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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 September 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
   95054
(Address of principal executive offices)   (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 November 4, 2004, 160,192,233 shares of the registrant’s common stock, $0.01 par value, were outstanding.

THIS DOCUMENT CONTAINS 73 PAGES.

THE EXHIBIT INDEX IS ON PAGE 71.

MCAFEE, INC.

Form 10-Q

September 30, 2004

CONTENTS

             
Item
Number Page
PART I: FINANCIAL INFORMATION
Item 1.  Financial Statements (Unaudited)        
          Condensed Consolidated Balance Sheets: September 30, 2004 and December 31, 2003     2  
          Condensed Consolidated Statements of Operations and Comprehensive Income: Three and nine months ended September 30, 2004 and 2003 (restated)     3  
          Condensed Consolidated Statements of Cash Flows: Nine months ended September 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     27  
 Item 3.  Quantitative and Qualitative Disclosures About Market Risk     66  
 Item 4.  Controls and Procedures     66  
 PART II: OTHER INFORMATION
 Item 1.  Legal Proceedings     68  
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds     68  
 Item 3.  Defaults upon Senior Securities     68  
 Item 4.  Submission of Matters to a Vote of Security Holders     68  
 Item 5.  Other Information     69  
 Item 6.  Exhibits     69  
 Signatures     70  
 Exhibit Index     71  
 Certificate of Ownership and Merger
 Amended and Restated Bylaws
 Certification of CEO and CFO Pursuant to Section 302
 Certification of CEO and CFO Pursuant to Section 906

1

Table of Contents

MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
                     
September 30, December 31,
2004 2003
(In thousands, except
share and per share data)
(Unaudited)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 340,408     $ 333,651  
 
Short-term marketable securities
    188,435       174,499  
 
Accounts receivable, net
    87,243       170,218  
 
Prepaid expenses, income taxes and other current assets
    97,920       97,616  
 
Deferred taxes
    172,069       160,550  
 
Assets held for sale
    —       24,719  
     
     
 
   
Total current assets
    886,075       961,253  
Long-term marketable securities
    318,190       258,107  
Restricted cash
    20,282       20,547  
Property and equipment, net
    96,971       111,672  
Deferred taxes
    112,414       199,196  
Intangible assets, net
    85,953       105,952  
Goodwill
    391,324       443,593  
Other assets
    7,927       20,178  
     
     
 
   
Total assets
  $ 1,919,136     $ 2,120,498  
     
     
 
LIABILITIES
Current liabilities:
               
 
Accounts payable
  $ 21,760     $ 32,099  
 
Accrued liabilities
    117,671       148,875  
 
Deferred revenue
    421,939       342,795  
 
Liabilities related to assets held for sale
    —       23,310  
     
     
 
   
Total current liabilities
    561,370       547,079  
Deferred revenue, less current portion
    99,188       116,762  
Convertible debt
    —       347,397  
Other long term liabilities
    193,604       221,171  
     
     
 
   
Total liabilities
    854,162       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: 168,294,143 shares and 162,071,798 shares at September 30, 2004 and December 31, 2003, respectively;
               
 
Outstanding: 159,280,943 shares and 161,721,798 shares at September 30, 2004 and December 31, 2003, respectively
    1,683       1,621  
Additional paid-in capital
    1,226,221       1,087,625  
Deferred stock-based compensation
    (268 )     (598 )
Accumulated other comprehensive income
    30,871       34,027  
Accumulated deficit
    (43,561 )     (229,879 )
Treasury stock, at cost: 9,013,200 shares and 350,000 shares at September 30, 2004 and December 31, 2003, respectively
    (149,972 )     (4,707 )
     
     
 
   
Total stockholders’ equity
    1,064,974       888,089  
     
     
 
   
Total liabilities and stockholders’ equity
  $ 1,919,136     $ 2,120,498  
     
     
 

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

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MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
                                     
Three Months Ended Nine Months Ended
September 30, September 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
  $ 65,518     $ 120,371     $ 229,256     $ 366,881  
 
Services and support
    156,115       107,404       437,133       297,233  
     
     
     
     
 
   
Total net revenue
    221,633       227,775       666,389       664,114  
     
     
     
     
 
Cost of net revenue:
                               
 
Product
    21,935       22,484       69,383       61,539  
 
Services and support
    9,526       12,016       30,165       38,248  
 
Amortization of purchased technology
    2,812       3,435       9,481       7,952  
     
     
     
     
 
   
Total cost of net revenue
    34,273       37,935       109,029       107,739  
     
     
     
     
 
Operating costs:
                               
