<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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
--- ---
50,881,368 shares of the registrant's common stock, $0.01 par value, were
outstanding as of July 31, 1997.
THIS DOCUMENT CONTAINS 38 PAGES.
THE EXHIBIT INDEX IS ON PAGE 29.
<PAGE> 2
MCAFEE ASSOCIATES, INC.
FORM 10-Q, June 30, 1997
C O N T E N T S
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 1997 and December 31, 1996.............................3
Condensed Consolidated Statements of Income:
Three months and six months ended June 30, 1997 and 1996........4
Condensed Consolidated Statements of Cash Flows:
Six months ended June 30, 1997 and 1996 ........................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................8
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.........................................26
SIGNATURES........................................................................28
EXHIBIT INDEX.....................................................................29
</TABLE>
2
<PAGE> 3
MCAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $117,830 $ 76,363
Marketable securities 40,510 50,368
Accounts receivable, net of allowances for doubtful
accounts and returns of $3,580 and $3,027 at
June 30, 1997 and December 31, 1996 60,162 25,930
Prepaids and other current assets 6,121 5,097
Prepaid taxes 175 1,869
Deferred taxes 3,912 4,321
-------- --------
Total current assets 228,710 163,948
Long term investments 37,674 14,021
Fixed assets, net 14,626 7,486
Intangibles, net 3,388 1,001
Deferred taxes 6,840 7,719
Other assets 795 310
-------- --------
Total assets $292,033 $194,485
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 10,434 $ 5,379
Accrued liabilities 16,176 15,734
Deferred revenue 27,606 20,182
-------- --------
Total current liabilities 54,216 41,295
Deferred revenue, less current portion 5,420 3,663
-------- --------
Total liabilities 59,636 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: 50,675,279 shares at June 30, 1997 and
48,662,489 at December 31, 1996 511 488
Additional paid-in capital 117,554 77,259
Retained earnings 114,332 71,780
-------- --------
Total stockholders' equity 232,397 149,527
-------- --------
Total liabilities and stockholders' equity $292,033 $194,485
======== ========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
<PAGE> 4
MCAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $86,271 $ 40,767 $159,628 $ 74,612
Operating costs and expenses:
Cost of net revenue 6,418 2,450 12,336 4,517
Research and development 11,878 4,752 21,536 8,562
Marketing and sales 25,292 11,596 47,279 21,179
General and administrative 6,300 2,961 11,855 5,674
Amortization of intangibles 213 1,099 317 1,649
Acquisition and other unusual costs -- 2,868 -- 11,165
-------- -------- -------- --------
Total operating costs and expenses 50,101 25,726 93,323 52,746
-------- -------- -------- --------
Income from operations 36,170 15,041 66,305 21,866
Other income 2,014 645 3,646 1,242
-------- -------- -------- --------
Income before income taxes 38,184 15,686 69,951 23,108
Provision for income taxes 14,510 6,286 26,581 12,625
-------- -------- -------- --------
Net income $ 23,674 $ 9,400 $ 43,370 $ 10,483
======== ======== ======== ========
Net income per share $ 0.44 $ 0.18 $ 0.81 $ 0.20
======== ======== ======== ========
Shares used in per share calculation 54,158 52,616 53,884 52,206
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
<PAGE> 5
MCAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 43,370 $ 10,483
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 2,276 2,579
Provision for doubtful accounts receivable
and allowance for returns 553 540
Unrealized gain on investments (137) --
Deferred taxes 1,288 2,538
Changes in assets and liabilities:
Accounts receivable (34,785) 3,308
Prepaids and other assets (1,509) (525)
Refundable income taxes 1,694 --
Accounts payable and accrued liabilities 5,497 4,794
Prepaid income taxes -- 4,162
Deferred revenue 9,181 (6,525)
--------- ---------
Net cash provided by operating activities 27,428 21,354
Cash flows from investing activities:
Purchase of Compusul (2,709) --
Purchases of investment securities, net (13,795) (16,059)
Additions to fixed assets (9,094) (1,691)
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 (25,795) (17,750)
--------- ---------
Cash flows from financing activities:
Effect of exchange rate fluctuations (484) (22)
Stock option exercises 15,420 4,368
Tax benefit from exercise of nonqualified stock options 24,898 11,250
--------- ---------
Net cash provided by financing activities 39,834 15,596
--------- ---------
Net increase in cash and cash equivalents 41,467 19,200
Cash and cash equivalents at beginning of period 76,363 30,299
--------- ---------
Cash and cash equivalents at end of period $ 117,830 $ 49,499
========= =========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
<PAGE> 6
MCAFEE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The accompanying consolidated financial statements have been prepared by
the Company without audit in accordance with instructions to Form 10-Q
and Article 10 of Regulation S-X. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments considered necessary for a fair
presentation, have been included. The results of operations for the three
and six month periods ended June 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
as 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.
