2006, our board of directors authorized the repurchase
of up to $250.0 million of our common stock in the open
market. Beginning in May 2006, we suspended repurchases of our
common stock in the open market due to the investigation into
our historical option granting practices and our inability to
file on a timely basis our 2006 and 2007 quarterly reports and
our 2006 annual report with the SEC. We repurchased
9.8 million shares of our common stock in 2006 for
$234.0 million, excluding commissions. During 2007, we had
no repurchases of our common stock that were pursuant to a
publicly announced plan or program. In January 2008, our board
of directors authorized the repurchase of up to
$750.0 million of our common stock from time to time in the
open market or through privately negotiated transactions through
July 2009, depending upon market conditions, share price and
other factors. During 2008, we repurchased 14.5 million
shares of our common stock for $499.7 million, excluding
commissions. As of December 31, 2008, we had authorization
to purchase an additional $250.3 million of our common
stock through July 2009.
During 2008, we repurchased approximately 0.5 million
shares of our common stock for approximately $16.6 million
in connection with our obligation to holders of RSUs, RSAs and
PSUs to withhold the number of shares required to satisfy the
holders tax liabilities in connection with the vesting of
such shares. During 2007 and 2006 we repurchased shares of our
common stock for approximately $0.2 million and
$0.5 million, respectively, in connection with our
obligation to holders of RSAs to withhold the number of shares
required to satisfy the holders tax liabilities in
connection with the vesting of such shares. These shares were
not part of the publicly announced repurchase program.
Preferred
Stock
We have authorized 5.0 million shares of preferred stock,
par value $0.01 per share. Our board of directors has authority
to provide for the issuance of the shares of preferred stock in
series, to establish from time to time the number of shares to
be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof,
without any further vote or action by the shareholders.
91
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Employee
Stock Benefit Plans
|
Employee
Stock Purchase Plan
Our Employee Stock Purchase Plan (ESPP) has
5.0 million shares of our common stock reserved for
issuance to our employees.
In July 2006, we suspended purchases under our ESPP and
prohibited our employees from exercising options due to the
announced investigation into our historical option granting
practices and our inability to become current on our reporting
obligations under the Securities Exchange Act of 1934, as
amended. In June 2008, we reinstated our ESPP with a six-month
offering period, a 15% discount and a six-month look-back
feature.
During an offering period, employees make contributions to the
ESPP through payroll deductions. At the end of each offering
period, we use the accumulated contributions to issue shares of
our common stock to the participating employees. The issue price
of those shares is equal to the lesser of (i) 85% of our
stock price on the first day of the offering period or
(ii) 85% of our stock price on the purchase date. No
participant may be issued more than $25,000 of common stock in
any one calendar year, and the maximum number of shares a
participant may be issued during a single offering period is
10,000 shares. In 2008, 0.4 million shares were issued
under the ESPP at a weighted-average issue price of $25.78. In
2007, no shares were issued under the ESPP. In 2006,
0.4 million shares were issued under the ESPP at a
weighted-average issue price of $17.22. The total intrinsic
value of shares issued under the ESPP during 2008 and 2006 was
$1.7 million and $2.4 million, respectively.
Company
Stock Incentive Plans
Under the terms of our amended 1997 Stock Incentive Plan
(1997 Plan), we have reserved a total of
43.5 million shares for issuance to employees, officers,
outside directors, third-party contractors and consultants
through stock-based awards provided in the form of options,
RSUs, RSAs, PSUs or stock appreciation rights. As of
December 31, 2008, we have no stock-based awards
outstanding with third-party contractors or consultants.
The exercise price for options is equal to the market value of
our common stock on the grant date. Although some of the options
may be exercised immediately upon granting, the majority contain
graded vesting provisions whereby 25% vest one year from the
date of grant and thereafter in equal monthly increments over
the remaining three years. All unexercised options expire ten
years after the grant date. RSAs and RSUs also vest over a
specified period, generally for RSAs and certain RSUs ratably
over three years and for other RSUs 50% two years from the grant
date and 50% three years from the grant date. RSAs and RSUs
assumed in the acquisition of Secure Computing contain graded
vesting provisions, generally whereby 25% vest one year from the
date of grant and thereafter in equal quarterly increments over
the remaining three years. RSAs are common stock issued to the
recipient that have not vested. RSUs are promises to issue
common stock in the future. PSUs are RSUs with performance-based
vesting.
Under the Stock Option Plan for Outside Directors, we have
reserved 1.1 million shares of our common stock for
issuance to members of our board of directors who are not
employees of ours or any of our affiliated entities. The
exercise price for these options is equal to the market value of
our common stock on the grant date. Initial grants to each
outside director generally vest ratably over a three-year
period, while any subsequent grants are exercisable one year
from the grant date. All unexercised options expire ten years
after the grant date.
92
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan
Activity
The following table summarizes option activity for the year
ended December 31, 2008 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
|
|
|
Value(1)
|
|
|
Outstanding at beginning of period
|
|
|
14,168
|
|
|
$
|
23.68
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
3,351
|
|
|
|
34.59
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(5,862
|
)
|
|
|
19.91
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(1,344
|
)
|
|
|
31.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
10,313
|
|
|
$
|
28.51
|
|
|
|
7.4
|
|
|
$
|
69,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest(2)
|
|
|
9,043
|
|
|
$
|
27.78
|
|
|
|
7.1
|
|
|
$
|
67,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
4,707
|
|
|
$
|
23.53
|
|
|
|
5.9
|
|
|
$
|
53,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intrinsic value is calculated as the difference between the
market value of our common stock on December 31, 2008 and
the exercise price of the option. The aggregate intrinsic value
of options vested and expected to vest and exercisable excludes
options with an exercise price above $34.57, the closing price
of our common stock on December 31, 2008, as reported by
the New York Stock Exchange. |
|
(2) |
|
Options vested and expected to vest reflect our estimated
forfeiture rates. |
The total intrinsic value of options exercised during 2008, 2007
and 2006 was $90.1 million, $10.8 million and
$16.2 million, respectively.
The tax benefit realized from option exercises, RSUs and RSAs
vested, and ESPP grants in 2008, 2007 and 2006 was
$48.6 million, $3.1 million and $8.3 million,
respectively.
The following table summarizes PSU, RSU and RSA activity for the
year ended December 31, 2008 (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Performance
|
|
|
Average
|
|
|
Restricted
|
|
|
Average
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Units
|
|
|
Fair Value
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Unvested at beginning of period
|
|
|
42
|
|
|
$
|
34.73
|
|
|
|
2,496
|
|
|
$
|
24.02
|
|
|
|
82
|
|
|
$
|
27.48
|
|
Granted
|
|
|
2,251
|
|
|
|
34.98
|
|
|
|
1,014
|
|
|
|
34.61
|
|
|
|
|
|
|
|
|
|
Awards assumed in conjunction with acquisition
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
28.57
|
|
|
|
359
|
|
|
|
28.57
|
|
Vested
|
|
|
(100
|
)
|
|
|
35.88
|
|
|
|
(1,349
|
)
|
|
|
24.97
|
|
|
|
(54
|
)
|
|
|
29.22
|
|
Canceled
|
|
|
(266
|
)
|
|
|
34.23
|
|
|
|
(277
|
)
|
|
|
26.17
|
|
|
|
(22
|
)
|
|
|
29.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at end of period
|
|
|
1,927
|
|
|
$
|
35.03
|
|
|
|
2,117
|
|
|
$
|
28.71
|
|
|
|
365
|
|
|
$
|
28.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual life for unvested
PSUs, RSUs and RSAs at December 31, 2008, was
2.1 years, 1.4 years and 2.6 years, respectively.
