<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 30 September 1996
OR
/ / 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 ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0316593
(State of incorporation) (IRS Employer Identification Number)
2710 Walsh Avenue
Santa Clara, California 95051
(408) 988-3832
(Address and telephone number of principal executive offices)
Indicate by check mark whether 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, and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
48,401,952 shares of the registrant's Common stock, $0.01 par value,
were outstanding as of October 31, 1996.
THIS DOCUMENT CONTAINS __ PAGES.
THE EXHIBIT INDEX IS ON PAGE 17.
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MCAFEE ASSOCIATES, INC.
FORM 10-Q, September 30, 1996
C O N T E N T S
<TABLE>
<CAPTION>
Item Number Page
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1996 and December 31, 1995.................... 3
Condensed Consolidated Statements of Income:
Three and nine months ended September 30, 1996 and 1995..... 4
Condensed Consolidated Statements of Cash Flows:
Nine months ended September 30, 1996 and 1995 .............. 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 15
SIGNATURES..................................................................... 16
EXHIBIT INDEX................................................................. 17
</TABLE>
2
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MCAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 68,246 $ 30,299
Marketable securities 45,596 25,058
Accounts receivable, net of allowances for doubtful
accounts and returns of $2,567 and $2,279 at September 30, 1996
and December 31, 1995 19,355 20,892
Prepaids and other current assets 2,827 3,373
Prepaid taxes 3,916 6,064
Deferred taxes 3,605 4,999
-------- --------
Total current assets 143,545 90,685
Fixed assets, net 6,063 3,399
Intangibles, net 1,611 3,129
Deferred taxes 6,983 6,513
Other assets 440 294
-------- --------
Total assets $158,642 $104,020
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 3,951 $ 2,214
Accrued liabilities 12,897 8,844
Deferred revenue 19,664 24,795
-------- --------
Total current liabilities 36,512 35,853
Deferred revenue, less current portion 2,792 4,625
-------- --------
Total liabilities 39,304 40,478
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized: 5,000,000 shares
Common stock, $.01 par value;
authorized: 100,000,000 shares; issued and
outstanding: 48,076,990 shares at September 30, 1996 and
46,129,887 at December 31, 1995 220 205
Additional paid-in capital 63,313 31,145
Retained earnings 55,805 32,192
-------- --------
Total stockholders' equity 119,338 63,542
-------- --------
Total liabilities and stockholders' equity $158,642 $104,020
======== =========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
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MCAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months Nine months
Ended September 30 Ended September 30
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $47,290 $25,613 $121,902 $60,703
Operating costs and expenses:
Cost of net revenue 2,703 877 7,220 3,539
Research and development 5,650 2,572 14,212 6,960
Marketing and sales 13,485 7,580 34,664 20,627
General and administrative 4,202 2,256 9,876 5,528
Amortization of intangibles 646 414 2,295 942
Acquisition and other unusual costs -- 10,784 11,165 10,784
-------- ------- ------- -------
Total operating costs and expenses 26,686 24,483 79,432 48,380
-------- ------- ------- -------
Income from operations 20,604 1,130 42,470 12,323
Other income 922 518 2,164 1,259
-------- ------- ------- -------
Income before income taxes 21,526 1,648 44,634 13,582
Provision for income taxes 8,628 1,218 21,253 5,976
-------- ------- ------- --------
Net income $ 12,898 $ 430 $23,381 $ 7,606
======== ======= ======= =======
Net income per share $ 0.24 $ 0.01 $ 0.44 $ 0.16
======== ======= ======= =======
Shares used in per share
calculation $ 54,020 49,518 52,810 48,492
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
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MCAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months
Ended September 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,381 $ 7,606
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 5,097 2,361
Provision for doubtful accounts receivable
and allowance for returns 288 1,634
Deferred taxes 924 (2,305)
Changes in assets and liabilities:
Accounts receivable 1,250 642
Prepaids and other assets (377) 353
Accounts payable and accrued liabilities 5,790 5,352
Prepaid income taxes 2,148 836
Deferred revenue (6,964) 3,268
-------- -------
Net cash provided by operating activities 31,537 19,747
-------- -------
Cash flows from investing activities:
Purchase of intangibles (1,000)
Sale (Purchases) of investment securities (20,538) (8,672)
Additions to fixed assets (5,466) (912)
-------- -------
Net cash provided by (used in) investing activities (26,004) (10,584)
-------- -------
Cash flows from financing activities:
Payments on capital leases (207)
Effect of exchange rate fluctuations 92 --
Stock option exercises 9,630 2,182
Costs of secondary security offering -- (446)
Tax benefit from exercise of nonqualified stock options 22,692 3,292
-------- -------
Net cash provided by financing activities 32,414 4,821
-------- -------
Net increase in cash and cash equivalents 37,947 13,984
Cash and cash equivalents at beginning of period 30,299 20,449
-------- -------
Cash and cash equivalents at end of period $ 68,246 $34,433
======== =======
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
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MCAFEE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The accompanying consolidated financial statements have been prepared by
the Company without audit in accordance with instructions to Form 10-Q
and Article 10 of Regulation S-X. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. The accompanying financial statements
should be read in conjunction with the audited financial statements
contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 1996. The results of
operations for the three and nine month periods ended September 30, 1996
are not necessarily indicative of the results to be expected for the
full year. All per share data contained herein has been restated to
reflect the stock dividend discussed in footnote 3.
