McAfee, Inc. - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2004

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number: 0-20558

McAfee, Inc.

(Exact name of registrant as specified in its charter)


Delaware		77-0316593
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3965 Freedom Circle Santa Clara, California (Address of principal executive offices)		95054 (Zip Code)

Registrant’s telephone number, including area code:

(408) 988-3832

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of July 30, 2004, 156,219,258 shares of the registrant’s common stock, $0.01 par value, were outstanding.

THIS DOCUMENT CONTAINS 71 PAGES.

THE EXHIBIT INDEX IS ON PAGE 69.

MCAFEE, INC.

FORM 10-Q

June 30, 2004

CONTENTS


Item
Number		Page

PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets: June 30, 2004 and December 31, 2003		2
	Condensed Consolidated Statements of Income and Comprehensive Income:
	Three and six months ended June 30, 2004 and 2003 (restated)		3
	Condensed Consolidated Statements of Cash Flows:
	Six months ended June 30, 2004 and 2003 (restated)		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		48
Item 4.	Controls and Procedures		64

PART II: OTHER INFORMATION
Item 1.	Legal Proceedings		66
Item 2.	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		66
Item 3.	Defaults upon Senior Securities		66
Item 4.	Submission of Matters to a Vote of Security Holders		66
Item 5.	Other Information		67
Item 6.	Exhibits and Reports on Form 8-K		67
Signatures			68
Exhibit Index			69
Addendum to Raymond J. Smets Employment Agreement
Sixth Amendment to Tax Deferred Savings Plan
Certification of CEO & CFO Pursuant to Section 302
Certification of CEO & CFO Pursuant to Section 906

MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


			June 30,			December 31,
			2004			2003


			(In thousands, except
			share and per share data)

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	355,518		$	333,651
	Short-term marketable securities			183,105			174,499
	Accounts receivable, net			115,985			170,218
	Prepaid expenses, income taxes and other current assets			110,749			97,616
	Deferred taxes			182,857			160,550
	Assets held for sale			—			24,719

		Total current assets		948,214			961,253
Long-term marketable securities				330,607			258,107
Restricted cash				20,749			20,547
Property and equipment, net				106,238			111,672
Deferred taxes				164,767			199,196
Intangible assets, net				92,205			105,952
Goodwill				441,352			443,593
Other assets				6,346			20,178

		Total assets	$	2,110,478		$	2,120,498


LIABILITIES
Current liabilities:
	Accounts payable		$	22,072		$	32,099
	Accrued liabilities			126,415			147,281
	Deferred revenue			434,488			342,795
	Current portion of convertible debt			339,079			—
	Liabilities related to assets held for sale			—			23,310

		Total current liabilities		922,054			545,485
Deferred revenue, less current portion				102,077			116,762
Convertible debt				—			347,397
Other long term liabilities				240,649			222,765

		Total liabilities		1,264,780			1,232,409

Commitments and contingencies (Notes 11 and 12)

STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value:
	Authorized: 5,000,000 shares; Issued and outstanding: none			—			—
Common stock, $0.01 par value:
	Authorized: 300,000,000 shares; Issued: 164,698,647 shares and 162,071,798 shares at June 30, 2004 and December 31, 2003, respectively;
	Outstanding: 155,685,447 shares and 161,721,798 shares at June 30, 2004 and December 31, 2003, respectively			1,647			1,621
Additional paid-in capital				1,125,479			1,087,625
Deferred stock-based compensation				(320	)		(598	)
Accumulated other comprehensive loss				30,573			34,027
Accumulated deficit				(161,709	)		(229,879	)
Treasury stock, at cost: 9,013,200 shares and 350,000 shares at June 30, 2004 and December 31, 2003, respectively				(149,972	)		(4,707	)

		Total stockholders’ equity		845,698			888,089

		Total liabilities and stockholders’ equity	$	2,110,478		$	2,120,498

The accompanying notes are an integral part of these condensed consolidated financial statements.

MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME



			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2004			2003			2004			2003


			(In thousands, except per share data)
			(Unaudited)
						(As Restated,						(As Restated,
						See Note 13)						See Note 13)
Net revenue:
	Product		$	80,007		$	119,204		$	163,738		$	246,510
	Services and support			145,671			97,821			281,018			189,829

		Total net revenue		225,678			217,025			444,756			436,339

Cost of net revenue:
	Product			24,496			20,365			47,448			39,055
	Services and support			9,792			13,002			20,639			26,232
	Amortization of purchased technology			3,276			2,776			6,669			4,517

		Total cost of net revenue		37,564			36,143			74,756			69,804

Operating costs and expenses:
	Research and development(1)			44,346			45,965			89,725			92,395
	Marketing and sales(2)			96,114			87,045			189,072			175,986
	General and administrative(3)			35,722			29,780			62,436			57,988
	(Gain) loss on sale of assets and technology			274			(904	)		(45,404	)		(941	)
	Provision for (recovery from) doubtful accounts, net			149			(64	)		674			(387	)
	Reimbursement related to litigation settlement			(5,890	)		—			(24,991	)		—
	Amortization of intangibles			3,516			3,721			7,089			8,732
	Restructuring charge			682			6,826			2,872			22,607
	In-process research and development			—			6,600			—			6,600

		Total operating costs		174,913			178,969			281,473			362,980

		Income from operations		13,201			1,913			88,527			3,555
Interest and other income				4,224			2,660			8,575			7,208
Interest and other expenses				(2,137	)		(2,034	)		(2,878	)		(5,205	)
Loss on repurchase of zero coupon convertible debentures				—			(136	)		—			(2,727	)
Gain (loss) on sale of marketable securities				(1,319	)		500			(831	)		1,548

	Income before provision for income taxes and cumulative effect of change in accounting principle			13,969			2,903			93,393			4,379
Provision for income taxes				3,769			412			25,223			556

	Income before cumulative effect of change in accounting principle			10,200			2,491			68,170			3,823
Cumulative effect of change in accounting principle, net of tax				—			—			—			11,142

	Net income		$	10,200		$	2,491		$	68,170		$	14,965

Other comprehensive income:
	Unrealized loss on marketable securities, net		$	(2,373	)	$	(77	)	$	(2,123	)	$	(766	)
	Foreign currency translation gain (loss)			(2,307	)		8,026			(1,333	)		10,485

Comprehensive income			$	5,520		$	10,440		$	64,714		$	24,684

Basic income per share:
	Income before cumulative effect of change in accounting principle		$	0.06		$	0.02		$	0.42		$	0.02
	Cumulative effect of change in accounting principle, net of taxes			—			—			—			0.07

	Net income per share — basic		$	0.06		$	0.02		$	0.42		$	0.09

	Shares used in per share calculation — basic			160,313			160,341			161,800			159,954

Diluted income per share:
	Income before cumulative effect of change in accounting principle		$	0.06		$	0.02		$	0.40		$	0.02
	Cumulative effect of change in accounting principle, net of taxes			—			—			—			0.07

	Net income per share — diluted		$	0.06		$	0.02		$	0.40		$	0.09

	Shares used in per share calculation — diluted			163,925			164,608			184,705			165,053

(1) Includes stock-based compensation charges of $258 and $576 for the three months ended June 30, 2004 and 2003, respectively, and $1,572 and $1,318 for the six months ended June 30, 2004 and 2003, respectively.

(2) Includes stock-based compensation charges of $51 and $158 for the three months ended June 30, 2004 and 2003, respectively, and $687 and $414 for the six months ended June 30, 2004 and 2003, respectively.

(3) Includes stock-based compensation charges of $131 and $225 for the three months ended June 30, 2004 and 2003, respectively, and $407 and $1,194 for the six months ended June 30, 2004 and 2003, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



			Six Months Ended
			June 30,

			2004		2003


			(In thousands)
			(Unaudited)
					(As Restated,
					see Note 13)
Cash flows from operating activities:
	Net income		$	68,170	$	14,965
	Adjustments to reconcile net income to net cash provided by operating activities:
		Cumulative effect of change in accounting principle		—		(11,142	)
		Depreciation and amortization		33,565		31,215
		Acquired in-process research and development		—		6,600
		Provision for (recovery from) doubtful accounts, net		674		(387	)
		Non-cash interest expense on convertible notes		1,050		2,112
		Premium amortization on marketable securities	&nb

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(1)	Includes stock-based compensation charges of $258 and $576 for the three months ended June 30, 2004 and 2003, respectively, and $1,572 and $1,318 for the six months ended June 30, 2004 and 2003, respectively.

(2)	Includes stock-based compensation charges of $51 and $158 for the three months ended June 30, 2004 and 2003, respectively, and $687 and $414 for the six months ended June 30, 2004 and 2003, respectively.

(3)	Includes stock-based compensation charges of $131 and $225 for the three months ended June 30, 2004 and 2003, respectively, and $407 and $1,194 for the six months ended June 30, 2004 and 2003, respectively.