The total fair value of RSUs vested during 2008 was
$44.9 million. The total fair value of PSUs vested during
2008 was $1.4 million. This does not include the fair value
of PSUs vested but not released as of December 31,
93
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2008. The total fair value of RSAs vested during 2008, 2007 and
2006 was $1.9 million, $1.6 million and
$1.5 million, respectively.
Shares available for future grants to employees under our stock
incentive plans totaled 6.0 million at December 31,
2008. Our management currently plans to issue new shares for the
granting of RSAs, vesting of RSUs and PSUs, and exercising of
options and ESPP grants.
The following table summarizes stock-based compensation expense
in accordance with the provisions of SFAS 123(R) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amortization of fair value of options
|
|
$
|
24,657
|
|
|
$
|
19,313
|
|
|
$
|
30,660
|
|
Restricted stock awards and units
|
|
|
26,237
|
|
|
|
21,346
|
|
|
|
16,426
|
|
Restricted stock units with performance-based vesting
|
|
|
22,415
|
|
|
|
1,459
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
|
3,353
|
|
|
|
|
|
|
|
1,864
|
|
Extension of post-termination exercise period
|
|
|
|
|
|
|
14,014
|
|
|
|
4,326
|
|
(Benefit) expense related to cash settlement of options
|
|
|
(382
|
)
|
|
|
2,885
|
|
|
|
3,066
|
|
Tender offer
|
|
|
601
|
|
|
|
|
|
|
|
|
|
Former executive acceleration
|
|
|
|
|
|
|
|
|
|
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
76,881
|
|
|
$
|
59,017
|
|
|
$
|
57,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of fair value of options. We
recognize the fair value of options issued to employees and
outside directors and assumed in acquisitions as stock-based
compensation expense over the vesting period of the awards.
These charges include stock-based compensation expense for
options granted prior to January 1, 2006 but not yet vested
as of January 1, 2006, based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and stock-based compensation expense for options
granted subsequent to January 1, 2006 based on the grant
date fair value estimated in accordance with the provisions of
SFAS 123(R).
Restricted stock awards and units. We
recognize the fair value of RSAs and RSUs issued to employees as
stock-based compensation expense over the vesting period of the
awards. Fair value is determined as the difference between the
closing price of our common stock on the grant date and the
purchase price of the RSAs and RSUs.
Restricted stock units with performance-based
vesting. We recognize stock-based compensation
expense for the fair value of PSUs issued to employees. These
awards vest as follows: 50% vest only if performance criteria
are met (performance component) and 50% cliff vest
four years from the date of grant, with accelerated vesting if
performance criteria are met (service component).
Certain executive grants have only the performance component.
The performance component will vest one-third each year from the
date of grant, provided that the performance criteria are met
for each respective year. If the performance criteria are not
met in any one year, then the awards that would have vested in
that year are forfeited. The performance component is being
recognized as expense one-third each year provided we determine
it is probable that the performance criteria will be met. For
certain of the PSUs, we have not communicated the performance
criteria to the employees. For these awards, the accounting
grant date will not occur until it is known whether the
performance criteria are met, and such achievement or
non-achievement is communicated to the employees. These awards
are marked-to-market at the end of each reporting period through
the accounting grant date, and recognized over the expected
vesting period. For the awards for which the performance
criteria have been communicated, stock-based compensation
expense has been measured on the grant date and is being
recognized over the expected vesting period.
The service component will cliff vest four years from the grant
date, with an acceleration provision based on the same
performance criteria as the performance component. Each of the
three tranches is being accounted for as a separate award. If
the performance criteria are met for each respective year, the
awards will vest one-third each year
94
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the grant date. The accounting grant date is deemed to have
occurred and stock-based compensation has been measured on the
grant date, and will be recognized over the expected vesting
period for each tranche.
Employee Stock Purchase Plan. We recognize
stock-based compensation expense for the fair value of ESPP
grants. The estimated fair value of ESPP grants is based on the
Black-Scholes pricing model. Expense is recognized ratably based
on contributions and the total fair value of the ESPP grants
estimated to be issued.
Extension of post-termination exercise
period. From July 2006, when we announced that we
might have to restate our historical financial statements as a
result of our option granting practices investigation, through
December 21, 2007, the date we became current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended, (blackout period), we imposed
restrictions on our ability to issue any shares, including those
pursuant to option exercises.
We recognized stock-based compensation expense of
$14.0 million and $4.3 million in 2007 and 2006,
respectively, related to the January 2007 and November 2007
extensions of post-termination exercise period for options that
would have expired during our blackout period. The compensation
charges were based on the fair value of the options after the
modifications. We had no such charges in 2008. We will not
recognize any further expense related to these extensions of
post-termination exercise period.
Cash settlement of options. Certain options
held by terminated employees expired during the blackout period
as they could not be exercised during the
90-day
period subsequent to termination. In January 2007, we determined
that we would settle these options in cash. As of
December 31, 2007, we recorded a liability of
$5.7 million based on the intrinsic value of these options
using our December 31, 2007 closing stock price. As of
December 31, 2006, we recorded a liability of
$3.1 million, based on the intrinsic value of these options
using our January 7, 2007 closing stock price. We paid
$5.2 million in January 2008 to settle these options based
on the average closing price of our common stock subsequent to
December 21, 2007, the date we became current on our
reporting obligations under the Securities Exchange Act of 1934,
as amended. We also paid approximately $0.3 million during
2007 to current employees whose options expired during the
blackout period. We recognized stock-based compensation expense
of $2.9 million and $3.1 million in 2007 and 2006,
respectively, based on the change in the liability we recorded
for the intrinsic value of these options. For 2008, we
recognized a benefit of $0.4 million for the difference
between the December 31, 2007 liability and the amount paid
in 2008. All of these options were cash settled by
March 31, 2008, and we will not recognize any further
expense related to these options.
Tender offer. In January 2008, after we became
current with our reporting obligations under the Securities
Exchange Act of 1934, as amended, we filed a Tender Offer
Statement with the SEC. The tender offer extended an offer by us
to holders of certain outstanding options to amend the exercise
price on certain of their outstanding options. The purpose of
the tender offer was to amend the exercise price on options to
have the same price as the fair market value on the revised
measurement dates that were identified during the investigation
of our historical option grant practices. As part of this tender
offer, we became obligated to pay a cash bonus of
$1.7 million, of which $0.4 million was paid to
Canadian employees in 2008, and $1.3 million was paid to
U.S. employees in 2009, to reimburse optionees who elected
to participate in the tender offer for any increase in the
exercise price of their options resulting from the amendment.
The impact of the cash bonus, as recorded in 2008, resulted in
stock-based compensation expense of $0.6 million and a
decrease to additional paid-in capital of $1.1 million. We
will not recognize any further expense related to the tender
offer.
Former executive acceleration. On
February 6, 2007, our board of directors accelerated
unvested options held by our former chief executive officer, who
retired in October 2006, without an extension of the
post-employment exercise period. All such options have since
expired unexercised due to the blackout. In the fourth quarter
of 2006, we recorded an additional non-cash, stock-based
compensation expense of $1.4 million for the remaining
unamortized fair value of these options.
