<PAGE>
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 September 30, 1997
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)
2805 Bowers 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[_]
51,259,448 shares of the registrant's common stock, $0.01 par value, were
outstanding as of September 30, 1997.
THIS DOCUMENT CONTAINS 35 PAGES.
THE EXHIBIT INDEX IS ON PAGE 32.
<PAGE>
McAFEE ASSOCIATES, INC.
FORM 10-Q, September 30, 1997
-------
C O N T E N T S
Item Number Page
- ----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1997 and December 31, 1996........................ 3
Condensed Consolidated Statements of Income:
Three and nine months ended September 30, 1997 and 1996......... 4
Condensed Consolidated Statements of Cash Flows:
Nine months ended September 30, 1997 and 1996................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 10
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 30
SIGNATURES ............................................................... 31
EXHIBIT INDEX ............................................................ 32
2
<PAGE>
McAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
---------------------------------------
-------
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
September 30 December 31
1997 1996
------------ -----------
(Unaudited)
---------
Current assets:
Cash and cash equivalents $134,564 $ 76,363
Marketable securities 34,987 50,368
Accounts receivable, net of allowances for doubtful
accounts and returns of $4,038 and $3,027 at September 30, 1997
and December 31, 1996 63,271 25,930
Prepaids and other current assets 8,659 5,097
Prepaid taxes - 1,869
Deferred taxes 3,977 4,321
-------- --------
Total current assets 245,458 163,948
Long term investments 68,193 14,021
Fixed assets, net 17,532 7,486
Intangibles, net 3,369 1,001
Deferred taxes 6,840 7,719
Other assets 1,101 310
-------- --------
Total assets $342,493 $194,485
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 9,455 $ 5,379
Accrued liabilities 18,348 15,734
Income taxes payable 3,028 -
Deferred revenue 31,479 20,182
-------- --------
Total current liabilities 62,310 41,295
Deferred revenue, less current portion 6,129 3,663
-------- --------
Total liabilities 68,439 44,958
-------- --------
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: 51,259,448 shares at September 30, 1997 and
48,662,489 at December 31, 1996 509 488
Additional paid-in capital 134,087 77,259
Retained earnings 139,458 71,780
-------- --------
Total stockholders' equity 274,054 149,527
-------- --------
Total liabilities and stockholders' equity $342,493 $194,485
======== ========
</TABLE>
The accompanying notes are an integral part of these conensed consolidated
financial statements.
3
<PAGE>
McAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
---------
(Dollars in thousands, except per share data)
-------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $88,332 $47,290 $247,960 $121,902
Operating costs and expenses:
Cost of net revenue 6,528 2,703 18,864 7,220
Research and development 12,268 5,650 33,804 14,212
Marketing and sales 25,599 13,485 72,878 34,664
General and administrative 6,472 4,202 18,327 9,876
Amortization of intangibles 271 646 588 2,295
Acquisition and other unusual costs - - - 11,165
------- ------- -------- --------
Total operating costs and expenses 51,138 26,686 144,461 79,432
------- ------- -------- --------
Income from operations 37,194 20,604 103,499 42,470
Other income 2,290 922 5,936 2,164
------- ------- -------- --------
Income before income taxes 39,484 21,526 109,435 44,634
Provision for income taxes 15,004 8,628 41,585 21,253
------- ------- -------- --------
Net income $24,480 $12,898 $ 67,850 $ 23,381
======= ======= ======== ========
Net income per share $0.45 $0.24 $1.26 $0.44
======= ======= ======== ========
Shares used in per share calculation 54,267 54,020 54,012 52,810
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these conensed consolidated
financial statements.
4
<PAGE>
McAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------
(Dollars in thousands)
--------------------
-----
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 67,850 $ 23,381
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 4,130 5,097
Provision for doubtful accounts receivable
and allowance for returns 1,011 288
Unrealized gain on investments 279 -
Deferred taxes 1,223 924
Changes in assets and liabilities:
Accounts receivable (38,352) 1,250
Prepaids and other assets (4,353) (377)
Refundable income taxes 4,897 -
Accounts payable and accrued liabilities 6,690 5,790
Prepaid income taxes - 2,148
Deferred revenue 13,763 (6,964)
-------- --------
Net cash provided by operating activities 57,138 31,537
-------- --------
Cash flows from investing activities:
Purchase of intangibles (253) -
Purchase of Compusul (2,709) -
Purchases of investment securities, net (38,791) (20,538)
Additions to fixed assets (13,582) (5,466)
Net liabilities of Jade K.K. acquired under pooling transaction (1,122) -
Net assets of SHBV acquired under pooling transaction 925 -
-------- --------
Net cash used in investing activities (55,532) (26,004)
-------- --------
Cash flows from financing activities:
Effect of exchange rate fluctuations (254) 92
Stock option exercises 21,721 9,630
Tax benefit from exercise of nonqualified stock options 35,128 22.692
-------- --------
Net cash provided by financing activities 56,595 32,414
-------- --------
Net increase in cash and cash equivalents 58,201 37,947
Cash and cash equivalents at beginning of period 76,363 30,299
-------- --------
Cash and cash equivalents at end of period $134,564 $ 68,246
======== ========
</TABLE>
The accompanying notes are an integral part of these conensed consolidated
financial statements.
5
<PAGE>
McAFEE ASSOCIATES, INC.
NOTES TO CONDENSED 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 results of operations for the three and nine month
periods ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year or for any future periods. The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 1997. The balance sheet at December 31, 1996 has
been derived from the audited financial statements as of and for the year
ended December 31, 1996, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
2. Recent Accounting Pronouncements
--------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
Per Share", which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 requires
restatement of all prior-period earnings per share data presented after the
effective date. FAS 128 will not have a material impact on the Company's
financial position, results of operations or cash flows.
In July 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income", which requires a separate financial statement showing changes in
comprehensive income is effective for financial statements issued for fiscal
years beginning after December 15, 1997. SFAS 130 requires reclassification
of all prior-period financial statements for comparative purposes.
In July 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of
an Enterprise and Related Information", which requires companies to report
certain information about operating segments, including certain information
about their products, services, the geographic areas in which they operate
and their major customers. This statement supersedes FASB Statements Nos.
14, 18, 24 and 30. SFAS 131 is effective for financial statements for fiscal
years beginning after December 15, 1997.
6
<PAGE>
3. Derivatives
-----------
During the quarter ended September 30, 1997, the Company began using
forward foreign exchange contracts to hedge certain assets denominated in
foreign currencies. For these instruments, risk reduction is assessed on a
transaction basis and the instruments are designated as, and effective as a
hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on these hedges
are included in the carrying amount of the assets and are ultimately
recognized in income. If a hedging instrument ceases to qualify as a hedge,
any subsequent gains and losses are recognized currently in income. The
Company does not use any derivatives for trading or speculative purposes. If
a derivative ceases to qualify for hedge accounting, it is accounted for on
a mark to market basis.
4. Litigation
-----------
On April 24, 1997, the Company was served by Symantec Corporation
("Symantec") with a suit filed in the United States District Court, Northern
District of California, San Jose Division, alleging copyright infringement
and unfair competition by McAfee. Symantec alleges that the Company's
computer software program called "PC Medic 1997" copied portions of
Symantec's computer software program entitled "CrashGuard." Symantec's
complaint sought injunctive relief and unspecified money damages. On July
20, 1997, Symantec sought leave to amend its complaint to include additional
allegations of copyright infringement and trade secret misappropriation
pertaining to the Company's "VirusScan" product. Symantec sought injunctive
relief and unspecified money damages. On October 6, 1997, the Court issued
an order granting Symantec's motion to amend its complaint and enjoining
McAfee from shipping any product containing either an approximately 30-line
routine found in one Symantec product or an approximately 100-line routine
found in a Symantec DLL. The Court's order expressly stated that "the court
is not enjoining the sale or distribution of McAfee's current product."