Historically, net revenue from subscription licenses for anti-virus
software was generally recognized ratably over a two year period as the
Company was not able to demonstrate the separate value of the product
license and maintenance agreement. During 1995, the Company was able to
demonstrate the separate value of the product license and maintenance
agreement and, effective July 1, 1995, the Company began generally to
recognize 80% of license fees for electronically distributed anti-virus
software at the time of the licensing transaction and the remaining 20%
evenly over the two year subscription period. Under the policy, revenue
for electronically distributed anti-virus software is recognized on a
basis consistent with the revenue recognition of electronically
distributed network management software. As a result of the change in
revenue recognition, results for the respective nine month periods are
not directly comparable. However, the revenue in the three month periods
ended September 30, 1996 and 1995 was recognized on a consistent basis
and therefore are comparable. Revenue growth for the three months ended
September 30, 1996 compared to the third quarter of 1995 was unfavorably
impacted due to the diminishing amortization of deferred revenue arising
from the unbundling of license and maintenance revenue.
2. Acquisitions:
On August 30, 1996, the Company acquired a controlling interest in FSA
Corporation of Calgary Canada, a developer of security software for an
aggregate of 356,000 shares and options to purchase shares of McAfee
common stock. The acquisition was accounted for as a pooling of
interests.
Stock dividend:
On September 17, 1996 the Company declared a stock dividend, payable to
all holders of record of common stock on October 7, 1996, of one share
of common stock for every two shares of common stock outstanding. The
stock dividend was distributed on October 17, 1996. All per share data
contained herein has been restated to reflect the increased number of
shares outstanding.
6
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere in this
report. The results shown herein are not necessarily indicative of the results
to be expected for the full year or any future periods.
OVERVIEW
The Company generates net revenue principally through the licensing of
its network management, security and help desk software products. Historically,
net revenue from subscription licenses for anti-virus software was generally
recognized ratably over a two year period, while net revenue from subscription
licenses for network management software was generally recognized 80% at the
time of the licensing transaction with the remaining 20% recognized ratably over
a two year period. Effective July 1, 1995, the Company began to generally
recognize 80% of license fees for electronically distributed anti-virus
software at the time of the licensing transaction with the remaining 20%
recognized over the remaining license period. The deferred revenue from
anti-virus subscription licenses entered into prior to July 1, 1995 continues to
be recognized over the original 24 month subscription period. This has resulted
in incremental revenue being recognized over the last five quarters. This
incremental revenue will continue to be recognized over the next three quarters
with a corresponding decrease in the amount of deferred revenue on the Company's
balance sheet.
As a result of the change in revenue recognition for anti-virus
subscription licenses, nine month results for 1996 and 1995 are not directly
comparable while revenue was recognized on a consistent basis in the three month
periods ended September 30, 1996 and 1995. In addition, since a decreasing
percentage of the Company's net revenue is attributable to the recognition of
previously deferred revenue, the Company's net revenue in future periods may be
subject to greater fluctuations on a quarter to quarter basis.
In addition to generating net revenue through subscription licenses,
the Company sells its network security and management products with shrink-wrap
licenses through traditional distribution channels. The Company recognizes
revenue from sales to distributors upon shipment, subject to a reserve for
returns.
On August 30, 1996, the Company acquired a controlling interest in FSA
Corporation of Calgary Canada, a developer of network security and encryption
software for an aggregate of 356,000 shares and options to purchase shares of
McAfee common stock. The acquisition was accounted for as a pooling of
interests. In the quarter ended September 30, 1996, the Company also entered
into agreements that enabled entry into the anti-virus market for Lotus Notes
and the market for server backup applications.