95
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock-based compensation expense
recorded by consolidated statements of income and comprehensive
income line item in 2008, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of net revenue service and support
|
|
$
|
1,763
|
|
|
$
|
1,448
|
|
|
$
|
1,968
|
|
Cost of net revenue subscription
|
|
|
809
|
|
|
|
915
|
|
|
|
699
|
|
Cost of net revenue product
|
|
|
1,129
|
|
|
|
767
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of net revenue
|
|
|
3,701
|
|
|
|
3,130
|
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18,476
|
|
|
|
14,023
|
|
|
|
15,042
|
|
Sales and marketing
|
|
|
32,625
|
|
|
|
21,756
|
|
|
|
24,289
|
|
General and administrative
|
|
|
22,079
|
|
|
|
20,108
|
|
|
|
15,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating costs
|
|
|
73,180
|
|
|
|
55,887
|
|
|
|
54,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
76,881
|
|
|
|
59,017
|
|
|
|
57,761
|
|
Deferred tax benefit
|
|
|
(21,780
|
)
|
|
|
(16,913
|
)
|
|
|
(15,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
55,101
|
|
|
$
|
42,104
|
|
|
$
|
42,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had no stock-based compensation costs capitalized as part of
the cost of an asset.
At December 31, 2008, the estimated fair value of all
unvested options, RSUs, RSAs, PSUs and ESPP grants that have not
yet been recognized as stock-based compensation expense was
$105.8 million, net of expected forfeitures. We expect to
recognize this amount over a weighted-average period of
2.4 years. This amount does not reflect stock-based
compensation expense relating to 0.8 million PSUs for which
the performance criteria had not been set as of
December 31, 2008.
Assumptions
The fair value of RSAs, RSUs and PSUs is determined as the
difference between the closing price of our common stock on the
grant date and the purchase price of the RSAs, RSUs and PSUs.
The fair values of our RSA, RSU and PSU grants during 2008, 2007
and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
RSA grants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23.76
|
|
RSU grants
|
|
$
|
34.61
|
|
|
$
|
29.43
|
|
|
$
|
23.79
|
|
PSU grants
|
|
$
|
34.98
|
|
|
$
|
34.73
|
|
|
$
|
|
|
96
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We use the Black-Scholes model to estimate the fair value of our
option and ESPP grants. The key assumptions used in the model
during 2008, 2007 and 2006 are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
3.1
|
%
|
|
|
4.5
|
%
|
|
|
4.8
|
%
|
Weighted average expected lives (years)
|
|
|
5.8
|
|
|
|
6.0
|
|
|
|
5.6
|
|
Volatility
|
|
|
39.9
|
%
|
|
|
33.7
|
%
|
|
|
37.4
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
1.1
|
%
|
|
|
|
|
|
|
4.6
|
%
|
Weighted average expected lives (years)
|
|
|
0.5
|
|
|
|
|
|
|
|
0.5
|
|
Volatility
|
|
|
32.0
|
%
|
|
|
|
|
|
|
38.0
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair values of our option and
ESPP grants during 2008, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Option grants
|
|
$
|
14.63
|
|
|
$
|
14.55
|
|
|
$
|
10.47
|
|
ESPP grants
|
|
$
|
7.64
|
|
|
$
|
|
|
|
$
|
6.11
|
|
We derive the expected term of our options through the use of a
lattice model that factors in historical data on employee
exercise and post-vesting employment termination behavior. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of grant. We use the implied volatility of options
traded on our stock with a term of one year or more to calculate
the expected volatility of our option grants. We have not
declared any dividends on our common stock in the past and do
not expect to do so in the foreseeable future.
|
|
15.
|
Provision
for Income Taxes
|
The domestic and foreign components of income before provision
for income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic
|
|
$
|
185,853
|
|
|
$
|
19,490
|
|
|
$
|
47,493
|
|
Foreign
|
|
|
36,353
|
|
|
|
209,714
|
|
|
|
136,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
222,206
|
|
|
$
|
229,204
|
|
|
$
|
183,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the provision for income taxes
attributable to continuing operations are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
10,159
|
|
|
$
|
17,770
|
|
|
$
|
28,948
|
|
Deferred
|
|
|
13,021
|
|
|
|
4,777
|
|
|
|
(17,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal
|
|
|
23,180
|
|
|
|
22,547
|
|
|
|
11,459
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
9,214
|
|
|
|
4,151
|
|
|
|
4,877
|
|
Deferred
|
|
|
1,079
|
|
|
|
(2,311
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total State
|
|
|
10,293
|
|
|
|
1,840
|
|
|
|
4,708
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
16,288
|
|
|
|
33,741
|
|
|
|
42,255
|
|
Deferred
|
|
|
236
|
|
|
|
4,096
|
|
|
|
(12,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign
|
|
|
16,524
|
|
|
|
37,837
|
|
|
|
30,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
49,997
|
|
|
$
|
62,224
|
|
|
$
|
46,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rate on income before income taxes differs
from the United States federal statutory tax rate as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal income tax provision at statutory rate
|
|
$
|
77,772
|
|
|
$
|
80,250
|
|
|
$
|
64,201
|
|
State tax expense (net of Federal benefit)
|
|
|
6,690
|
|
|
|
1,150
|
|
|
|
3,808
|
|
Acquisition related non deductible costs
|
|
|
6,825
|
|
|
|
|
|
|
|
161
|
|
Foreign earnings taxed at rates different than the Federal rate
|
|
|
(8,951
|
)
|
|
|
(49,146
|
)
|
|
|
(30,402
|
)
|
Other permanent differences and other taxes
|
|
|
(5,831
|
)
|
|
|
2,976
|
|
|
|
1,593
|
|
Tax credits, net of withholding taxes
|
|
|
(6,370
|
)
|
|
|
(5,605
|
)
|
|
|
(2,907
|
)
|
Deemed repatriations of earnings from foreign subsidiaries
|
|
|
4,857
|
|
|
|
15,523
|
|
|
|
3,399
|
|
Changes in valuation allowances
|
|
|
(34,298
|
)
|
|
|
(1,979
|
)
|
|
|
4,248
|
|
Non deductible stock compensation
|
|
|
6,192
|
|
|
|
4,499
|
|
|
|
4,339
|
|
Provision (benefit) for accruals for tax exposures
|
|
|
3,111
|
|
|
|
14,556
|
|
|
|
(2,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,997
|
|
|
$
|
62,224
|
|
|
$
|
46,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In October of 2008, we were granted administrative relief by the
U.S. Internal Revenue Service from the negative tax
consequences associated with certain acquisition integration
activities. As a result, we reversed previously recorded tax
expense in the fourth quarter 2008. We recorded a tax benefit of
$28.9 million for the fourth quarter and a
$3.0 million benefit for the year.
The earnings from our foreign operations in India are subject to
a tax holiday. In May 2008, the Indian government extended the
period through which the holiday would be effective to
March 31, 2010. The tax holiday provides for zero percent
taxation on certain classes of income and requires certain
conditions to be met. We were in compliance with these
conditions as of December 31, 2008.
98
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 3, 2008, President Bush signed the Emergency
Economic Stabilization Act of 2008 (The Act). The
Act extended the research and development credit for both 2008
and 2009. We have recorded the benefit of the research and
development credit for all of 2008 in the fourth quarter and it
was not material.