Trial is set for September 1998.
On May 13, 1997, Trend Micro Inc. ("Trend") filed suit in United States
District Court for the Northern District of California against both the
Company and Symantec Corporation. Trend alleges that the Company's
"WebShield" and "GroupShield" products infringe a Trend patent which issued
on April 22, 1997. Trend's complaint seeks injunctive relief and unspecified
money damages. On June 6, 1997, the Company filed its answer denying any
infringement. The Company also filed a counterclaim accusing Trend of unfair
competition, false advertising, trade libel, and interference with
prospective economic advantage. The case is in the initial stages of
discovery. A patent claim interpretation hearing before the Court is set for
April 28, 1998. The Court has not yet set a date for trial.
On September 15, 1997, the Company was named as a defendant in a patent
infringement action filed by Hilgraeve Corporation ("Hilgraeve") in the
United States District Court Eastern District of Michigan. Hilgraeve alleges
that a product (not yet disclosed) of the Company infringes a Hilgraeve
patent which was issued on June 7, 1994. On October 13, 1997, the Company
filed an answer and counterclaim to the Hilgraeve complaint. Hilgraeve's
action seeks injunctive relief and unspecified money damages. The case is in
initial stages of discovery. The Court has not yet set a trial date.
7
<PAGE>
5. Subsequent Events
-----------------
On October 13, 1997, the Company entered into an Agreement and Plan of
Reorganization pursuant to which a wholly owned subsidiary of the Company
will merge (the "Merger") with and into Network General Corporation
("Network General"), a provider of network fault and performance management
solutions. In the Merger, each outstanding share of common stock of Network
General will be converted into 0.4167 shares of common stock of the Company.
The Company will also assume all outstanding options, warrants and other
rights to acquire Network General common stock. The Merger is subject to
approval by the stockholders of both companies and certain other conditions,
including the receipt of opinions that the Merger may be accounted for as a
pooling of interests.
If the Merger is accounted for under the pooling of interests method,
historical financial data in future reports will be restated to include
Network General data. The following unaudited pro forma summary presents the
combined consolidated results of operations as if the Merger had been
completed on January 1, 1994.
(unaudited pro forma)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------
1996 1995 1994 1997 1996
-------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenue $421,794 $278,910 $192,692 $438,888 $282,913
Net income 64,110 42,341 28,016 52,540 52,242
Net income
per share $ 0.89 $ 0.62 $ 0.43 $ 0.73 $ 0.73
</TABLE>
Network General has a fiscal year that ends on March 31 of each year. For
purposes of the pro forma summary financial data, Network General's
consolidated statement of income (loss) for each of the three fiscal years
ended March 31, 1997, and for the nine month periods ended September 30,
1997 and 1996, have been combined with the Company's consolidated statement
of income for each of the three fiscal years ended December 31, 1996 and the
nine month periods ended September 30, 1997 and 1996 (as a result Network
General's results of operations for the three month period ended March 31,
1997 are included in the pro forma combined statements of income for both
the twelve months ended December 31, 1996 and the nine months ended
September 30, 1997, and the results of operations for the three months ended
March 31, 1996 are included in the pro forma combined statements of income
for both the twelve months ended December 31, 1995 and the nine months ended
September 30, 1996). Revenues and net income (loss) of Network General for
the quarters ended March 31, 1997 and 1996 were $68.0 million and $(6.4)
million and $53.8 million and $10.4 million, respectively.
The Company and Network General estimate they will incur direct
transaction costs of approximately $15,000,000 associated with the Merger,
consisting of transaction fees for investment bankers, attorneys,
accountants, financial printing and other related charges. These
nonrecurring transaction costs will be charged to operations upon
consummation of the Merger. It is expected that following the Merger, the
Company and Network General will incur an additional
8
<PAGE>
significant charge to operations, which is not currently reasonably
estimable, to reflect costs associated with integrating the two companies.
This charge has not been reflected in the pro forma financial data. There
can be no assurance that the combined company will not incur additional
charges to reflect costs associated with the Merger or that management will
be successful in its efforts to integrate the operations of the two
companies.
Pursuant to Section 7.3 of the Reorganization Agreement, the
Reorganization Agreement may be terminated by either party under certain
circumstances. Each of McAfee and Network General has agreed that if the
Merger is not consummated as a result of certain specified events, it will
pay to the other party a termination fee of $30.0 million. Payment of the
fees described in this paragraph shall not be in lieu of damages incurred
in the event of material and willful breach of the Reorganization
Agreement.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break up" fees described
above) could have a material adverse effect on McAfee's results of
operations.
9
<PAGE>
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.
This Report on Form 10-Q contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future. All forward-looking statements included in
this Report on Form 10-Q are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those set forth in "Risk
Factors" and elsewhere in this Report on Form 10-Q.
OVERVIEW
McAfee Associates, Inc. ("McAfee" or the "Company") licenses network
security and management products, including help desk and storage management
software. McAfee generally recognizes 80% of license fees for electronically
distributed anti-virus software at the time of the licensing transaction. In
addition to direct subscription and perpetual licenses, McAfee 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 October 13, 1997, the Company entered into an Agreement and Plan of
Reorganization pursuant to which a wholly owned subsidiary of the Company will
merge (the "Merger") with and into Network General Corporation ("Network
General"). The Merger is subject to approval by the stockholders of McAfee and
Network General and certain other conditions. The Company's historical results
of operation described below do not give effect to the Merger. There can be no
assurance that the Merger will be consummated and, in addition to risks
generally associated with acquisitions, there are a number of risks specifically
associated with the consummation of the Merger. See "Risk Factors--Risks
Associated with the Proposed Network General Merger." In addition, contingent
upon consummation of the Merger and McAfee stockholder approval, the Company
plans to change its name to "Network
10
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
Associates, Inc." For more information concerning the Merger, readers should see
the Joint Proxy Statement/Prospectus filed by McAfee and Network General with
the Securities and Exchange Commission on October 31, 1997.
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, distributor inventory
levels and return rates, Company inventory levels, 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. In addition, revenue generated through distribution channels tends to be
non-linear and this may cause the Company's revenue to fluctuate in the future.
The Company's results for any given period should not be relied upon as
indicative of future performance. See "Risk Factors-- Variability of Quarterly
Operating Results.
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. See "Risk
Factors -- Volatility of Stock Price" and "Risk Factors -- Risks Associated with
Failure to Manage Growth; Potential Future Acquisitions."