7
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's results of operations can fluctuate significantly on a
quarterly basis. Causes of such fluctuations may include the volume and timing
of new orders and renewals, the introduction of new products, product upgrades
or updates released by the Company or its competitors, changes in product
prices, the impact of competitive pricing or products, timely availability and
acceptance of new products, changes in product mix, changes in the market for
anti virus or network management software, inclusion of network security or
management software functionality in system software, failure to manage growth
and/or potential acquisitions, seasonality, trends in the computer industry,
general economic conditions, extraordinary events such as acquisitions or
litigation and the occurrence of unexpected events. Historically, renewals have
accounted for a significant portion of the Company's net revenue; however, there
can be no assurance that the Company will be able to sustain current renewal
rates in the future. The Company's results for any given period should not be
relied upon as indicative of future performance.
The Company's future earnings and stock price may be subject to
volatility in any period. Any shortfall in various operating results, including
licensing activity, product sales, net revenue, operating income, net income or
net income per share from historical levels or expectations of securities
analysts may have significant adverse effects on the trading price of the
Company's stock. Furthermore, other factors such as acquisitions or unforeseen
events in the technology or software industry or in the Company's day to day
activities can have a material adverse effect on the Company's stock
performance.
8
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of net revenue represented by certain items in the Company's statements of
operations for the three and nine month periods ended September 30, 1996 and
1995:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of net revenue 5.7 3.4 5.9 5.8
Research and development 11.9 10.0 11.7 11.5
Marketing and sales 28.5 29.6 28.4 34.0
General and administrative 8.9 8.8 8.1 9.1
Amortization of intangibles 1.4 1.6 1.9 1.6
Acquisition and other unusual costs -- 42.1 9.2 17.8
----- ----- ----- -----
Total operating costs and expenses 56.4 95.6 65.2 79.7
----- ----- ----- -----
Income from operations 43.6 4.4 34.8 20.3
Other income 1.9 2.0 1.8 2.1
----- ----- ----- -----
Income before income taxes 45.5 6.4 36.6 22.4
Provision for income taxes 18.2 4.8 17.4 9.8
----- ----- ----- -----
Net income 27.3 % 1.7 % 19.2 % 12.5 %
===== ===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
9
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Revenue. Net revenue increased 85% to $47.3 million in the three
months ended September 30, 1996 from $25.6 million in the three months ended
September 30, 1995. For the nine month period ended September 30, 1996, net
revenue increased 101% to $121.9 million from $60.7 million in the same period
in 1995. The revenue increase in the three months ended September 30 is largely
attributable to increased revenue from subscription licenses for anti virus
products and to a lesser extent subscription licenses for network management and
help desk products. The increase in revenue for the nine months ended September
30, 1996 is due primarily to the increase in subscription licenses for anti
virus software and secondarily to the change in revenue recognition policy for
anti-virus subscriptions. In the three and nine month periods ended September
30, 1996, 80% of the revenue from subscription licenses for anti- virus software
was recognized at the time of the licensing transaction rather than being
recognized ratably over 24 months for licenses sold in the periods prior to July
1, 1995. Net revenue also increased as a result of increased sales of
shrink-wrapped products through traditional distribution channels. The Company
has recently been experiencing increased price competition for anti virus
products and expects that competition to increase in the future which will
reduce average selling prices.
The deferred revenue from anti-virus subscription licenses entered into
prior to July 1, 1995 is being recognized over the balance of the 24 month
subscription period. This resulted in incremental license revenue being
recognized in the three and nine month periods ended September 30, 1996 and will
continue to result in incremental revenue being recognized over the next three
quarters with a corresponding decrease in the amount of deferred revenue on the
Company's balance sheet.
Net revenue from international sales accounted for approximately
16% and 31% of net revenue for the three months ended September 30, 1996 and
1995, respectively. For the nine month periods ended September 30, 1996 and
1995, the percentage of net revenue from international licenses was
approximately 16% and 26%, respectively. The decrease in the overall percentage
of international revenue occurred as a result of domestic revenue growing at a
faster rate. However, despite this decrease, international revenue grew in
absolute dollars. During the second half of 1995, the Company expanded its
international operations, in Europe primarily as a result of the acquisitions of
Saber Software Corporation and its former distributors in the UK and France. In
addition, the Company acquired a former distributor in Germany of Saber Software
Corporation in 1996. As a result of the expansion of its international
operations, the Company now denominates certain international license fees in
local currencies, primarily in Europe. As a result, the Company is subject to
the risks associated with fluctuations in currency exchange rates. To date the
Company has not engaged in significant hedging activities so there can be no
assurance that it will not incur significant losses related to currency
fluctuations. Risks inherent in the Company's international sales generally
include the impact of fluctuating exchange rates, longer payment cycles, greater
difficulty in accounts receivable collection, unexpected changes in regulatory
10
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
requirements, seasonality due to the slowdown in European business activity
during the third quarter, and tariffs and other trade barriers. There can be no
assurance that these factors will not have a material adverse effect on the
Company's future business, financial condition and results of operations.