Significant components of net deferred tax assets are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
325,923
|
|
|
$
|
236,455
|
|
Accrued liabilities and allowances
|
|
|
69,920
|
|
|
|
65,017
|
|
Depreciation and amortization
|
|
|
158,216
|
|
|
|
196,712
|
|
Tax credits
|
|
|
43,302
|
|
|
|
110,087
|
|
Deferred stock-based compensation
|
|
|
34,754
|
|
|
|
38,259
|
|
Net operating loss carryover
|
|
|
134,494
|
|
|
|
34,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766,609
|
|
|
|
680,725
|
|
Valuation allowance
|
|
|
(64,832
|
)
|
|
|
(65,044
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
701,777
|
|
|
|
615,681
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Intangibles not amortizable for tax purposes
|
|
|
73,570
|
|
|
|
27,254
|
|
Prepaids
|
|
|
13,400
|
|
|
|
10,897
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
86,970
|
|
|
|
38,151
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
614,807
|
|
|
$
|
577,530
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
310,870
|
|
|
$
|
256,188
|
|
Noncurrent portion
|
|
|
303,937
|
|
|
|
321,342
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
614,807
|
|
|
$
|
577,530
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, we had net deferred tax assets of
$614.8 million, partially resulting from net operating loss
carryovers for federal, state and foreign income tax purposes of
approximately $324.0 million, $130.5 million, and
$83.6 million, respectively. The federal and state net
operating loss carryovers relate primarily to acquisitions and
are limited in the amount that can be recognized in any one
year. They have expiration dates ranging from 2009 to 2029.
There was a significant increase in the net operating loss
deferred tax asset resulting from the acquisition of Secure
Computing during the fourth quarter. The foreign net operating
losses relate primarily to losses incurred as a result of
current operations and do not expire. The net decreases in the
valuation allowance relate to utilization of foreign tax credits
in the current year offset by approximately $33.6 million
of valuation allowance on acquired net operating losses. We
believe that it is more likely than not that the results of
future operations will generate sufficient taxable income to
realize the net deferred tax assets, other than certain acquired
net operating loss and credit carryforwards and certain other
foreign tax credits for which a valuation allowance has been
provided.
In December 2007, the FASB issued SFAS 141R, Business
Combinations. SFAS 141R establishes principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. At December 31, 2008,
approximately $43.8 million of the valuation allowance for
deferred tax assets was related to acquired deferred tax assets.
Future reductions in the valuation allowance due to realization
of acquired deferred tax assets will affect income tax expense
in the period of reversal.
99
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We intend to indefinitely reinvest all current
and/or
future earnings of our foreign subsidiaries. As such,
U.S. income taxes have not been provided for on a
cumulative total of approximately $505.8 million of
earnings of certain
non-U.S. subsidiaries.
The determination of the amount of the unrecognized deferred tax
liability related to the undistributed earnings of certain
non-U.S. subsidiaries
is not practicable due to the complexities of this hypothetical
calculation.
As of December 31, 2008, gross unrecognized tax benefits
totaled $89.6 million and accrued interest and penalties
totaled $13.9 million (net of any tax benefit) for an
aggregate gross amount of $103.5. Of the $103.5 million,
$102.7 million, if recognized, would favorably affect our
effective tax rate. Furthermore, of the $102.7 million,
$20.4 million relates to tax positions of acquired entities
taken prior to their acquisition. Pursuant to the provisions of
SFAS 141R, effective for years after December 15,
2008, liabilities settled for lesser amounts will affect income
tax expense in the period of reversal.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning Gross unrecognized tax benefits(1)
|
|
$
|
71,690
|
|
|
$
|
47,468
|
|
Gross increases related to tax positions in prior period(1)
|
|
|
17,195
|
|
|
|
21,077
|
|
Gross decreases related to tax positions in prior period(1)
|
|
|
(1,896
|
)
|
|
|
(1,141
|
)
|
Gross increases related to tax positions in current period(1)
|
|
|
3,648
|
|
|
|
5,189
|
|
Settlements
|
|
|
(244
|
)
|
|
|
0
|
|
Lapse of statute of limitations
|
|
|
(781
|
)
|
|
|
(903
|
)
|
|
|
|
|
|
|
|
|
|
Ending Gross unrecognized tax benefits(1)
|
|
$
|
89,612
|
|
|
$
|
71,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
State and local positions are presented before federal tax
benefit. |
We accrue potential interest and penalties related to
unrecognized tax benefits through income tax expense. Upon
recognition of these tax benefits, interest and penalty amounts
accrued will generally be released as a benefit in the income
tax provision. During the twelve months ended December 31,
2008, we recognized a net increase of $1.5 million in
potential interest and penalties associated with uncertain tax
positions.
We file numerous consolidated and separate income tax returns in
the U.S. federal and state jurisdictions and in many
foreign jurisdictions. On an ongoing basis, we are routinely
subject to examination by taxing authorities throughout the
world, including jurisdictions such as Australia, Canada,
France, Germany, India, Ireland, Italy, Japan, The Netherlands
and the United Kingdom. With few exceptions, we are no longer
subject to U.S. federal income tax examinations for years
before 2006 and are no longer subject to state and local or
foreign income tax examinations by tax authorities for years
before 1997.
We are presently under examination in many jurisdictions,
including notably the U.S., California, Germany, and The
Netherlands. The Internal Revenue Service is presently
conducting an examination of our federal income tax returns for
the calendar years 2006 and 2007. The State of California is
examining our income tax returns for the years 2004 and 2005.
Secure Computing was involved in an examination in Germany at
the date of acquisition for tax year 2002 2007. We
concluded pre-filing discussions with the Dutch tax authorities
with respect to tax years 2004 and 2005 in January 2009. A tax
benefit of approximately $2.2 million will be reflected in
the first quarter 2009. We cannot currently predict the timing
regarding the resolution of any other tax examinations. We
believe it is reasonably possible that, in the next
12 months, the amount of unrecognized tax benefits related
to the resolution of federal, state and foreign matters could be
reduced by $6.6 million to $22.7 million as
examinations close and statutes expire.
100
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the numerator and denominator of basic and
diluted net income per share is provided as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator basic net income
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
|
$
|
137,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator diluted net income
|
|
$
|
172,209
|
|
|
$
|
166,980
|
|
|
$
|
137,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common stock outstanding
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
160,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common stock outstanding
|
|
|
156,205
|
|
|
|
159,819
|
|
|
|
160,945
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, RSUs, RSAs, PSUs and ESPP grants(1)
|
|
|
3,201
|
|
|
|
4,307
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares
|
|
|
159,406
|
|
|
|
164,126
|
|
|
|
163,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
1.10
|
|
|
$
|
1.04
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
1.08
|
|
|
$
|
1.02
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2008, 2007 and 2006, 5.7 million,
3.2 million and 7.2 million RSUs and options,
respectively, were excluded from the calculation since the
effect was anti-dilutive. In addition, we excluded
0.8 million PSUs for the year ended December 31, 2008,
because they are contingently issuable shares. |
|
|
17.
|
Business
Segment and Major Customer Information
|
We have one business and operate in one industry. We develop,
market, distribute and support computer and network security
solutions for large enterprises, governments, and small and
medium-sized business and consumer users, as well as resellers
and distributors. Management measures operations based on our
five operating segments: North America; EMEA; Japan;
Asia-Pacific, excluding Japan; and Latin America. Our chief
operating decision maker is our chief executive officer.
We market and sell anti-virus and security software, hardware
and services through our geographic regions. These products and
services are marketed and sold worldwide primarily through
resellers, distributors, systems integrators, retailers,
original equipment manufacturers, internet service providers and
directly by us. In addition, we offer on our web site, suites of
online products and services personalized for the user based on
the users personal computer configuration, attached
peripherals and resident software. We also offer managed
security and availability applications to corporations and
governments on the internet.
Our chief operating decision maker evaluates performance based
on income from operations, which includes only cost of revenue
and selling expenses directly attributable to a sale.