11
<PAGE>
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, 1997 and
1996:
<TABLE>
<CAPTION>
Three months ended Nine Months Ended
----------------------------- ---------------------------
September 30 September 30
------------ ------------
1997 1996 1997 1996
--------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of net revenue 7.4 5.7 7.6 5.9
Research and development 13.9 11.9 13.6 11.7
Marketing and sales 29.0 28.5 29.4 28.4
General and administrative 7.3 8.9 7.4 8.1
Amortization of intangibles 0.3 1.4 0.3 1.9
Acquisition and other unusual costs - - - 9.2
----- ----- ----- -----
Total operating costs and expenses 57.9 56.4 58.3 65.2
----- ----- ----- -----
Income from operations 42.1 43.6 41.7 34.8
Other income 2.6 1.9 2.4 1.8
----- ----- ----- -----
Income before income taxes 44.7 45.5 44.1 36.6
Provision for income taxes 17.0 18.2 16.8 17.4
----- ----- ----- -----
Net income 27.7% 27.3% 27.4% 19.2%
===== ===== ===== =====
</TABLE>
Net Revenue. Net revenue increased 86.8% to $88.3 million in the
three months ended September 30, 1997 from $47.3 million in the three months
ended September 30, 1996. For the nine month period ended September 30, 1997,
net revenue increased 103% to $248.0 million from $121.9 million in the same
period in 1996. This increase is largely attributable to increased revenue from
12
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
licenses for anti-virus/security products and renewal of expiring anti-virus
licenses and, to a lesser extent, licenses for network management and help desk
(McAfee Service Desk) products. The Company has experienced increased price
competition for its products and should competition increase in the future, the
Company may experience reduced average selling prices for the its products.* Due
to competitive and other factors (such as a maturing client anti-virus market
and an increasingly higher base from which to grow), the Company's historic
growth rate will be difficult to maintain or exceed.* In response to increasing
price competition and in an effort to maintain average selling prices, the
Company introduced its anti-virus/security product suites. There can be no
assurance that this strategy will be successful in the long term.* In January
1997, the Company implemented a licensing program with its distribution and
corporate channel resellers (such as value added resellers (VARs) and system
integrators) in an effort to increase sales through indirect channels. There can
be no assurance that this licensing program will be successful.* If the Merger
with Network General is consummated, the combined company is expected to have an
overall lower growth rate than the Company's historic growth rate. Network
General's business has historically grown at a lower rate than the Company's
historic growth rate.*
Net revenue from international sales accounted for approximately 32% and 16%
of net revenue for the three months ended September 30, 1997 and 1996,
respectively. For the nine month periods ended September 30, 1997 and 1996, the
percentage of net revenue from international licenses was approximately 28% and
18%, respectively. These increases were due to increased sales through
traditional distribution channels as well as the expansion of the Company's
international operations in Japan, the Netherlands and Brazil as a result of the
acquisition of Jade KK and a former distributor Schuijers Holding B.V. ("SHBV")
in February 1997 and Compusul Consultoria e Comercio de Informatica Ltda. in
April 1997. The Company denominates certain international license fees in local
currencies, primarily European currencies. As a result, the Company is subject
to the risks associated with fluctuations in currency exchange rates. In July
1997, the Company began to manage potential foreign currency fluctuations using
non-leveraged forward currency contracts. 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 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 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
- -------------------------------------------------------------------------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that McAfee's actual future performance will meet
McAfee's current expectations. See the Risk Factors on page 19 for discussion of
certain factors that could effect future performance.
13
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
Company's products. Also, despite the Company's dependence in certain
international markets 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. See
"Risk Factors -- Risks Related to International License Revenue."
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 varies among the Company's products, because, in part, products may
include third party technology on which royalties are payable. The cost of net
revenue also differs between international and domestic sales as international
sales are primarily through traditional distribution channels and costs of
media, manuals and packaging for products sold internationally tend to be
higher.
For the three months ended September 30, 1997 and 1996, the Company's cost of
net revenue was $6.5 million and $2.7 million, respectively. The cost of net
revenue for the nine month period ended September 30, 1997 increased to $18.9
million from $7.2 million in the same period in 1996. As a percentage of net
revenue, cost of net revenue increased to 7.4% from 5.7% in the three month
period ended September 30, 1997 and 1996, respectively and increased to 7.6%
from 5.9% in the nine month period ended September 30, 1997 and 1996,
respectively. 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 increases in cost as a percent of revenue is
attributable to an increasing percentage of the Company's products being
distributed through traditional distribution channels, partially as a result of
the increase in the overall percentage of international sales. To the extent
this trend continues, the Company's cost of net revenue would increase and,
accordingly, gross margins would decrease.* See "Risk Factors -- Variability of
Quarterly Operating Results." Should the Merger be completed, the cost of net
revenue of the combined company would represent a larger percentage of net
revenue as Network General has (on a percentage of revenue basis) a higher cost
of net revenue.
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 117% to $12.3 million
in the three months ended September 30, 1997 from $5.7 million in same period in
1996.
- -------------------------------------------------------------------------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that McAfee's actual future performance will meet
McAfee's current expectations. See the Risk Factors on page 19 for discussion of
certain factors that could effect future performance.
14
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
For the nine month period ended September 30, 1997, research and development
expenditures increased 138% to $33.8 million from $14.2 million in the same
period in 1996. These increases were primarily due to growth in the Company's
product development staff, increased use of third-party contractors and
increased development activity mainly in security products, server based
products, McAfee Service Desk, as well as the transition to the Company's
VirusScan 3.0 product. As a percentage of net revenue, research and development
expenses increased to 13.9% for the three months ended September 30, 1997 from
11.9% for the same period in 1996 and increased to 13.6% in the nine months
ended September 30, 1997 from 11.7% for the same period in 1996. 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 will depend in large part upon its ability to
continue to offer a broad range of anti-virus/security and network
management/help desk 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 anti-virus/security and network management/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.* See "Risk Factors -- Rapid Technological Change; Risks
Associated with Product Development."
Marketing and Sales. Marketing and sales expenses consist principally of
salary, commissions and benefits for marketing, sales and customer support
personnel and costs associated with advertising and promotions. Marketing and
sales expenses increased 90% to $25.6 million in the three months ended
September 30, 1997 from $13.5 million in the three months ended September 30,
1996. For the nine month period ended September 30, 1997, marketing and sales
expenditures increased 110% to $72.9 million from $34.7 million in the same
period in 1996. These increases principally reflect growth in the Company's
sales and marketing staff, including the expansion of the Company's
international operations, expanded coverage in indirect channels in an effort to
grow indirect sales, and increased advertising and promotional expenses.
- -------------------------------------------------------------------------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that McAfee's actual future performance will meet
McAfee's current expectations. See the Risk Factors on page 19 for discussion of
certain factors that could effect future performance.
15
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
As a percentage of net revenue, marketing and sales expenses increased to
29.0% in the three months ended September 30, 1997, from 28.5% in the same
period in 1996, and increased to 29.4% in the nine months ended September 30,
1997 from 28.4% in the same period in 1996. These increases principally reflect
greater proportionate growth in the Company's sales and marketing staff and
advertising and promotional expenses as compared to revenue growth. 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, accounting and other professional fees. General and
administrative costs increased 54% to $6.5 million in the three months ended
September 30, 1997 from $4.2 million in the three months ended September 30,
1996. For the nine months ended September 30, 1997, general and administrative
expenditures increased 86% to $18.3 million from $9.9 million. These increases
are largely a result of a concerted effort to strengthen the infrastructure of
the Company both domestically and internationally to accommodate its growth in
revenue. As a percentage of net revenue, general and administrative expenses
decreased to 7.3% in the three months ended September 30, 1997 from 8.9% in the
same period in 1996, and decreased to 7.4% in the nine months ended September
30, 1997 from 8.1% in the same period in 1996. 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 $271,000 and $646,000 of
amortization related to intangibles in the three months ended September 30, 1997
and 1996, respectively, and $588,000 and $2.3 million in the nine months ended
September 30, 1997 and 1996, respectively. Intangibles consist of purchased
goodwill and certain technology acquired through acquisitions.
Other Income. Other income consists primarily of interest income earned on the
Company's cash and short and long term investments and foreign exchange gains.
Other income totaled $2.3 million and $922,000 in the three months ended
September 30, 1997 and 1996, respectively, and $5.9 million and $2.2 million in
the nine months ended September 30, 1997 and 1996 respectively. These increases
in the Company's other income relate to higher interest income resulting from
higher average balances invested.
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, 1997 and 1996, was 38.0%
- -------------------------------------------------------------------------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that McAfee's actual future performance will meet
McAfee's current expectations. See the Risk Factors on page 19 for discussion of
certain factors that could effect future performance.
16
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
and 40.1%, respectively. For the nine month periods ended September 30, 1997 and
1996, the effective tax rate was 38.0% and 47.6%, respectively. The Company's
effective tax rate reflects the non-deductibility for tax purposes of $11.2
million in acquisition costs expensed during the nine months ended September 30,
1996, of which $8.3 million was expensed in the three months ended March 31,
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, 1997, the Company had $134.6 million in cash and cash
equivalents and $103.2 million in marketable securities, for a combined total of
$237.7 million.