Further, in countries with a high incidence of software piracy, the Company may
experience a higher rate of piracy of its products. In addition, a significant
portion of the Company's international sales are generated through independent
agents. Since these agents are not employees of the Company and are not required
to offer the Company's products exclusively, there can be no assurance that they
will continue to market the Company's products. Also, despite the Company's
substantial dependence in the international market upon the marketing, sales and
customer support of its agents, the Company currently has limited control over
its agents. For example, the Company is dependent upon its international agents
to provide it with information regarding licensees and there can be no assurance
that the Company will be able to obtain sufficient information to contact such
licensees, if necessary, regarding renewal. In addition, the Company may be
unaware of the nature and scope of the representations made to customers by
these agents.
Cost of Net Revenue. The Company has historically distributed the
majority of its products electronically, and as a result, its cost of net
revenue has been low relative to other software vendors. The Company's cost of
net revenue includes the cost of media, manuals and packaging for products
distributed through traditional distribution channels and third-party royalties.
The cost of net revenue does not vary significantly among the Company's various
products, or between international or domestic sales.
For the three months ended September 30, 1996 and 1995, the
Company's cost of net revenue was $2.7 million and $0.9 million, respectively.
The cost of net revenue for the nine month period ended September 30, 1996
increased to $7.2 million from $3.5 million in the same period in 1995. These
increases were primarily due to a corresponding increase in net revenue. As a
percentage of net revenue, cost of net revenue increased to 5.7% from 3.4% in
the three month periods ended September 30, 1996 and 1995 respectively. For the
nine month periods, the cost of revenue increased from 5.8% to 5.9% compared to
the same period in 1995. The cost of revenue fluctuates slightly on a quarter to
quarter basis depending on the percentage of revenue that is distributed
electronically versus traditional channels. The increase in cost as a percent of
revenue is attributable to an increasing percentage of the Company's products
being distributed through traditional distribution channels. To the extent this
trend continues, the Company's cost of net revenue would increase and,
accordingly, gross margins would decrease.
11
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Research and Development. Research and development expenses consist
primarily of salary and benefits for the Company's software development and
technical support staff and to a lesser extent, costs associated with
independent contractors. Research and development expenses increased 119% to
$5.7 million in the three months ended September 30, 1996 from $2.6 million in
same period in 1995. For the nine month period ended September 30, 1996,
research and development expenditures increased 104% to $14.2 million from $7.0
million in the same period in 1995. These increases were primarily due to growth
in the Company's product development staff, increased use of third party
contractors and increased development activity. As a percentage of net revenue,
research and development expenses increased to 11.9% and 11.7% from 10.0% and
11.5% in the three and nine months periods ended September 30, 1996 and 1995,
respectively. These increases primarily reflect the Company's continued
investment in new and existing products. The Company anticipates that research
and development expenses will continue to increase in absolute dollars but may
fluctuate as a percentage of net revenue.
The Company's future success depends in large part upon its ability to
continue to offer a broad range of network management, help desk and security
products, to continue to enhance its existing products, to develop and introduce
in a timely manner new products that take advantage of technological advances
and to respond to new customer requirements. The Company also believes that
providing a high level of technical support is key to success in the network
management and help desk markets. Furthermore, while the Company updates its
products on a regular basis, competitors may announce new products with
capabilities or technologies that could have the potential to replace or shorten
the life cycles of the Company's existing or new products. As a result, the
Company believes that significant investments in product development and
technical support are essential. The timing and amount of research and
development expenses may vary significantly based upon the number of new
products and significant upgrades under development during a given period.
Marketing and Sales. Marketing and sales expenses consist primarily of
salary, commissions and benefits for marketing, sales and customer support
personnel and costs associated with advertising and promotions. Marketing and
sales expenses increased 78% to $13.5 million in the three months ended
September 30, 1996 from $7.6 million in the three months ended September 30,
1995. For the nine month period ended September 30, 1996, marketing and sales
expenses increased 68% to $34.7 million from $20.6 million in the same period in
1995. These increases primarily reflect growth in the Company's sales and
marketing staff including the expansion of the Company's international
operations and increased advertising and promotional expenses.
12
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a percentage of net revenue, marketing and sales expense decreased
to 28.5 % and 28.4 % in the three and nine month periods ended September 30,
1996 from 29.6% and 34.0%, respectively, in the same periods in 1995. These
decreases primarily reflect the increase in the Company's net revenue. The
Company is seeking to expand its product line in the future, and such expansion
could contribute to an increase in marketing and sales expenses as a percentage
of revenue.