Historically, the measure of segment operating income included
the allocation of cost of revenues, research and development and
certain sales and marketing expenses. We revised the segment
information from prior periods to conform to the 2008
presentation for
101
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
comparative purposes. Summarized financial information
concerning our net revenue, income from operations and
depreciation expense by geographic region is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
844,937
|
|
|
$
|
678,227
|
|
|
$
|
633,222
|
|
EMEA
|
|
|
502,876
|
|
|
|
426,966
|
|
|
|
354,592
|
|
Japan
|
|
|
116,567
|
|
|
|
102,272
|
|
|
|
87,121
|
|
Asia-Pacific, excluding Japan
|
|
|
81,109
|
|
|
|
60,913
|
|
|
|
43,018
|
|
Latin America
|
|
|
54,576
|
|
|
|
39,842
|
|
|
|
27,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
1,145,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
630,000
|
|
|
$
|
527,016
|
|
|
$
|
481,575
|
|
EMEA
|
|
|
378,212
|
|
|
|
319,134
|
|
|
|
253,343
|
|
Japan
|
|
|
86,070
|
|
|
|
78,255
|
|
|
|
62,337
|
|
Asia-Pacific, excluding Japan
|
|
|
52,427
|
|
|
|
38,603
|
|
|
|
22,148
|
|
Latin America
|
|
|
37,042
|
|
|
|
24,672
|
|
|
|
14,890
|
|
Corporate and other
|
|
|
(994,180
|
)
|
|
|
(827,867
|
)
|
|
|
(695,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
189,571
|
|
|
$
|
159,813
|
|
|
$
|
139,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
9,340
|
|
|
$
|
7,884
|
|
|
$
|
12,269
|
|
EMEA
|
|
|
2,159
|
|
|
|
2,127
|
|
|
|
1,842
|
|
Japan
|
|
|
154
|
|
|
|
60
|
|
|
|
381
|
|
Asia-Pacific, excluding Japan
|
|
|
1,842
|
|
|
|
1,995
|
|
|
|
2,352
|
|
Latin America
|
|
|
27
|
|
|
|
13
|
|
|
|
175
|
|
Corporate
|
|
|
27,091
|
|
|
|
23,475
|
|
|
|
18,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
40,613
|
|
|
$
|
35,554
|
|
|
$
|
35,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other includes research and development expenses,
cost of revenues and sales and marketing expenses not directly
related to the sale of our products and services, general and
administrative expenses, stock-based compensation, amortization
of purchased technology and other intangibles, restructuring
(benefit) charges and in-process research and development. These
expenses are not attributable to any specific geographic region
and are not included in the segment measure of profit and loss
reviewed by our chief operating decision maker. Additionally,
operating income by region reflects certain costs such as sales
commissions and customer acquisition costs that are recognized
over the period during which the related revenue is recognized
for consolidated GAAP operating income and are reflected as
period expense in the operating income above. The difference
between income from operations and income before taxes is
reflected on the face of our consolidated statements of income.
Following is a summary of our total assets by geographic region.
Assets purchased to support infrastructure and general and
administrative activities, including land purchases, are
included in Corporate in the table below. These corporate assets
are not assigned to any specific geographic region. Fixed
assets, intangible assets and certain other assets are reflected
below in their respective geographic regions, however, the
related depreciation and amortization expenses are not reflected
in the measure of profit and loss reviewed by our chief
operating decision
102
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
maker. Summarized financial information concerning our total
assets by business and geographic region is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
$
|
2,194,800
|
|
|
$
|
2,333,535
|
|
EMEA
|
|
|
870,735
|
|
|
|
741,726
|
|
Japan
|
|
|
221,804
|
|
|
|
170,545
|
|
Asia-Pacific, excluding Japan
|
|
|
76,530
|
|
|
|
57,227
|
|
Latin America
|
|
|
30,218
|
|
|
|
22,360
|
|
Corporate
|
|
|
63,794
|
|
|
|
61,131
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,457,881
|
|
|
$
|
3,386,524
|
|
|
|
|
|
|
|
|
|
|
Property and equipment based on the physical location of the
assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
India
|
|
$
|
6,157
|
|
|
$
|
10,130
|
|
Japan
|
|
|
3,161
|
|
|
|
2,884
|
|
United Kingdom
|
|
|
3,513
|
|
|
|
4,718
|
|
Ireland
|
|
|
1,341
|
|
|
|
1,508
|
|
Other foreign countries
|
|
|
8,586
|
|
|
|
6,269
|
|
|
|
|
|
|
|
|
|
|
Total foreign countries
|
|
|
22,758
|
|
|
|
25,509
|
|
United States
|
|
|
91,677
|
|
|
|
69,161
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114,435
|
|
|
$
|
94,670
|
|
|
|
|
|
|
|
|
|
|
Net revenue attributed to countries based on the location of the
customer is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United Kingdom
|
|
$
|
159,501
|
|
|
$
|
139,157
|
|
|
$
|
101,824
|
|
Germany
|
|
|
64,409
|
|
|
|
54,157
|
|
|
|
53,145
|
|
Japan
|
|
|
116,567
|
|
|
|
102,273
|
|
|
|
87,121
|
|
Canada
|
|
|
59,493
|
|
|
|
40,552
|
|
|
|
26,401
|
|
Other foreign countries
|
|
|
414,651
|
|
|
|
334,408
|
|
|
|
269,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign countries
|
|
|
814,621
|
|
|
|
670,547
|
|
|
|
538,337
|
|
United States
|
|
|
785,444
|
|
|
|
637,673
|
|
|
|
606,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,600,065
|
|
|
$
|
1,308,220
|
|
|
$
|
1,145,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, Ingram Micro, Inc. had an
accounts receivable balance which comprised 9% and 20%,
respectively, of our gross accounts receivable balance.
Additionally, at December 31, 2008 and 2007, Tech Data
Corp. had an accounts receivable balance which comprised 14% and
6%, respectively, of our gross accounts receivable balance.
During 2008, 2007 and 2006, Ingram Micro, Inc. accounted for
16%, 15% and 17%, respectively, of total net revenue. During
2008, 2007 and 2006, Tech Data Corp. accounted for 11%, 9% and
11%, respectively, of total net revenue. The net revenue derived
from these customers is reported primarily in our North American
and EMEA geographic segments.
103
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Settled
Cases
In July 2006, the United States District Court for the Northern
District of California consolidated several purported
stockholder derivative suits as In re McAfee, Inc. Derivative
Litigation, Master File No. 5:06CV03484 (JF) (the
Consolidated Action). In September 2006, three
identical lawsuits that had been filed in the Superior Court of
the State of California, County of Santa Clara, were
consolidated in that court (the State Action). The
Consolidated Action and State Action asserted that we improperly
backdated stock option grants for a period ending in May 2006.
In December 2007, we reached a tentative settlement with the
plaintiffs in both Actions. The Court preliminary approved the
settlement in October 2008 and granted final approval in
February 2009. We accrued $13.8 million in the condensed
consolidated financial statements as of June 30, 2006, due
to the stock option investigation and restatement related to
expected payments pursuant to the settlement.
Certain shareholders of Secure Computing filed lawsuits against
Secure Computing and the members of its board of directors (the
Secure Computing Board) alleging that the Secure
Computing Board breached its fiduciary duties by executing an
Agreement and Plan of Merger with McAfee in September 2008. We
were accused of aiding and abetting the Secure Computing
Boards alleged breach of fiduciary duty. The related suits
were ultimately consolidated in the Superior Court of California
in Santa Clara. In January 2009, the Plaintiffs filed a
request to voluntarily dismiss the consolidated action without
prejudice, which was granted by the Court on January 8,
2009, after a finding that neither the Plaintiffs nor their
counsel derived any personal benefit from the Defendants through
dismissal of the case.