Net cash provided by operating activities was $57.1 million and $31.5 million
for the nine months ended September 30, 1997 and 1996, respectively. Net cash
provided by operating activities for the nine months ended September 30, 1997
consisted primarily of net income, an increase in accounts payable and accrued
liabilities together with an increase in deferred revenue offset by an increase
in accounts receivable and prepaids and other assets. Net cash provided by
operating activities for the nine months ended September 30, 1996 consisted
primarily of net income plus non-cash expenses plus an increase in accounts
payable and accrued liabilities offset by decreases in accounts receivable,
prepaid income taxes, deferred taxes and deferred revenue.
At September 30, 1997, the Company's accounts receivable balance as a
percentage of sales for the quarter then ended increased over the prior period.
This increase was due to, among other factors, the Company's increased emphasis
on international sales (typically having longer payment terms); a higher
percentage of indirect sales through indirect channels; and a shift in the
Company's product mix to more server/enterprise based products. The Company
expects this trend to continue into the first quarter of fiscal 1998.* With an
increase in business through indirect channels, the Company's receivable
collection experience has become more dependent on the longer payment cycle for
VARs and system integrators. To address this increase in accounts receivable
and to improve cash flow, the Company may, among other things, take actions to
encourage earlier payment of receivables or sell receivables. To the extent that
the Company's receivable balance increases, the Company will be subject to
greater general credit risks with respect thereto.*
- -------------------------------------------------------------------------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that McAfee's actual future performance will meet
McAfee's current expectations. See the Risk Factors on page 19 for discussion of
certain factors that could effect future performance.
17
<PAGE>
McAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----
Net cash used in investing activities was $55.5 million in the nine months
ended September 30, 1997, primarily reflecting purchases of marketable
securities and fixed assets as well as goodwill from the acquisition of
Compusul. Net cash used by investing activities in the nine months ended
September 30, 1996 was $26.0 million, primarily reflecting purchases of
marketable securities.
Net cash provided by financing activities was $56.6 million and $32.4 million
in the nine months ended September 30, 1997 and 1996, respectively, consisting
primarily of the proceeds and tax benefits associated with the exercise of
nonqualified stock options.
Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each of
Network General and McAfee has agreed that if the Merger is not consummated as a
result of certain specified events, it will pay to the other party a termination
fee of $30.0 million. Payment of the fees described in this paragraph shall not
be in lieu of damages incurred in the event of material and willful breach of
the Reorganization Agreement.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break-up" fees described above)
could have a material adverse effect on McAfee's results of operations.*
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.*
- -------------------------------------------------------------------------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that McAfee's actual future performance will meet
McAfee's current expectations. See the Risk Factors on page 19 for discussion of
certain factors that could effect future performance.
18
<PAGE>
RISK FACTORS
The following risk factors should be considered in conjunction with the
information in this Report on Form 10-Q.
Variability of Quarterly Operating Results. McAfee's licensing activity and
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, distributor inventory levels and
return rates, McAfee inventory levels, upgrades or updates by McAfee or its
competitors, changes in product prices, changes in product mix, seasonality,
trends in the computer industry, general economic conditions, extraordinary
events such as acquisitions or litigation and the occurrence of unexpected
events. Because of the nature of its distribution methods, McAfee generally
cannot predict when a user will license its products. Historically, renewals
have accounted for a significant portion of McAfee's net revenue; however, there
can be no assurance that McAfee will be able to sustain historic renewal rates
in the future.
The operating results of many software companies reflect seasonal trends, and
McAfee's business, financial condition and results of operations may be affected
by such trends in the future. Such 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. The timing of customer orders may vary from
quarter to quarter. For example, orders in the summer often occur at the end of
the quarter. This may affect the Company's receivable balance and resultant
receivable balance as a percentage of sales, as well as the Company's ability to
ship orders (at which time it would recognize the related revenue). The Company
has had significant growth in net revenue and net income in absolute terms,
however the Company's growth rate has slowed in recent periods. The Company has
experienced and expects to continue to experience increased price competition
for its products and expects competition to increase in the near-term, which may
result in reduced average selling prices for the Company's products in the
future.* Due to these and other factors (such as a maturing anti-virus market
and an increasingly higher base from which to grow), the Company's historic
growth rate will be difficult to maintain or exceed.* In addition, although the
Company has historically experienced greater order growth rates as compared to
revenue growth rates in sequential quarters, the Company has seen a general
convergence of these growth rates. In January 1997, the Company entered into a
licensing program with its distribution and corporate channel resellers (such as
value added resellers (VARs) and system integrators) in an effort to increase
sales through indirect channels. There can be no assurance that this licensing
program will be successful.
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 revenue fluctuates
slightly on a quarter to quarter basis depending on the percentage of revenue
that is distributed electronically versus traditional channels. As a percentage
of net revenue, cost of net revenue increased to 7.6% from 5.9% in the nine
19
<PAGE>
month periods ended September 30, 1997 and 1996 respectively. 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. See "Results of
Operations -- Cost of Net Revenue."
Risk of Inclusion of Network Management and Security Functionality in Other
Software. In the future, vendors of operating system software or other software
(such as firewall or electronic mail software) may continue to enhance their
products (including separate products that are bundled together) to include
functionality that is currently provided most often by network security and
management software. This enhancement could be achieved through the addition of
functionality to operating system software or other software or the bundling of
network security and management software with operating system software or other
products. For example, Microsoft introduced limited anti-virus functionality
into MS-DOS versions in 1993. The widespread inclusion of the functionality of
McAfee's products, and of the functionality of the network security or
management products, as standard features of operating system software or other
software could render McAfee's products obsolete and unmarketable, particularly
if the quality of such functionality were comparable to that of McAfee's
products. Furthermore, even if the network security and/or management
functionality provided as standard features by operating systems or other
software is more limited than that of McAfee's products, there can be no
assurance that a significant number of customers would not elect to accept such
functionality in lieu of purchasing additional software. If McAfee was unable
to develop new network security and management products to further enhance
operating systems or other software and to replace successfully any obsolete
products, McAfee's business, financial condition and results of operations would
be materially adversely affected.
Rapid Technological Change; Risks Associated with Product Development. The
network security and management market is highly fragmented and is characterized
by ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. McAfee's success depends upon its ability to
offer a broad range of network security and management software products, to
continue to enhance existing products, to develop and introduce in a timely
manner new products that take advantage of technological advances, and to
respond promptly to new customer requirements. While McAfee believes that it
currently offers one of the broadest product lines in the network management and
security market, this market is continuing to evolve and customer requirements
are continuing to change. As the market evolves and competitive pressures
increase, McAfee believes that it will need to further expand its product
offerings. McAfee has identified a number of enhancements to its existing
product offerings which it believes are important to its continued success in
the network security and management market. There can be no assurance that
McAfee will be successful in developing and marketing, on a timely basis,
enhancements to its existing products or new products, or that its new products
will adequately address the changing needs of the marketplace. Failure by
McAfee in any of these areas could materially and adversely affect its business,
financial condition and results of operations. In addition, from time to time,
McAfee or its competitors may announce new products with new or additional
capabilities or technologies. Such announcements of new products could have the
potential to replace or shorten the life cycles of McAfee's existing products
and to cause customers to defer purchasing McAfee's existing products.
20
<PAGE>
McAfee has in the past experienced delays in software development, and there
can be no assurance that McAfee will not experience delays in connection with
its current or future product development activities. Software products as
complex as those offered by McAfee may contain undetected errors or version
compatibility issues, particularly when first introduced or when new versions
are released, resulting in loss of or delay in market acceptance. For example,
the Company recently experienced compatibility issues in connection with its
recent NetShield upgrade, and also McAfee's anti-virus software products have in
the past falsely detected viruses that did not actually exist. See "Risk Factors
--Risk of False Detection of Viruses." Delays and difficulties associated with
new product introductions, performance or enhancements could have a material
adverse effect on McAfee's business, financial condition and results of
operations.