General and Administrative. General and administrative expenses consist
principally of salary and benefit costs for administrative personnel, general
operating costs and legal and accounting costs. General and administrative costs
increased 86% to $4.2 million in the three months ended September 30, 1996 from
$2.3 million in the three months ended September 30, 1995. For the nine month
period ended September 30, 1996, general and administrative expenses increased
79% to $9.9 million from $5.5 million in the same period in 1995. These
increases reflect increased investment in the Company's infrastructure including
expansion of the Company's domestic and international operations. Additionally,
the Company reserved $1.3 million in connection with a dispute with respect to
the timing of prior tax payments and also incurred additional expenses related
to the acquisition of FSA Corporation. General and administrative expenses
increased to 8.9% in the three months ended September 30, 1996 from 8.8% in the
same period in 1995. As a percentage of net revenue, general and administrative
expenses decreased to 8.1% in the nine month period ended September 30, 1996
from 9.1% in the same period in 1995. These decreases reflect growth in the
Company's net revenue. The Company intends to continue to make investments in
its general and administrative infrastructure, and, as a result, expects general
and administrative expenses to increase in absolute dollars.
Amortization of Intangibles. The Company expensed $0.6 million and $0.4
million of amortization related to intangibles in the three months ended
September 30, 1996 and 1995, respectively. For the nine month periods ended
September 30, 1996 and 1995, amortization of intangibles amounted to $2.3
million and $0.9 million, respectively. Intangibles consist of purchased
goodwill and certain technology acquired through acquisitions. The increase in
amortization of intangibles in 1996 was due primarily to the write-off of
certain previously acquired technology.
Other Income. Other income consists primarily of interest income earned
on the Company's cash and short term investments. Other income totaled $0.9
million and $0.5 million in the three months ended September 30, 1996 and 1995,
respectively. For the nine month periods ended September 30, 1996 and 1995,
other income totaled $2.2 million and $1.3 million, respectively. These
increases in the Company's other income relates to higher interest income as a
result of higher average balances invested due to net cash generated from
operations.
13
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes. The provision for income taxes is recorded
at the Company's effective tax rate which, for the three month periods ended
September 30, 1996 and 1995, was 40.1% and 74.0%, respectively. For the nine
month periods ended September 30, 1996 and 1995, the effective tax rate was
47.6% and 44.0%, respectively. The provision for income taxes for each period
presented includes the effect of a net deferred tax asset arising from the
different treatment of revenue recognition for tax and financial reporting
purposes and differing treatment of purchased intangible assets and in- process
technology. In addition, the Company's effective tax rate reflects the
non-deductibility for tax purposes of acquisition costs expensed during the nine
month period ended September 30, 1996. The Company has not reduced the deferred
tax asset by a valuation allowance as it is likely that all of the deferred tax
asset will be realized due to sufficient taxable income available through
carryback to prior years and to carryforward to future years.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $68.2 million in cash and cash
equivalents and $45.6 million in marketable securities.
Net cash provided by operating activities was $31.5 million and $19.7
million for the nine months ended September 30, 1996 and 1995, respectively. Net
cash provided by operating activities for the nine months ended September 30,
1996 consisted primarily of net income and non-cash expenses plus an increase in
accounts payable and accrued liabilities together with decreases in accounts
receivable, prepaid income taxes, and deferred taxes, offset by decreases in
deferred revenue. Net cash provided by operating activities for the nine months
ended September 30, 1995 was comprised primarily of net income and non-cash
expenses together with increases in accounts payable and deferred revenue.
Net cash used in investing activities was $26.0 million in the nine
months ended September 30, 1996, primarily reflecting purchases of investment
securities. Net cash used by investing activities in the nine months ended
September 30, 1995 was $10.6 million which consisted principally of purchases of
marketable securities and intangibles.
Net cash provided by financing activities was $32.4 million and $4.8
million in the nine months ended September 30, 1996 and 1995, respectively,
consisting primarily of the proceeds and tax benefits associated with the
exercise of nonqualified stock options.
The Company believes that its available cash and anticipated cash
flow from operations will be sufficient to fund the Company's working capital
and capital expenditure requirements for at least the next twelve months.
14
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MCAFEE ASSOCIATES, INC.
FORM 10-Q, September 30, 1996
PART II: OTHER INFORMATION
Item 3. Legal Proceedings:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) The Company filed a report on Form 8-K on September
24, 1996 describing the acquisition by the
company of a controlling interest in FSA
Corporation.