3. Acquisitions:
On April 15, 1997, the Company acquired a controlling interest in its
former distributor, Compusul-Consultores de Informatica Ltda.
("Compusul") of Sao Palo, Brazil, for an aggregate purchase price of $3.6
million, represented by an initial payment of $2.6 million and an
additional $1.0 million payable upon the achievement of certain earnings
targets. The acquisition was accounted for as a purchase transaction. The
excess of the purchase price, including transaction costs, over the net
assets acquired was $2.7 million and has been recorded as goodwill, which
is being amortized on a straight-line basis over 5 years.
6
<PAGE> 7
4. Litigation
On April 1, 1997, the Company was named as defendant in an action filed
by CyberMedia, Inc. ("CyberMedia") in the United States District Court
for the Northern District of California. The complaint alleges that the
packaging and advertisement of the Company's PC Medic 97 product, which
was introduced in March 1997, constitute unfair competition, false
advertising and trade libel with respect to CyberMedia's "First Aid 97"
product. The complaint seeks unspecified damages and injunctive relief,
including a temporary restraining order. On April 9, 1997, the court
denied CyberMedia's application for a temporary restraining order. A date
has been set in June 1997, for a hearing on plaintiff's request for a
preliminary injunction. McAfee has filed an opposition to the request for
a preliminary injunction. McAfee has filed an opposition to the request
for a restraining order which denies the allegations of CyberMedia's
complaint. In May, the parties reached an agreement pursuant to which
the complaint was dismissed.
On April 24, 1997, the Company received notice that Symantec Corporation
("Symantec") filed suit in the United States District Court, Northern
District of California, San Jose Division, alleging copyright
infringement and unfair competition by the Company. 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 seeks 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 seeks injunctive relief and unspecified money damages. The
Company is continuing to investigate the facts surrounding Symantec's
claims.
On May 13, 1997, Trend Micro Inc. ("Trend") filed suit in United States
District Court for the Northern District of California. Trend alleges
that the Company's "WebShield" and "GroupShield" products infringe a
Trend patent which recently was 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. The
Court has not yet set a trial date.
7
<PAGE> 8
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. Prior to July 1, 1995, net revenue from licenses for anti-virus
software was generally recognized ratably over the two year license period
because there was no basis for unbundling the separate maintenance portion of
the license, while net revenue from licenses for network management software was
generally recognized 80% at the time of the licensing transaction with the
remaining 20%, representing the maintenance portion of the license fee,
recognized ratably over the two year license period. Effective July 1, 1995, the
Company established a basis for unbundling the maintenance portion of the
anti-virus license and began to generally recognize 80% of license fees for
electronically distributed anti-virus software at the time of the licensing
transaction. The deferred revenue from anti-virus licenses entered into prior to
July 1, 1995, however, has been ratably recognized over the original
subscription periods. This change in the Company's revenue recognition policy
has resulted in the earlier recognition of revenue over the last eight quarters
with a corresponding decrease in the amount of deferred revenue on the Company's
balance sheet.
8
<PAGE> 9
MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
As a result of the change in revenue recognition for anti-virus
licenses, period-to-period results are not directly comparable and should not be
relied upon as indicative of future performance. In addition, since a decreasing
percentage of the Company's net revenue is attributable to the recognition of
previously deferred revenue, the Company's net revenue in future periods may be
subject to greater fluctuations on a quarter-to-quarter basis. In addition to
generating net revenue through licenses, the Company sells its network security
and management products with shrink-wrap licenses through traditional
distribution channels. The Company recognizes revenue from sales to distributors
upon shipment, subject to a reserve for returns.
On April 14, 1997, the Company acquired a former Brazilian distributor,
Compusul-Consultoria E Comercio de Informatica Ltda. ("Compusul"). This
combination was accounted for as purchase transaction. Compusul's results for
the quarter ended June 30, 1997 have been included in the Company's consolidated
results for that period.