In addition to developing new products, McAfee's internal development staff
is focused on developing upgrades and updates to existing products and modifying
and enhancing acquired products. Future upgrades and updates may, among other
things, include additional functionality, respond to user problems or address
issues of compatibility with changing operating systems and environments.
McAfee believes that the ability to provide these upgrades and updates to users
frequently and at a low cost is key to its success. In particular, the
proliferation of new and changing viruses makes it imperative to update anti-
virus products frequently in order for the products to avoid obsolescence.
Failure to release such upgrades and updates on a timely basis could have a
material adverse effect on McAfee's business, financial condition and results of
operations. There can be no assurance that McAfee will be successful in these
efforts. In addition, future changes in Windows 95, Windows NT, NetWare or other
popular operating systems may result in compatibility problems with McAfee's
products. Further, delays in the introduction of future versions of operating
systems or lack of market acceptance of future versions of operating systems
would result in a delay or a reduction in the demand for McAfee's future
products and product versions which are designed to operate with such future
versions of operating systems. McAfee's failure to introduce new products in a
timely manner that are compatible with operating systems and environments
preferred by desktop computer users would have a material adverse effect on
McAfee's business, financial condition and results of operations.
McAfee's Dependence on Anti-Virus Product Revenue. McAfee derived a
substantial majority of its net revenue in 1996 and the quarter ended September
30, 1997 from licensing its anti-virus software products, and these products are
expected to continue to account for a substantial portion of McAfee's net
revenue for the foreseeable future. Because of this concentration of revenue, a
decline in demand for, or in the prices of, McAfee's anti-virus software
products as a result of competition, technological change, the inclusion of
anti-virus functionality in operating system or other software or otherwise, or
a maturation in the anti-virus software market could have a material adverse
effect on McAfee's business, financial condition and results of operations. In
addition, while McAfee will continue to focus on growing its anti-virus revenue,
factors such as increased competition, technological change or expanded
operating system functionality could adversely affect McAfee's future rate of
growth.
Dependence on Emergence of Network Management and Network Security Markets.
The markets for McAfee's network management and network security products are
evolving, and their growth depends upon broader market acceptance of network
management and network security software, including help desk software. Although
the number of LAN-attached personal computers
21
<PAGE>
("PCs") has increased dramatically, the network management and network security
markets continue to be emerging markets and there can be no assurance that such
markets will continue to develop or that further market development will be
rapid enough to significantly benefit McAfee. In addition, there are a number of
potential approaches to network management and network security, including
management and security tools incorporated into network operating systems.
Therefore, even if network management and network security tools gain broader
market acceptance, there can be no assurance that McAfee's products will be
chosen by organizations which acquire network management and network security
tools. Furthermore, to the extent that either the network management or network
security market does continue to develop, McAfee expects that competition will
increase. See "Risk Factors -- Competition" and "Risk Factors -- Risk of
Inclusion of Network Security and Management Functionality in Other Software."
Competition. The market for McAfee's products is intensely competitive and
McAfee expects competition to increase in the future. McAfee believes that the
principal competitive factors affecting the market for its products include
performance, functionality, quality, customer support, breadth of product line,
frequency of upgrades and updates, brand name recognition, company reputation
and price. Certain of the criteria upon which the performance and quality of
McAfee's anti-virus software products compete include the number and types of
viruses detected, the speed at which the products run and ease of use. Certain
of McAfee's competitors have been in the network management market longer than
McAfee, and other competitors, such as Symantec, Intel and Seagate, are larger
and have greater name recognition than McAfee. In addition, certain larger
competitors such as Intel, Microsoft and Novell have established relationships
with hardware vendors related to their other product lines. These relationships
may provide them with a competitive advantage in penetrating the OEM market with
their network management products. As is the case in many segments of the
software industry, McAfee has been encountering, and expects to further
encounter, increasing competition. This could reduce average selling prices and,
therefore, profit margins. Competitive pressures could result not only in
sustained price reductions but also in a decline in sales volume, which events
would materially adversely affect McAfee's business, financial condition and
results of operations. In addition competitive pressures will make it difficult
for McAfee to maintain or exceed its historic growth rate.
The network security and management market is highly fragmented with
products offered by many vendors. McAfee's principal competitor is the Peter
Norton Group of Symantec in the network security market and Intel's LanDesk in
the network management market. Other competitors include Computer Associates
International, Inc./Cheyenne Software, Inc., Intel, Seagate, the Dr. Solomon
Group and Trend Micro, Inc., as well as numerous smaller companies and shareware
authors that may in the future develop into stronger competitors or be
consolidated into larger competitors. McAfee also faces competition in the
security market from Cisco Systems, Inc., Security Dynamics, Checkpoint and
other vendors in the encryption/firewall market. In addition, McAfee faces
competition from large and established software companies such as Microsoft,
Novell and Hewlett Packard which offer network management products as
enhancements to their network operating systems. McAfee believes that as the
network management market develops, McAfee may face increased competition from
these large companies, as well as other companies seeking to enter the market.
The trend toward enterprise-wide network management and security solutions may
result in a consolidation of the network management and security market around a
smaller number of vendors who are able to provide the necessary software and
support capabilities.
22
<PAGE>
The Company's principal competitors in the help desk market are Remedy
Corporation and Software Artistry. The Company also faces significant
competition in the storage management market. There can be no assurance that
McAfee will continue to compete effectively against existing and potential
competitors, many of whom have substantially greater financial, technical,
marketing and support resources and name recognition than McAfee. In addition,
there can be no assurance that software vendors who currently use traditional
distribution methods will not in the future decide to compete more directly with
McAfee by utilizing electronic software distribution.
The competitive environment for anti-virus software internationally is similar
to that in North America, although local competitors in specific foreign markets
present stronger competition and shareware authors control a more significant
portion of the European market. The international market for network management
software has developed more slowly than the North American market, although
larger competitors such as Intel and Symantec have begun to penetrate European
markets. Asian markets have significantly lagged behind North America and Europe
in their adoption of networking technology. There can be no assurance that
McAfee will be able to compete successfully in international markets.
Risks Associated with Acquisitions. The software industry has experienced and
is expected to continue to experience a significant amount of consolidation. In
addition, it is expected that McAfee will grow both internally and through
strategic acquisitions. McAfee frequently evaluates potential acquisitions of
complementary businesses, products and technologies. McAfee has consummated a
series of acquisitions since 1995, including the acquisition of the following:
Compusul of Brazil on April 14, 1997, Jade KK of Japan on February 28, 1997, a
controlling interest in FSA Corporation of Canada on August 30, 1996, Vycor
Corporation in the first quarter of 1996 and Saber Software Corporation, Inc. in
the third quarter of 1995. In addition, since 1995 McAfee has acquired a number
of its international distributors, including distributors in France, England and
the Netherlands. Past McAfee acquisitions have consisted of, and future
acquisitions will likely include, acquisitions of businesses, interests in
businesses and assets of businesses. McAfee's past acquisitions have presented,
and any future acquisitions by McAfee could present, challenges to McAfee's
management, such as integration and incorporation of new operations, product
lines, technologies and personnel. If McAfee's management is unable to manage
these challenges, McAfee's business, financial condition and results of
operations could be materially adversely affected. Any acquisition, depending on
its size, could result in a significant charge to earnings, or the use of a
significant portion of McAfee's available cash, or if such acquisition is made
utilizing McAfee's securities, could result in significant dilution to McAfee's
stockholders. McAfee's acquisitions may result in the incurrence or the
assumption of liabilities, including liabilities that are unknown or not fully
known to McAfee at the time of acquisition, which could have a material adverse
effect on McAfee's business, financial condition and results of operations.