(b) The exhibits listed in the accompanying Exhibit
Index are filed or incorporated by reference as
part of this Report.
15
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MCAFEE ASSOCIATES, INC.
FORM 10-Q, September 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, and the
results and regulations promulgated thereunder, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
McAFEE ASSOCIATES, INC.
/s/ Prabhat K. Goyal
Date: November 13, 1996 _________________________________
Name: Prabhat K. Goyal
Title: Vice President Finance and
Chief Financial Officer
16
<PAGE> 17
McAFEE ASSOCIATES, INC.
Form 10-Q, September 30, 1996
EXHIBIT INDEX
Exhibit No. Description Page No.
- ---------- ----------- --------
3.1 Second Restated Certificate of Incorporation.
3.2 By-laws, incorporated by reference to Exhibit 3.1 of
the Company's Registration Statement No. 33-51042 on
Form S-1 (the "S-1").
3.3 Certificate of Designation of Series A Preferred Stock of
the Company.
4.1 See Exhibit 10.44.
10.5 1992 Stock Option Plan, incorporated by reference from
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 ("1994 Form 10-K"), as
amended.
10.7 Outside Directors Stock Option Plan, incorporated by
reference from Exhibit 10.7 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1992.
10.8 Lease Agreement for facility at 2710 Walsh Avenue dated May
10, 1993, between the Company and John Arillaga and Richard
T. Peery Separate Property Trusts, incorporated by reference
from Exhibit 10.8 to the Company's Report on Form 10-Q for
the fiscal quarter ended June 30, 1993.
17
<PAGE> 18
McAFEE ASSOCIATES, INC.
Form 10-Q, September 30, 1996
EXHIBIT INDEX
10.10 Asset Acquisition Agreement among the Company and Brightwork, Jack
Bell, Thomas Dolan, Rosemarie Dubrowsky, Greg Gianforte, Kerry Giftos,
Roman Michalowski and Philip Raffiani dated March 16, 1994, together
with the Escrow Agreement among the Company, Brightwork, BDI Partners,
and Silicon Valley Bank as Escrow Agent, dated March 30, 1994 (Exhibit
2.3(b) to the Asset Acquisition Agreement) and the Employment
Agreement, dated March 30, 1994 between the Company and Greg Gianforte
(Exhibit 8.5 to the Asset Acquisition Agreement) incorporated by
reference from Exhibit 2.1 to the Company's Report on Form 8-K dated
March 30, 1994, as filed with the Securities and Exchange Commission
on April 12, 1994.
10.11 Asset Acquisition Agreement by and between the Company and ADS dated
April 19, 1994, incorporated by reference from Exhibit 2.1 to the
Company's Report on Form 8-K, dated May 6, 1994, as filed with the
Securities and Exchange Commission on May 20, 1994.
10.12 Confidential Resignation Agreement and Mutual General Release of
Claims between the Company and William S. McKiernan dated April 18,
1994, incorporated by reference from Exhibit 10.12 to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1994.
10.14 Employment Agreement between the Company and Gregory Gianforte dated
March 31, 1994, as amended September 28, 1994, incorporated by
reference to Exhibit 10.14 of the 1994 Form 10-K.
10.15 Lease Agreement between Jerral Office Associates, a New Jersey limited
partnership, and Brightwork Development, Inc. dated October 19, 1992,
as amended May 26, 1994 to substitute the Company as the tenant,
incorporated by reference to Exhibit 10.15 of the 1994 Form 10-K.
10.16 Employee Stock Purchase Plan, incorporated by reference from Exhibit
10.16 of the 1994 Form 10-K.
18
<PAGE> 19
McAFEE ASSOCIATES, INC.
Form 10-Q, September 30, 1996
EXHIBIT INDEX
10.17 Lease Agreement between John Arrillaga, Trustee, UTA dated 7/20/77
(John Arrillaga Separate Property Trust), Richard Peery, Trustee, UTA
dated 7/20/77 (Richard T. Peery Separate Property Trust) and the
Company dated November 2, 1994, incorporated by reference to Exhibit
10.17 of the 1994 Form 10-K.
10.18 Offer letter to Richard Kreysar dated December 16, 1994, incorporated
by reference to Exhibit 10.18 of the 1994 Form 10-K.
10.19 Offer letter to Dennis Cline dated September 21, 1994, incorporated by
reference to Exhibit 10.19 of the 1994 Form 10-K.
10.20 401(k) Plan, incorporated by reference to Exhibit 10.20 of the 1994
Form 10-K.