In February 2008, a former executive notified us of his intent
to seek arbitration of claims associated with his employment.
The parties entered into a confidential settlement agreement
resolving the dispute in its entirety, following a mediation
held in December 2008.
On August 17, 2006, a patent infringement
lawsuit captioned Deep Nines, Inc. v. McAfee,
Inc., No. 9:06CV174, (Deep Nines litigation)
was filed in the United States District Court for the Eastern
District of Texas. The lawsuit asserted that (i) several of
our Enterprise products infringe a Deep Nines patent and
(ii) we falsely marked certain products with a McAfee
patent that was abandoned after its issuance. On July 15,
2008, a jury found that certain applications of IntruShield
infringe upon Deep Nines patent and awarded a one-time,
lump sum payment for past and future damages. On July 29,
2008, we resolved all patent litigation matters with Deep Nines,
Inc. by entering into a $25.0 million confidential
settlement agreement. As part of the settlement, we acquired
certain nonexclusive rights and entered into a mutual release of
all related claims. In the three months ended June 30,
2008, we recorded $9.0 million of legal settlement costs.
The remaining $16.0 million was recorded as an asset as of
June 30, 2008. We are amortizing the asset to cost of
product revenue in our consolidated statements of income and
comprehensive income over the economic life, which is estimated
to be the remaining life of the primary patent which expires in
2020. The case was dismissed on September 8, 2008.
Open
Cases
While we cannot predict the likelihood of future claims or
inquiries, we expect that new matters may be initiated against
us from time to time. The results of claims, lawsuits and
investigations also cannot be predicted, and it is possible that
the ultimate resolution of these matters, individually and in
the aggregate, may have a material adverse effect on our
business, financial condition, results of operations or cash
flows.
On June 5, 2006, Finjan Software, Ltd. filed a complaint in
the United States District Court for the District of Delaware
against Secure Computing Corporation and two subsidiaries
(Secure Computing), alleging Webwasher Secure
Content Management suite and CyberGuard TSP infringe three
Finjan patents. In March 2008, a jury found that Secure
Computing wilfully infringed certain claims of three Finjan
patents and awarded $9.2 million in damages. We acquired
Secure Computing in November 2008 and intend to vigorously
challenge the verdict and Finjans pending motions for an
injunction and enhanced damages.
104
MCAFEE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January 2007, a former executive filed an arbitration demand
with the American Arbitration Association in Dallas, Texas,
seeking the arbitration of claims associated with his
employment; we have filed counterclaims. The arbitration is
currently scheduled to begin in March 2009. We believe the
claims asserted against us are without merit; therefore, no
provision has been recorded in the financial statements.
Certain investment bank underwriters, our company, and certain
of our directors and officers have been named in a putative
class action for violation of the federal securities laws in the
United States District Court for the Southern District of New
York, captioned In re McAfee.com Corp. Initial Public
Offering Securities Litigation, 01 Civ. 7034 (SAS). This is
one of a number of cases challenging underwriting practices in
the initial public offerings (IPOs) of more than
300 companies. These cases have been coordinated for
pretrial proceedings as In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS). Plaintiffs generally
allege that certain underwriters engaged in undisclosed and
improper underwriting activities and that various investment
bank securities analysts issued false and misleading analyst
reports. The complaint against us claims that the purported
improper underwriting activities were not disclosed in the
registration statements for McAfee.coms IPO and seeks
unspecified damages on behalf of a purported class of persons
who purchased our securities during the time period from
December 1, 1999 to December 6, 2000.
We, together with other issuer defendants and plaintiffs,
entered into a stipulation of settlement and release of claims
against the issuer defendants that was submitted to the Court
for approval in June 2004. On August 31, 2005, the Court
preliminarily approved the settlement, which, among other
things, was conditioned upon class certification. After the
Second Circuit Court of Appeals issued a ruling overturning
class certification in six test cases for the coordinated
proceedings (the case against us is not one of the six test
cases), the settlement was terminated in June 2007 by
stipulation of the parties and order of the Court. On
August 14, 2007, plaintiffs filed amended master
allegations and amended complaints in the six test cases, which
the defendants in those cases moved to dismiss. On
March 26, 2008, the Court largely denied the
defendants motion to dismiss the amended complaints. It is
uncertain whether there will be any revised or future
settlement. Thus, the ultimate outcome, and any ultimate effect
on us, cannot be precisely determined at this time.
In addition, we are engaged in certain legal and administrative
proceedings incidental to our normal business activities and
believe that these matters will not have a material adverse
effect on our financial position, results of operations or cash
flows.
|
|
19.
|
Related
Party Transactions
|
In October 2006, Robert M. Dutkowsky, a member of our board of
directors, was appointed chief executive officer and a director
of Tech Data Corporation, one of our customers. We recognized
revenue from sales to Tech Data Corporation of
$37.1 million during the fourth quarter of 2006. Our
outstanding accounts receivable balance related to Tech Data
Corporation was $22.7 million at December 31, 2006.
Our deferred revenue balance related to Tech Data Corporation
was $79.2 million at December 31, 2006.
Mr. Dutkowsky resigned from our board of directors during
the first quarter of 2007, and Tech Data Corporation ceased to
be a related party.
On January 9, 2009, we borrowed $100.0 million against
the term loan in the Credit Facility (see Note 11).
Interest on the first $50.0 million of outstanding
borrowings bears interest at the three month LIBOR rate plus
2.0% and is payable quarterly, while interest on the remaining
$50.0 million of outstanding borrowings bears interest at
the one month LIBOR rate plus 2.0% payable monthly. The
principal of, together with accrued interest on, the term loan
is due on December 22, 2009.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized on the 2nd day of
March 2009.
MCAFEE, INC.