Furthermore, there can be no assurance that any products acquired in connection
with such acquisitions will gain acceptance in McAfee's markets. Also there can
be no assurance that McAfee will be able to repatriate funds from these
countries.
Risks Related to the Proposed Network General Merger. In addition to the risks
generally associated with acquisitions, there are a number of significant risks
directly associated with the Company proposed Merger with Network General,
including, without limitation, the following: First, the combined company is
expected to have an overall lower growth rate than McAfee's historic growth
rate. Network General's business has historically grown at a lower rate than
McAfee's historic growth rate. Second, the successful combination of McAfee
and Network General will require substantial
23
<PAGE>
attention from management. The anticipated benefits of the Merger will not be
achieved unless the operations of Network General are successfully combined with
those of McAfee in a timely manner. The difficulties of assimilation may be
increased by the need to integrate personnel and to combine different corporate
cultures and by McAfee's limited personnel, management and other resources. The
successful combination of the two companies will also require integration of the
companies' product offerings and the coordination of their research and
development and sales and marketing efforts. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses and
certain customers may defer purchasing decisions. The diversion of the attention
of management from the day-to-day operations of the combined company, or
difficulties encountered in the transition and integration process, could have a
material adverse effect on the business, financial condition and operations of
the combined company. Third, the negotiation and implementation of the Merger
(as well as expenses related to the proposed name change to "Network Associates,
Inc.") will result in significant pre-tax expenses to McAfee and Network
General. The costs associated with the Merger are expected to negatively impact
results of operations in the quarter ending December 31, 1997 and, possibly the
quarter ending March 31, 1998. See "Note 5 of Notes to Consolidated Financial
Statements." Fourth, the success of the combined company is dependent, in part,
on the retention and integration of key management, technical, marketing, sales
and customer support personnel of Network General. Network General has entered
into severance arrangements with certain members of senior management. The
success of the combined company will depend upon the retention of these
executives during the transitional period following the Merger. There can be no
assurance that such executives will remain with the combined company prior to or
for any specified period after the proposed Merger. The loss of such services
would adversely affect the combined company's business and financial results.
Fifth, the combined company intends to offer a suite of network security and
management products targeted at the enterprise computing market. McAfee
historically has not had a large enterprise account sales force. While Network
General has greater experience than McAfee in the enterprise sales channel, it
has only recently developed its direct sales group focused on large enterprise
network accounts. To succeed in the direct sales channel for the enterprise
market, the combined company will be required, using primarily Network General's
organization as a base, to build a significant direct sales organization and
will be required to attract and retain qualified personnel, which personnel will
require training about, and knowledge of, product attributes for the combined
company's suite of products. There can be no assurance that the combined company
will be successful in building the necessary sales organization or in
attracting, retaining or training these individuals. While the development of a
direct sales channel reduces the combined company's dependence on distributors,
it may lead to conflicts for the same customers, pressure by current and
prospective customers for price reductions on products and, consequently, in
reductions in the combined company's gross margin and operating profit.
Risks Associated with Failure to Manage Growth. The growth of McAfee has
placed, and any further expansion would continue to place, a significant strain
on the Company's limited personnel, management and other resources. McAfee's
ability to manage any further growth, particularly with the expansion of the
Company's international business and growth in indirect channel business, will
require it to attract, train, motivate and manage new employees successfully, to
effectively integrate new employees into its operations and to continue to
improve its operational, financial, management and information systems and
controls. The failure of McAfee's management team to effectively manage any
24
<PAGE>
further growth could have a material adverse effect on McAfee's business,
financial condition and results of operations.
Reliance on Indirect Channels of Distribution. McAfee markets a significant
portion of its products to end-users through distributors. In particular, Ingram
Micro Devices has accounted for 17%, 12% and 12% of net revenue in 1996, 1995
and 1994, respectively. In the quarter ended September 30, 1997, Ingram Micro
Devices accounted for 14% of net revenue. These distributors also sell other
products that are complementary to, or compete with, those of McAfee. While
McAfee encourages its distributors to focus on their respective products through
marketing and support programs, there can be no assurance that these
distributors will not give greater priority to products of other suppliers,
including competitors. Distributors have no long-term obligations to purchase
products from McAfee. In addition, McAfee has begun to recognize revenue for
products sold through distributors upon sales to distributors. Since McAfee's
agreements with its distributors provide for a right of return, revenue
recognized upon sales to distributors is subject to a reserve for returns.
Returns could exceed reserves as a result of distributors holding excessive
McAfee product inventory. Such excessive distributor inventories could result
from among other things, returns to distributors by end users, inaccurate
estimates of end user demand by distributors, increased purchases by
distributors in response to sales incentives or transitions to new products or
versions of products. There can be no assurance that any future reserves for
returns will be adequate.
As the Company's help desk, network management and network security
products become more complex and require additional customer support, the
Company will require distributors, resellers and system integrators to provide a
portion of this increasing level of support. There can be no assurance that such
third parties will be able or willing to provide additional support services.
Moreover, increased reliance on these third parties will reduce the Company's
control over the provision of support services for its products and place a
greater burden on these third parties, which, in turn, could harm the Company's
relationships or reputation with such third parties or the end users of its
products and result in decreased sales of, or prices for, its products.
Proprietary Technology. McAfee's success is heavily dependent upon its
proprietary software technology. McAfee relies on a combination of contractual
rights, trademarks, trade secrets and copyrights to establish and protect
proprietary rights in its software. McAfee has a limited number of patents and
registered only selected copyrights and trademarks. SABER is a trademark of a
subsidiary of the SABRE Group, Inc. and is licensed to McAfee pursuant to a non-
exclusive worldwide, royalty free license. McAfee is not otherwise affiliated
with the SABRE Group, Inc. or SABRE Travel Information Network. In the event
that the license of the trademark were to expire, or be terminated, McAfee could
be required to cease using the trademark on its products, which could involve
significant expense and the possibility of customer confusion. Any loss of
McAfee's ability to use this trademark could have a material adverse effect on
McAfee's business, financial condition and results of operations.
McAfee does not typically obtain signed license agreements from its
corporate, government and institutional customers who license products directly
from McAfee. McAfee includes an electronic version of a "shrink-wrap" license
in all of its electronically distributed software and a printed license in
25
<PAGE>
the box for its products distributed through traditional distribution channels
in order to protect its copyrights and trade secrets in those products. Since
none of these licenses are signed by the licensee, many authorities believe
that such licenses may not be enforceable under many state laws and the laws
of many foreign jurisdictions. In addition, the laws of some foreign countries
either do not protect McAfee's proprietary rights or offer only limited
protection for those rights. There can be no assurance that the steps taken by
McAfee to protect its proprietary software technology will be adequate to
deter misappropriation of this technology. McAfee is aware that a substantial
number of users of its anti-virus products have not paid any registration or
license fees to McAfee. Changing legal interpretations of liability for
unauthorized use of McAfee's software, or lessened sensitivity by corporate,
government or institutional users to avoiding copyright infringement, would
have a material adverse effect on McAfee's business, financial condition and
results of operations.
Subject to consummation of the proposed Network General Merger and
Company stockholder approval, following such Merger, the Company will be
called "Network Associates, Inc." Based on a preliminary review, the Company
believes that there are a number of other companies with similar names. There
can be no assurance that the combined company will be able to enforce rights
in that name, that it will be free to use the name in all jurisdictions or
that there will be no challenges to the use of that name.