10.21 Change in control agreement between McAfee and Robert S. Chappelear
dated April 14, 1995, incorporated by reference from Exhibit 10.1 of
the Company's Registration Statement No. 33-93296 on Form S-4 ("the
S-4").
10.22 Change in control agreement between McAfee and Dennis Cline dated
April 14, 1995 incorporated by reference to Exhibit 10.2 of the S-4.
10.23 Change in control agreement between McAfee and Richard D. Kreysar
dated April 14, 1995, incorporated by reference to Exhibit 10.3 of the
S-4.
10.24 Change in control agreement between McAfee and Robert J. Schwei dated
April 14, 1995, incorporated by reference to Exhibit 10.4 of the S-4.
10.25 Change in control agreement between McAfee and R. Terry Duryea dated
May 1, 1995, incorporated by reference to Exhibit 10.5 of the S-4.
10.26 Change in control agreement between McAfee and Peter Watkins dated May
1, 1995, incorporated by reference to Exhibit 10.6 of the S-4.
10.27 Change in control agreement between McAfee and William L. Larson dated
April 14, 1995, incorporated by reference to Exhibit 10.7 of the S-4.
10.28 Management Agreement between McAfee and Saber Software Corporation
dated July 20, 1995, incorporated by reference to Exhibit 10.8 of the
S-4
10.29 Cross Distribution Agreement between McAfee and Saber Software
Corporation dated July 21, 1995, incorporated by reference to Exhibit
10.9 of the S-4.
19
<PAGE> 20
McAFEE ASSOCIATES, INC.
Form 10-Q, September 30, 1996
EXHIBIT INDEX
10.30 Dilg Settlement Agreement and Release and Covenant Not to Sue dated as
of October 24, 1995 between Saber Software Corporation and Dilg
Properties, Inc. ("Dilg"), ContactPerfect Corporation ("CPC"), Jerry
D. Blackburn, J. Robert Dilg, and Alvin D. Gilbert, incorporated by
reference to Exhibit 10.30 of the Company's Form 10-Q for the Quarter
Ended September 30, 1995 (the "September 30, 1995 10-Q").
10.31 Sale and Purchase Agreement Relating to 850 shares between Patrick
Legranche and the Company dated July 27, 1995 incorporated by
reference to Exhibit 10.31 of the Company's September 30, 1995 10-Q.
10.32 Sales and Purchase Agreement Relating to 1,650 shares between Serge
Gauthron, Patrick Legranche, Valorisation Informatique de Fichiers and
the Company dated July 27, 1995 incorporated by reference to Exhibit
10.32 of the Company's September 30, 1995 10-Q.
10.33 Common Stock Purchase Warrant to purchase 10,000 shares of the
Company's Common Stock held by RT Software dated July 27,1995
incorporated by reference to Exhibit 10.33 of the Company's September
30, 1995 10-Q.
10.34 Share Purchase Agreement between International Data Security Limited
(an Australian company), the Company and International Data Security
Limited (an English company) dated September 13, 1995 incorporated by
reference to Exhibit 10.34 of the Company's September 30, 1995 10-Q.
10.35 Agreement and Plan of Merger dated March 6, 1996 and among McAfee
Associates, Inc., McCor Acquisition Corporation and Vycor Corporation,
incorporated by reference to Exhibit 10.35 of the Company's Form 10-K
file for the year ended December 31, 1995 (the "1995 10-K").
10.36 Change of Control Agreement between McAfee and Mark Woodward dated
November 10, 1995, incorporated by reference to Exhibit 10.36 of the
Company's 1995 10-K.
10.37 Confidential Agreement and Release of Claims between McAfee and Robert
Chappaelear dated January 30, 1996 incorporated by reference to
Exhibit 10.37 of the Company's 1995 10-K.
10.38 Sublease Agreement dated November 15, 1995 between the Company and
Digital Video Systems incorporated by reference to Exhibit 10.38 of
the Company's 1995 10-K.
20
<PAGE> 21
McAFEE ASSOCIATES, INC.
Form 10-Q, September 30, 1996
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
10.39 Amendment No. 1 to Lease dated September 27, 1995 by and between the
Company and Arilliga Family Trust and Richard T. Perry Separate
Property Trust, incorporated by reference to Exhibit 10.39 of the
10.40 1995 Stock Incentive Plan, incorporated by reference to Exhibit 10.40
of the Company's Form 10-Q for the Quarter ended March 31, 1996.
10.41 Lease by and between Herndon Associates, a Virginia general
partnership and the Company dated July 22, 1996, incorporated by
reference to Exhibit 10.41 of the Company's Form 10-Q for the Quarter
ended June 30, 1996.