David G. DeWalt
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
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|
Signature
|
|
Title
|
|
Date
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|
|
|
|
|
|
/s/ David
G. DeWalt
(David
G. DeWalt)
|
|
Chief Executive Officer and President (Principal Executive
Officer)
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March 2, 2009
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|
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/s/ Albert
A. Rocky Pimentel
(Albert
A. Rocky Pimentel)
|
|
Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer)
|
|
March 2, 2009
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|
|
|
|
|
/s/ Keith
S. Krzeminski
(Keith
S. Krzeminski)
|
|
Chief Accounting Officer and Senior Vice President, Finance
(Principal Accounting Officer)
|
|
March 2, 2009
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|
|
|
|
/s/ Charles
J. Robel
(Charles
J. Robel)
|
|
Non-Executive Chairman of the Board
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|
March 2, 2009
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|
(Carl
Bass)
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Director
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|
March 2, 2009
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/s/ Thomas
Darcy
(Thomas
Darcy)
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Director
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|
March 2, 2009
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|
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|
|
/s/ Leslie
G. Denend
(Leslie
G. Denend)
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|
Director
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|
March 2, 2009
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|
|
|
|
|
/s/ Jeffrey
A. Miller
(Jeffrey
A. Miller)
|
|
Director
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|
March 2, 2009
|
|
|
|
|
|
/s/ Denis
J. OLeary
(Denis
J. OLeary)
|
|
Director
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|
March 2, 2009
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|
|
|
|
|
/s/ Robert
W. Pangia
(Robert
W. Pangia)
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Anthony
Zingale
(Anthony
Zingale)
|
|
Director
|
|
March 2, 2009
|
106
SCHEDULE II
MCAFEE,
INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
|
|
|
|
|
|
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Doubtful
|
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|
|
|
|
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|
|
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|
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Accounts,
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|
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|
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|
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|
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Additions Charged
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|
|
Write-Offs of
|
|
|
|
|
|
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Balance at
|
|
|
to Operating Expense,
|
|
|
Previously
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Deferred Revenue or
|
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Provided
|
|
|
End of
|
|
Allowance for Doubtful Accounts, Net(1)
|
|
Period
|
|
|
Net Revenue
|
|
|
Accounts
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2008
|
|
$
|
4,076
|
|
|
$
|
1,126
|
|
|
$
|
(1,255
|
)
|
|
$
|
3,947
|
|
Year Ended December 31, 2007
|
|
$
|
2,015
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|
|
$
|
2,248
|
|
|
$
|
(187
|
)
|
|
$
|
4,076
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|
Year Ended December 31, 2006
|
|
$
|
2,389
|
|
|
$
|
884
|
|
|
$
|
(1,258
|
)
|
|
$
|
2,015
|
|
|
|
|
(1) |
|
Allowance for Doubtful Accounts, Net. The
allowance for doubtful accounts, consists of our estimates with
respect to the uncollectibility of our receivables. Our
management must make estimates of the uncollectibility of our
accounts receivables. Management specifically analyzes accounts
receivable and analyzes historical bad debts, customer
concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when
determining the allowance for doubtful accounts. |
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|
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Provision for
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|
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Sales Returns
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|
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|
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|
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|
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|
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Charged to Net
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|
|
|
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|
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|
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Balance at
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|
|
Revenue or
|
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|
|
|
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Balance at
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|
Beginning of
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|
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Deferred
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|
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Actual
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|
|
End of
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Sales Returns
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|
Period
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|
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Revenue(2)
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|
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Returns
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|
|
Period
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(In thousands)
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|
|
Year Ended December 31, 2008
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$
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7,994
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$
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95,853
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|
|
$
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(89,058
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)
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|
$
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14,789
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|
Year Ended December 31, 2007
|
|
$
|
8,508
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|
|
$
|
55,931
|
|
|
$
|
(56,445
|
)
|
|
$
|
7,994
|
|
Year Ended December 31, 2006
|
|
$
|
3,837
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|
|
$
|
19,198
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|
|
$
|
(14,527
|
)
|
|
$
|
8,508
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|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
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|
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Provision for
|
|
|
|
|
|
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Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentives
|
|
|
|
|
|
|
|
|
|
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|
Charged to Net
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Revenue or
|
|
|
|
|
|
Balance at
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|
|
|
Beginning of
|
|
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Deferred
|
|
|
Actual
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|
|
End of
|
|
Other Incentives
|
|
Period
|
|
|
Revenue(2)
|
|
|
Incentives
|
|
|
Period
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|
|
|
(In thousands)
|
|
|
Year Ended December 31, 2008
|
|
$
|
40,494
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|
|
$
|
110,469
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|
|
$
|
(104,546
|
)
|
|
$
|
46,417
|
|
Year Ended December 31, 2007
|
|
$
|
31,266
|
|
|
$
|
133,748
|
|
|
$
|
(124,520
|
)
|
|
$
|
40,494
|
|
Year Ended December 31, 2006
|
|
$
|
28,102
|
|
|
$
|
119,856
|
|
|
$
|
(116,692
|
)
|
|
$
|
31,266
|
|
|
|
|
(2) |
|
Allowance for Sales Returns and Allowance for Other
Incentives. The allowance for sales returns and
the allowance for incentives consists of our estimates of
potential future product returns related to product revenue, and
specific provisions for distributor, reseller, and retailer
sales incentives that are reductions in the revenue to be
realized, respectively. We analyze and monitor current and
historical return rates, current economic trends and changes in
customer demand and acceptance of our products when evaluating
the adequacy of the sales returns and other allowances. These
estimates affect our net revenue line item on our statements of
income and affect our net accounts receivable and other accrued
liabilities line items on our consolidated balance sheets. These
estimates affect all of our operating geographies. At
December 31, 2008, $28.7 million is netted with
accounts receivable and $32.5 million is in other accrued
liabilities on our consolidated balance sheet. |
107
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
3.1
|
|
|
Second Restated Certificate of Incorporation of the Registrant,
as amended on December 1, 1997
|
|
S-4
|
|
333-48593
|
|
3.1
|
|
March 25, 1998
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|
|
|
|
|
3.2
|
|
|
Certificate of Ownership and Merger between Registrant and
Network Associates, Inc.
|
|
10-Q
|
|
001-31216
|
|
3.2
|
|
November 8, 2004
|
|
|
|
|
|
3.3
|
|
|
Third Amended and Restated Bylaws of the Registrant
|
|
8-K
|
|
001-31216
|
|
3.1
|
|
February 6, 2009
|
|
|
|
|
|
3.4
|
|
|
Certificate of Designation of Series A Preferred Stock of
the Registrant
|
|
10-Q
|
|
000-20558
|
|
3.3
|
|
November 14, 1996
|
|
|
|
|
|
3.5
|
|
|
Certificate of Designation of Rights, Preferences and Privileges
of Series B Participating Preferred Stock of the Registrant
|
|
8-A
|
|
000-20558
|
|
5.0
|
|
October 22, 1998
|
|
|
|
|
|
10.1
|
|
|
Lease Assignment dated November 17, 1997 for facility at
3965 Freedom Circle, Santa Clara, California by and between
Informix Corporation and the Registrant
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|
S-3
|
|
333-46049
|
|
10.13
|
|
February 11, 1998
|
|
|
|
|
|
10.2
|
|
|
Consent to Assignment Agreement dated December 19, 1997 by
and among Birk S. McCandless, LLC, Guaranty Federal Bank,
F.S.B., Informix Corporation and the Registrant
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|
S-3
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|
333-46049
|
|
10.14
|
|
February 11, 1998
|
|
|
|
|
|
10.3
|
|
|
Subordination, Nondisturbance and Attornment Agreement dated
December 18, 1997, between Guaranty Federal Bank, F.S.B.,
the Registrant and Birk S. McCandless, LLC
|
|
S-3
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|
333-46049
|
|
10.15
|
|
February 11, 1998
|
|
|
|
|
|
10.4
|
|
|
Form of lease executed November 22, 1996 by and between
Birk S. McCandless, LLC and Informix Corporation for facility at
3965 Freedom Circle, Santa Clara, California
|
|
S-3
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|
333-46049
|
|
10.16
|
|
February 11, 1998
|
|
|
|
|
|
10.5
|
|
|
First Amendment to Lease dated March 20, 1998 between Birk
S. McCandless, LLC and the Registrant
|
|
10-Q
|
|
000-20558
|
|
10.28
|
|
November 13, 2001
|
|
|
|
|
|
10.6
|
|
|
Confirmation, Amendment and Notice of Security Agreement dated
March 20, 1998 among Informix Corporation, Birk S.