There has also been substantial industry litigation regarding
intellectual property rights of technology companies. McAfee has in the past
been subject to litigation related to its intellectual property and, from time
to time, McAfee receives claims that it has infringed the intellectual
property rights of others. There can be no assurance that infringement claims
will not be asserted against McAfee in the future or that the outcome of any
such claims would not have a material adverse effect on McAfee's business,
financial condition and results of operation. In April 1997, Symantec filed a
complaint alleging copyright infringement and unfair competition by McAfee.
Symantec alleged that McAfee's computer software program called "PC Medic
1997" copied portions of Symantec's computer software program entitled
"CrashGuard", and by amendment of the complaint, Symantec expanded the
allegations to McAfee's software program "VirusScan". On October 6, 1997, the
United States District Court, Northern District of California, San Jose
Division (the "Court") issued an order granting Symantec's motion to amend its
complaint and enjoining McAfee from shipping any product containing either an
approximately 30-line routine found in one Symantec product or an
approximately 100-line routine found in a Symantec Dynamic Link Library. Trial
is set for September 1998. In addition, on May 13, 1997, Trend Micro Inc.
("Trend") filed suit in United States District Court for the Northern District
of California against both McAfee and Symantec Corporation. Trend alleges that
McAfee's "WebShield" and "GroupShield" products infringe a Trend patent which
issued on April 22, 1997. Trend's complaint seeks injunctive relief and
unspecified money damages. On June 6, 1997, McAfee filed its answer denying
any infringement. McAfee also filed counterclaims accusing Trend of unfair
competition, false advertising, trade libel, and interference with prospective
economic advantage. The case is in the initial stages of discovery. A patent
claim interpretation hearing before the Court is set for April 28, 1998. The
Court has not yet set a date for trial. McAfee is also subject to two other
claims for patent infringement. There can be no assurance that there will be
no developments
26
<PAGE>
arising out of this litigation which could have a material adverse effect on
McAfee's business, financial condition and results of operation. In addition, as
McAfee may acquire a portion of software included in future products from third
parties, its exposure to infringement actions may increase because McAfee must
rely upon such third parties as to the origin and ownership of any software
being acquired. Similarly, McAfee's exposure to infringement claims exists and
will increase to the extent that it currently employs or hires software
engineers previously employed by its competitors, notwithstanding measures taken
by McAfee to prevent usage by these software engineers of intellectual property
used or developed by them while employed by a competitor. In the future,
litigation may be necessary to enforce and protect trade secrets and other
intellectual property rights owned by McAfee. McAfee may also be subject to
litigation to defend it against claimed infringement of the rights of others or
to determine the scope and validity of the proprietary rights of others. Any
such litigation could be costly and cause diversion of management's attention,
either of which could have a material adverse effect on McAfee's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of McAfee's proprietary rights, subject
McAfee to significant liabilities, require McAfee to seek licenses from third
parties or prevent McAfee from manufacturing or selling its products, any one of
which could have a material adverse effect on McAfee's business, financial
condition and results of operations. Furthermore, there can be no assurance that
any necessary licenses will be available on reasonable terms, or at all.
Risks Related to International License Revenue. In 1996, 1995 and 1994 net
revenue from international licenses (license revenue from outside the United
States and Canada) represented approximately 19%, 29% and 23%, respectively, of
McAfee's net revenue. In the nine months ended September 30, 1997, net revenue
from international licenses represented approximately 28% of McAfee's net
revenue. McAfee expects that net revenue from international licenses will
continue to account for a significant portion of net revenue. A significant
portion of McAfee's international revenue in 1997 is expected to be denominated
in local currency. In July 1997, the Company began to manage potential foreign
currency fluctuations, using non-leveraged forward currency contracts. To date,
the Company's results of operations have not been significantly affected by
currency fluctuation, however, there can be no assurance that the Company's
future results of operations will not be adversely affected by such
fluctuations. Risks inherent in McAfee's international revenue generally
include the impact of fluctuating exchange rates, longer payment cycles, greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, seasonality due to the slowdown in European business activity
during the third quarter, and tariffs and other trade barriers. There can be no
assurance that these factors will not have a material adverse effect on McAfee's
future international license revenue. The Company is converting its
international agents (who can sell an unlimited number of copies of the software
in their respective territory for a flat royalty) to VARs and resellers (who pay
for software on a per copy sold basis). There can be no assurance that this
conversion will be successful, which could result in a loss of revenue. Further,
in countries with a high incidence of software piracy, McAfee may experience a
higher rate of piracy of its products.
In addition, a portion of McAfee's international revenue is generated
through independent agents. Since these agents are not employees of McAfee and
are not required to offer McAfee's products exclusively, there can be no
assurance that they will continue to market McAfee's products. Also, McAfee
currently has limited control over its agents. For example, McAfee is dependent
upon its
27
<PAGE>
international agents to provide it with information regarding licensees and
there can be no assurance that McAfee will be able to obtain sufficient
information to contact such licensees, if necessary, regarding renewal. In
addition, McAfee may be unaware of the nature and scope of the representations
made to customers by these agents. For example, independent agents could make
representations to customers about McAfee's current and future products which
are inaccurate or incomplete, which could result in the products not meeting
customers' expectations or requirements.
Risk of Sabotage. Given McAfee's high profile in the anti-virus software
market, McAfee has been a target of computer "hackers" who have created viruses
to sabotage McAfee's products. While to date these viruses have been discovered
quickly and their dissemination has been limited, there can be no assurance that
similar viruses will not be created in the future, that they will not cause
damage to users' computer systems and that demand for McAfee's software products
will not suffer as a result. In addition, since McAfee does not control diskette
duplication by distributors or its independent agents, there can be no assurance
that diskettes containing McAfee's software will not be infected.
Risk of False Detection of Viruses. McAfee's anti-virus software products
have in the past and may at times in the future falsely detect viruses that do
not actually exist. Such "false alarms," while typical in the industry, may
impair the perceived reliability of McAfee's products and may therefore
adversely impact market acceptance of McAfee's products. In addition, McAfee
has in the past been subject to litigation claiming damages related to a false
alarm, and there can be no assurance that similar claims will not be made in the
future.
Product Liability. McAfee's anti-virus software products and network
management products are used to protect and manage computer systems and networks
that may be critical to organizations and, as a result, the sale and support of
these products by the Company may entail the risk of product liability and
related claims. The Company's license agreement with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions, particularly given the Company's
reliance on unsigned licenses. A product liability claim brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
Dependence upon Key Personnel. McAfee's success will depend to a
significant extent upon a number of key technical and management employees.
While McAfee's employees are required to sign standard agreements concerning
confidentiality and ownership of inventions, the employees are generally not
otherwise subject to employment agreements and McAfee employees are generally
not subject to noncompetition covenants. The loss of the services of any of
McAfee's key employees could have a material adverse effect on its business,
financial condition and results of operations. McAfee does not maintain life
insurance policies on its key employees. McAfee's success also depends in large
part upon its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that McAfee will be successful in retaining
its existing key personnel and in attracting and retaining the personnel it
requires.
28
<PAGE>
Volatility of Stock Price. The trading price of McAfee Common Stock has
historically been subject to wide fluctuations in response to quarterly
variations in financial performance, shortfalls in revenue or earnings from
levels forecast by securities analysts, changes in estimates by such analysts,
market conditions in the computer software or hardware industries, product
introductions by McAfee or its competitors, announcements of extraordinary
events such as acquisitions or litigation or general economic conditions. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. These fluctuations have had a substantial effect on the
market prices for many high technology and emerging growth companies, often
unrelated to the operating performance of the specific companies. On several
occasions during 1995, 1996 and 1997, the closing sales prices for McAfee Common
Stock on successive days fluctuated in excess of 10%. There can be no assurance
that such fluctuations in McAfee's Common Stock price will not continue in the
future.
Effect of Certain Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law; Limitation of Liability of Directors.