10.42 Purchase contract by and between Interactive Distributed Systems
Software GmbH and the Company effective June 30, 1996. incorporated by
reference to Exhibit 10.42 of the Company's Form 10-Q for the Quarter
ended June 30, 1996.
10.43 Change in control agreement between McAfee and Prabhat K. Goyal
incorporated by reference to Exhibit 10.43 of the Company's Form 10-Q
for the Quarter ended June 30, 1996.
10.44 Combination Agreement by and among the Company, FSA Combination Corp.,
FSA Corporation, and Daniel Freedman, the sole shareholder of FSA
Corporation, dated August 16, 1996, the Registration Rights Agreement,
dated August 30, 1996 by and between the Company and Daniel Freedman,
and the Voting and Exchange Trust Agreement, dated August 30, 1996, by
and among the Company, FSA Combination Corp. and FSA Corporation, all
incorporated by reference to the Corp., Report on Form 8-K, as filed
with the Securities and Exchange Commission on September 24, 1996.
11.1 Computation of Net Income Per Share. 22
27.1 Financial Data Sheet 23
</TABLE>
21
<PAGE> 1
CERTIFICATE OF DESIGNATION
of
SERIES A PREFERRED STOCK
of
McAFEE ASSOCIATES, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
------------------------------------------------
McAfee Associates, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the "Corporation"), hereby certifies that the following resolution was adopted
by the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on August 16, 1996:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Certificate of Incorporation of the Corporation (the "Restated Certificate"),
the Board of Directors hereby creates a series of Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), of the Corporation and hereby states
the designation and number of shares, and fixes the relative rights,
preferences, and limitations thereof as follows:
Designation and Amount. The shares of this series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock") and
the number of shares constituting the Series A Preferred Stock shall be one (1).
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, that no decrease shall reduce the number of shares of
Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants exercisable into Series A Preferred
Stock.
<PAGE> 2
Dividends. The holders of shares of Series A Preferred Stock
shall not be entitled to receive any dividends.
Liquidation. In the event of any liquidation, dissolution or
winding up of the Corporation, the holders of Series A Preferred Stock shall not
be entitled to receive any assets of the Corporation available for distribution
to its stockholders.
Voting Rights. Except as otherwise required by law or this
Restated Certificate, the holder of the share of Series A Preferred Stock shall
have a number of votes equal to the number of shares of Common Stock of the
Corporation issuable upon exchange of then outstanding exchangeable shares
("Exchangeable Shares") of FSA Corporation, an Alberta corporation, which are
not owned by the Corporation or any direct or indirect subsidiary of the
Corporation in each case for the election of directors and on all other matters
submitted to a vote of stockholders of the Corporation. In respect of all
matters concerning the voting of shares, the Common Stock and Series A Preferred
Stock shall vote as a single class and such voting rights shall be identical in
all respects.
Redemption. At such time as the Series A Preferred Stock has
no votes attached to it because there are no Exchangeable Shares outstanding
which are not owned by the Corporation or its direct or indirect subsidiaries,
the Series A Preferred Stock shall be redeemable at par value at any time at the
option of the Corporation upon ten days prior written notice to the holder of
such share.
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation by its Secretary this 16th day of August,
1996.
McAFEE ASSOCIATES, INC.
By: /s/ R. Terry Duryea
------------------------------------
R. Terry Duryea, Secretary
2
<PAGE> 1
EXHIBIT 11.1
MCAFEE ASSOCIATES, INC.
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 48,083 45,531 47,260 45,380
for the period
Dilutive effect of options, net 5,937 3,987 5,550 3,112
------- ------- ------- ------
Shares used in per share calculation 54,020 49,518 52,810 48,492
======= ======= ======= =======
Net income $12,898 $ 430 $23,381 $ 7,606
======= ======= ======= =======
Net income per share $ 0.24 $ 0.01 $ 0.44 $ 0.16
======= ======= ======= =======
</TABLE>
Note: Fully diluted net income per share is substantially the same as net income
per share.
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 68,246
<SECURITIES> 45,596
<RECEIVABLES> 19,355
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 143,545
<PP&E> 8,865
<DEPRECIATION> (2,802)
<TOTAL-ASSETS> 158,642
<CURRENT-LIABILITIES> 36,512
<BONDS> 0
0
0
<COMMON> 220
<OTHER-SE> 119,118
<TOTAL-LIABILITY-AND-EQUITY> 158,642
<SALES> 121,902
<TOTAL-REVENUES> 121,902
<CGS> 7,220
<TOTAL-COSTS> 79,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,164)
<INCOME-PRETAX> 44,634
<INCOME-TAX> 0
<INCOME-CONTINUING> 44,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,381
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