McCandless, LLC and the Registrant
|
|
10-Q
|
|
000-20558
|
|
10.29
|
|
November 13, 2001
|
|
|
|
|
|
10.7
|
|
|
Second Amendment to Lease dated September 1, 1998 among
Informix Corporation, Birk S. McCandless, LLC and the Registrant
|
|
10-Q
|
|
000-20558
|
|
10.30
|
|
November 13, 2001
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
10.8
|
|
|
Subordination, Non-disturbance and Attornment Agreement dated
June 21, 2000, among Column Financial, Inc., Informix
Corporation, Birk S. McCandless, LLC, and the Registrant
|
|
10-Q
|
|
000-20558
|
|
10.31
|
|
November 13, 2001
|
|
|
|
|
|
10.9*
|
|
|
Form of Indemnification Agreement between the Registrant and its
Executive Officers
|
|
10-K
|
|
001-31216
|
|
10.34
|
|
March 9, 2004
|
|
|
|
|
|
10.10*
|
|
|
Network Associates, Inc. Tax Deferred Savings Plan
|
|
S-8
|
|
333-110257
|
|
4.1
|
|
November 5, 2003
|
|
|
|
|
|
10.11
|
|
|
Umbrella Credit Facility of Registrant dated April 15, 2004
|
|
10-Q
|
|
001-31216
|
|
10.36
|
|
May 10, 2004
|
|
|
|
|
|
10.12*
|
|
|
Fifth Amendment to Network Associates, Inc. Tax Deferred Savings
Plan
|
|
10-Q
|
|
001-31216
|
|
10.37
|
|
May 10, 2004
|
|
|
|
|
|
10.13*
|
|
|
Sixth Amendment to Network Associates, Inc. Tax Deferred Savings
Plan
|
|
10-Q
|
|
001-31216
|
|
10.43
|
|
August 9, 2004
|
|
|
|
|
|
10.14*
|
|
|
Employment Agreement between Registrant and Eric F. Brown dated
December 10, 2004
|
|
8-K
|
|
001-31216
|
|
10.1
|
|
December 14, 2004
|
|
|
|
|
|
10.15*
|
|
|
First Amendment to Employment Agreement between Registrant and
Eric F. Brown dated May 26, 2005
|
|
8-K
|
|
001-31216
|
|
10.3
|
|
May 26, 2005
|
|
|
|
|
|
10.16*
|
|
|
Letter Agreement Amendment to Employment Agreement between the
Registrant and Eric F. Brown dated January 31, 2006
|
|
10-K
|
|
001-31216
|
|
10.36
|
|
March 1, 2006
|
|
|
|
|
|
10.17*
|
|
|
Letter agreement, dated February 23, 2007 between David
DeWalt and the Registrant
|
|
8-K
|
|
001-31216
|
|
10.37
|
|
March 8, 2007
|
|
|
|
|
|
10.18*
|
|
|
Letter Agreement, dated February 5, 2008 between David
DeWalt and the Registrant, amending the Letter Agreement, dated
February 23, 2007 between David DeWalt and the Registrant
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.19
|
|
|
Share Purchase Agreement, dated October 8, 2007 among the
Registrant, McAfee European Holdings Limited and SafeBoot
Holding B.V., among other parties
|
|
10-K
|
|
001-31216
|
|
10.32
|
|
February 27, 2008
|
|
|
|
|
|
10.20*
|
|
|
Letter agreement, dated April 30, 2008 between Albert
Rocky Pimentel and the Registrant
|
|
8-K
|
|
001-31216
|
|
10.1
|
|
April 30, 2008
|
|
|
|
|
|
10.21*
|
|
|
Letter agreement, dated August 17, 2007 between Mark
Cochran and the Registrant
|
|
10-Q
|
|
001-31216
|
|
10.1
|
|
May 12, 2008
|
|
|
|
|
|
10.22*
|
|
|
Letter agreement, dated September 14, 2007 between Michael
DeCesare and the Registrant
|
|
10-Q
|
|
001-31216
|
|
10.2
|
|
May 12, 2008
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
10.23*
|
|
|
Letter agreement, dated February 15, 2007 between Keith
Krzeminski and the Registrant
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.24*
|
|
|
Employment Agreement, dated October 1, 2004 between
Christopher Bolin and the Registrant
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.25*
|
|
|
First Amendment to Employment Agreement between Christopher
Bolin and the Registrant, dated May 21, 2005
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.26*
|
|
|
Amendment of Stock Options, dated February 11, 2008 between
Christopher Bolin and the Registrant
|
|
10-Q
|
|
001-31216
|
|
10.3
|
|
May 12, 2008
|
|
|
|
|
|
10.27*
|
|
|
Foundstone, Inc. 2000 Stock Plan, as amended
|
|
10-Q
|
|
001-31216
|
|
10.6
|
|
May 12, 2008
|
|
|
|
|
|
10.28*
|
|
|
2002 Employee Stock Purchase Plan, as amended
|
|
10-Q
|
|
001-31216
|
|
10.7
|
|
May 12, 2008
|
|
|
|
|
|
10.29*
|
|
|
SafeBoot Stock Option Plan 2006, as amended
|
|
S-8
|
|
333-150918
|
|
4.1
|
|
May 14, 2008
|
|
|
|
|
|
10.30*
|
|
|
1997 Stock Incentive Plan, as amended
|
|
10-Q
|
|
001-31216
|
|
10.2
|
|
August 7, 2008
|
|
|
|
|
|
10.31*
|
|
|
Form of Performance Stock Unit Issuance Agreement
|
|
10-Q
|
|
001-31216
|
|
10.8
|
|
May 12, 2008
|
|
|
|
|
|
10.32*
|
|
|
Form of Stock Option Award Agreement
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.33*
|
|
|
Executive Bonus Plan
|
|
10-Q
|
|
001-31216
|
|
10.3
|
|
August 7, 2008
|
|
|
|
|
|
10.34
|
|
|
Agreement and Plan of Merger, dated September 21, 2008
among the Registrant, Seabiscuit Acquisition Corporation and
Secure Computing Corporation
|
|
8-K
|
|
001-31216
|
|
10.1
|
|
September 22, 2008
|
|
|
|
|
|
10.35*
|
|
|
Amended and Restated 1993 Stock Option Plan for Outside
Directors, as amended
|
|
10-Q
|
|
001-31216
|
|
10.2
|
|
November 7, 2008
|
|
|
|
|
|
10.36*
|
|
|
Secure Computing Corporation 2002 Stock Incentive Plan
|
|
S-8
|
|
333-155583
|
|
4.1
|
|
November 21, 2008
|
|
|
|
|
|
10.37*
|
|
|
Secure Computing Corporation (formerly CipherTrust, Inc.) 2000
Stock Option Plan
|
|
S-8
|
|
333-155583
|
|
4.2
|
|
November 21, 2008
|
|
|
|
|
|
10.38*
|
|
|
CyberGuard Corporation Third Amended and Restated Employee Stock
Option Plan
|
|
S-8
|
|
333-155583
|
|
4.3
|
|
November 21, 2008
|
|
|
|
|
|
10.39*
|
|
|
Form of Change of Control and Retention Agreement (Tier 2
Executives)
|
|
8-K
|
|
001-31216
|
|
10.1
|
|
December 18, 2008
|
|
|
|
|
|
10.40*
|
|
|
Change of Control and Retention Plan (Tier 3 Executives)
|
|
8-K
|
|
001-31216
|
|
10.2
|
|
December 18, 2008
|
|
|
|
|
|
10.41*
|
|
|
Change of Control and Retention Agreement, dated
January 26, 2009, between David DeWalt and the Registrant
|
|
8-K
|
|
001-31216
|
|
10.1
|
|
January 30, 2009
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
File
|
|
Exhibit
|
|
|
|
Filed with
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Number
|
|
Filing Date
|
|
this 10-K
|
|
|
10.42
|
|
|
Credit Agreement dated December 22, 2008 among the
Registrant, McAfee Ireland Holdings Limited, the subsidiaries of
the Registrant party thereto as guarantors, the lenders from
time to time party thereto and Bank of America, N.A., as
Administrative Agent and L/C Issuer
|
|
8-K
|
|
001-31216
|
|
10.1
|
|
December 29, 2008
|
|
|
|
|
|
21.1
|
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
23.1
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.1
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
* |
|
Management contracts or compensatory plans or arrangements
covering executive officers or directors of McAfee, Inc. |
111