 
Research and development(1)
    38,989       46,705       128,714       138,087  
 
Marketing and sales(2)
    82,945       91,405       272,017       267,105  
 
General and administrative(3)
    33,562       37,743       96,672       96,643  
 
Reimbursement from transition services agreement
    (3,671 )     —       (3,671 )     —  
 
(Gain) loss on sale of assets and technology
    (195,875 )     —       (241,279 )     867  
 
Reimbursement related to litigation settlement
    —       —       (24,991 )     —  
 
Severance costs related to Sniffer disposition(4)
    8,696       —       8,696       —  
 
Amortization of intangibles
    3,448       3,637       10,537       12,369  
 
Restructuring charge
    8,549       257       11,421       22,864  
 
In-process research and development
    —       —       —       6,600  
     
     
     
     
 
   
Total operating costs
    (23,357 )     179,747       258,116       544,535  
     
     
     
     
 
   
Income from operations
    210,717       10,093       299,244       11,840  
Interest and other income
    4,591       4,174       13,166       13,190  
Interest and other expenses
    (540 )     (1,222 )     (3,418 )     (6,427 )
Loss on redemption of convertible debt
    (15,070 )     —       (15,070 )     (2,727 )
Gain (loss) on sale of marketable securities
    (241 )     223       (1,072 )     1,771  
     
     
     
     
 
 
Income before provision for income taxes and cumulative effect of change in accounting principle
    199,457       13,268       292,850       17,647  
Provision for income taxes
    81,309       2,494       106,532       3,050  
     
     
     
     
 
 
Income before cumulative effect of change in accounting principle
    118,148       10,774       186,318       14,597  
Cumulative effect of change in accounting principle, net of tax
    —       —       —       11,142  
     
     
     
     
 
 
Net income
  $ 118,148     $ 10,774     $ 186,318     $ 25,739  
     
     
     
     
 
Other comprehensive income:
                               
 
Unrealized gain (loss) on marketable securities, net
  $ 843     $ 767     $ (1,280 )   $ 1  
 
Foreign currency translation (loss) gain
    (545 )     82       (1,878 )     10,567  
     
     
     
     
 
Comprehensive income
  $ 118,446     $ 11,623     $ 183,160     $ 36,307  
     
     
     
     
 
Basic income per share:
                               
 
Income before cumulative effect of change in accounting principle
  $ 0.75     $ 0.07     $ 1.16     $ 0.09  
 
Cumulative effect of change in accounting principle, net of taxes
    —       —       —       0.07  
     
     
     
     
 
 
Net income per share — basic
  $ 0.75     $ 0.07     $ 1.16     $ 0.16  
     
     
     
     
 
 
Shares used in per share calculation — basic
    158,151       160,347       160,321       160,086  
     
     
     
     
 
Diluted income per share:
                               
 
Income before cumulative effect of change in accounting principle
  $ 0.70     $ 0.07     $ 1.08     $ 0.09  
 
Cumulative effect of change in accounting principle, net of taxes
    —       —       —       0.07  
     
     
     
     
 
 
Net income per share — diluted
  $ 0.70     $ 0.07     $ 1.08     $ 0.16  
     
     
     
     
 
 
Shares used in per share calculation — diluted
    172,103       164,141       180,192       164,398  
     
     
     
     
 

(1)  Includes stock-based compensation charges of $575 and $2,202 for the three months ended September 30, 2004 and 2003, respectively, and $2,147 and $3,520 for the nine months ended September 30, 2004 and 2003, respectively.
 
(2)  Includes stock-based compensation charges of $203 and $2,795 for the three months ended September 30, 2004 and 2003, respectively, and $890 and $3,209 for the nine months ended September 30, 2004 and 2003, respectively.
 
(3)  Includes stock-based compensation charges of $485 and $839 for the three months ended September 30, 2004 and 2003, respectively, and $892 and $2,033 for the nine months ended September 30, 2004 and 2003, respectively.
 
(4)  Includes stock-based compensation charges of $991 for the three and nine months ended September 30, 2004.

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

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MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                         
Nine Months Ended
September 30,
2004 2003
(In thousands)
(Unaudited)
(As Restated,
see Note 13)
Cash flows from operating activities:
               
 
Net income
  $ 186,318     $ 25,739  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Cumulative effect of change in accounting principle
    —       (11,142 )
   
Depreciation and amortization
    49,615       46,507  
   
Acquired in-process research and development
    —       6,600  
   
Non-cash interest expense on convertible notes
    1,225       2,637  
   
Premium amortization on marketable securities
    3,916       —  
   
(Gain) loss on sale of assets and technology
    (241,279 )     867  
   
Loss (gain) on sale of marketable securities
    1,072       (1,771 )
   
Loss on redemption of convertible debt
    15,070       2,727  
   
Deferred taxes <