The McAfee Board of Directors has the authority to issue up to 5,000,000 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 its stockholders. The rights of the holders of McAfee Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of McAfee. McAfee has no present plans to issue shares
of Preferred Stock. Further, certain provisions of Delaware law and McAfee's
Certificate of Incorporation and Bylaws, such as a classified board, could delay
or make more difficult a merger, tender offer or proxy contest involving McAfee.
While such provisions are intended to enable the McAfee Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of McAfee Common Stock in the future. In addition, McAfee's charter
provides that its directors shall not be personally liable to McAfee or its
stockholders for monetary damages in the event of a breach of fiduciary duty to
the extent permitted by Delaware law.
29
<PAGE>
McAFEE ASSOCIATES, INC.
FORM 10-Q, September 30, 1997
-------
PART II: OTHER INFORMATION
Item 3. Legal Proceedings:
Information with respect to this item is incorporated by reference to
Note 4 of the Notes to the Consolidated Financial Statements included
herein on page 7 of this Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K:
(a) Reports on Form 8-K. There were no reports filed on Form 8-K
during the quarterly period ended September 30, 1997.
(b) Exhibits. The exhibits listed in the accompanying Exhibit
Index are filed or incorporated by reference as part of this
Report.
30
<PAGE>
McAFEE ASSOCIATES, INC.
FORM 10-Q, September 30, 1997
-------
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 4, 1997 Name: Prabhat K. Goyal
Title: Vice President Administration,
Chief Financial Officer and
Secretary
31
<PAGE>
McAFEE ASSOCIATES, INC.
Form 10-Q, September 30, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
- ---------- ------------- --------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization, dated as of October 13,
1997, among the Company, Mystery Acquisition Corp. and Network
General Corporation, as amended by the First Amendment dated as
of October 22, 1997, incorporated by reference to the Company's
Registration Statement on Form S-4.
3.1 Second Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 of the Company's Report on Form 10Q
for the fiscal quarter ended September 31, 1996.
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, incorporated by reference to Exhibit 3.3 of the
Company's form 10-Q for the Quarter ended September 30, 1996.
4.1 Registration Rights Agreement, dated August 30, 1996, by and
among FSA Combination Corp. and FSA Corporation, all
incorporated by reference to the Company's Report on Form 8-K,
as filed with the Securities and Exchange Commission on
September 24,1996.
4.2 Registration Rights Agreement, dated January 13, 1997 by and
between McAfee Associates, Inc. and the shareholders of Jade,
all incorporated by reference to the Company's Report on Form
8-K, as filed with the Securities and Exchange Commission on
March 14, 1997, incorporated by reference to Exhibit 10.49 of
the Company's Form 10-K, filed for the year ended December 31,
1996 (the "1996 10-K").
4.3 Registration Rights Agreement, dated February 28, 1997, by and
between the Company and shareholders of Schuijers, incorporated
by reference to Exhibit 10.50 of the 1996 Form 10-K.
9.1 Form of McAfee Associates, Inc. Voting Agreement, dated as of
October 13, 1997. Incorporated by reference to the Company's
Registration Statement on Form S-4.
10.1 1992 Stock Option Plan, incorporated by reference to Exhibit 10.5
to the Company's Report on Form 10-K for the year ended December
31, 1994
</TABLE>
32
<PAGE>
("1994 Form 10-K") as amended.
10.2 Outside Directors Stock Option Plan, incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
10.3 401(k) Plan, incorporated by reference to Exhibit 10.20 of the 1994
Form 10-K.
10.4 Change in control agreement between the Company and Richard D.
Kreysar, dated as of April 14, 1995, incorporated by reference to
Exhibit 10.2 of the Company's Registration Statement No. 33-93926 on
Form S-4 (the "S-4").
10.5 Change in control agreement between the Company and Robert J. Schwei,
dated as of April 14, 1995, incorporated by reference to Exhibit 10.4
of the S-4.
10.6 Change in control agreement between the Company and Peter Watkins,
dated as of May 1, 1995, incorporated by reference to Exhibit 10.6 of
the S-4.
10.7 Change in control agreement between the Company and William L. Larson,
dated as of April 14, 1995, incorporated by reference to Exhibit 10.7
of the S-4.
10.8 Agreement and Plan of Merger, dated as of March 6, 1996 and among the
Company, McCor Acquisition Corporation and Vycor Corporation,
incorporated by reference to Exhibit 10.35 of the Company's Form 10-K,
filed for the year ended December 31, 1995 (the "1995 10-K").
10.9 1995 Stock Incentive Plan, incorporated by reference to Exhibit 10.40
of the Form 10-Q of the Company for the Quarter ended June 30, 1996.
10.10 Change in control agreement between the Company 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.
10.11 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, incorporated by reference to the
Company's Form 8-K as filed with the Securities and Exchange
Commission on September 24, 1996.
10.12 Stock Exchange Agreement, dated January 13, 1997, by and among the
33
<PAGE>
Company, FSA Combination Corp., Kabushiki Kaisha Jade ("Jade") and
the shareholders of Jade, Incorporated by reference to the Company's
Report on Form 8-K, as filed with the Securities and Exchange
Commission on March 14, 1997.
10.13 Stock Exchange Agreement, dated February 29, 1997, by and among the
Company, FSA Combination Corp., Schuijers Holding B.V. ("Schuijers")
and the shareholders of Schuijers. Incorporated by reference to
Exhibit 10.50 to the Company's Form 10-K for the year ended December
31, 1996.
10.14 Sublease Agreement for facility at 2805 Bowers Avenue, Santa Clara
dated February 20, 1997 by and between the Company, and National
Semiconductor Corporation, incorporated by reference to Exhibit 10.51
of the Company's Form 10-Q for the Quarter ended June 30, 1997.
10.15 Quota Purchase Assignment Agreement, dated April 14, 1997, by and
among the Company and McAfee Do Brasil Ltda., Compusul-Consultoria E
Comericio De Informatica Ltda., and the stockholders of Compusu-
Consultoria E Comericio De Informatica Ltda., incorporated by
reference to Exhibit 10.52 of the Company's Form 10-Q for the Quarter
ended June 30, 1997.
11.1 Computation of Net Income Per Share.
27.1 Financial Data Sheet.
_____________________________
* Management contracts or compensatory plans or arrangements covering executive
officers or directors of McAfee.
34
<PAGE>
EXHIBIT 11.1
------------
McAFEE ASSOCIATES, INC.
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Primary and Fully Diluted Three months ended September 30 Nine months ended September 30
------------------------------------ ------------------------------------
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 51,329 48,083 50,543 47,260
for the period
Dilutive effect of options, net 2,938 5,937 3,469 5,550
------- ------- ------- -------
Shares used in per share calculation 54,267 54,020 54,012 52,810
======= ======= ======= =======
Net income $24,480 $12,898 $67,850 $23,381
======= ======= ======= =======
Net income per share $ 0.45 $ 0.24 $ 1.26 $ 0.44
======= ======= ======= =======
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS FOR 3rd Quarter 10Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 134,564 134,564
<SECURITIES> 103,180 103,180
<RECEIVABLES> 63,271 63,271
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 245,458 245,458
<PP&E> 27,643 27,643
<DEPRECIATION> (10,111) (10,111)
<TOTAL-ASSETS> 342,493 342,493
<CURRENT-LIABILITIES> 62,310 62,310
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 273,545 273,545
<TOTAL-LIABILITY-AND-EQUITY> 342,493 342,493
<SALES> 88,332 247,960
<TOTAL-REVENUES> 88,332 247,960
<CGS> 6,528 18,864
<TOTAL-COSTS> 51,138 144,461
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 39,484 109,435
<INCOME-TAX> 15,004 41,585
<INCOME-CONTINUING> 24,480 67,850
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 24,480 67,850
<EPS-PRIMARY> 0.45 1.26
<EPS-DILUTED> 0.45 1.26
</TABLE>