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. 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."
9
<PAGE> 10
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 six month periods ended June 30, 1997
and 1996:
<TABLE>
<CAPTION>
Three months ended Six Months Ended
June 30 June 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 6.0 7.7 6.0
Research and development 13.8 11.7 13.6 11.5
Marketing and sales 29.3 28.4 29.6 28.4
General and administrative 7.3 7.3 7.4 7.6
Amortization of intangibles 0.2 2.7 0.2 2.2
Acquisition and other unusual costs -- 7.0 -- 15.0
----- ----- ----- -----
Total operating costs and expenses 58.1 63.1 58.5 70.7
----- ----- ----- -----
Income from operations 41.9 36.9 41.5 29.3
Other income 2.4 1.6 2.3 1.7
----- ----- ----- -----
Income before income taxes 44.3 38.5 43.8 31.0
Provision for income taxes 16.8 15.5 16.7 17.0
----- ----- ----- -----
Net income 27.5% 23.0% 27.1% 14.0%
===== ===== ===== =====
</TABLE>
Net Revenue. Net revenue increased 112% to $86.3 million in the three months
ended June 30, 1997 from $40.8 million in the three months ended June 30, 1996.
For the six month period ended June 30, 1997, net revenue increased 114% to
$159.6 million from $74.6 million in the same period in 1996. This increase is
largely attributable to increased revenue from 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.
Net revenue also increased as a result of increased sales of
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
10
<PAGE> 11
MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
shrink-wrapped products through traditional distribution channels. 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 has
experienced 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.* 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.* In
response to increasing price competition and in an effort to maintain average
selling prices, the Company has recently introduced its anti-virus/security
product suites. There can be no assurance that this strategy will be
successful.* 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.*
Net revenue from international sales accounted for approximately 27%
and 20% of net revenue for the three months ended June 30, 1997 and 1996,
respectively. For the six month periods ended June 30, 1997 and 1996, the
percentage of net revenue from international licenses was approximately 26% and
23%, respectively. This increase was 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 Shuijers Holding B.V. ("SHBV") in February
1997 and Compusul 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 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
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
11
<PAGE> 12
MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
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 does 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 June 30, 1997 and 1996, the
Company's cost of net revenue was $6.4 million and $2.5 million, respectively.
The cost of net revenue for the six month period ended June 30, 1997 increased
to $12.3 million from $4.5 million in the same period in 1996. As a percentage
of net revenue, cost of net revenue increased to 7.4% from 6.0% in the three
month period ended June 30, 1997 and 1996, respectively and increased to 7.7%
from 6.0% in the six month period ended June 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."
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 150% to
$11.9 million in the three months ended June 30, 1997 from $4.8 million in same
period in 1996. For the six month period ended June 30, 1997, research and
development expenditures increased 152% to $21.6 million from $8.6 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,
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
12
<PAGE> 13
MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
research and development expenses increased to 13.8% for the three months ended
June 30, 1997 from 11.7% for the same period in 1996 and increased to 13.6% in
the six months ended June 30, 1997 from 11.5% 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 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 118% to $25.3 million in the three months ended June
30, 1997 from $11.6 million in the three months ended June 30, 1996. For the six
month period ended June 30, 1997, marketing and sales expenditures increased
123% to $47.3 million from $21.2 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.
As a percentage of net revenue, marketing and sales expenses increased
to 29.3% in the three months ended June 30, 1997, from 28.4% in the same period
in 1996, and increased to 29.6% in the six months ended June 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.*
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
13
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
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 113% to $6.3 million in the three months ended
June 30, 1997 from $3.0 million in the three months ended June 30, 1996. For the
six months ended June 30, 1997, general and administrative expenditures
increased 109% to $11.9 million from $5.7 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 was 7.3% in the
three months ended June 30, 1997 and 1996, and decreased to 7.4% in the six
months ended June 30, 1997 from 7.6% 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 $213,000 and $1.1
million of amortization related to intangibles in the three months ended June
30, 1997 and 1996, respectively, and $317,000 and $1.6 million in the six months
ended June 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 $2.0 million and $645,000 in the three months ended
June 30, 1997 and 1996, respectively, and $3.6 million and $1.2 million in the
six months ended June 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
June 30, 1997 and 1996, was 38.0% and 40.1%, respectively. For the six month
periods ended June 30, 1997 and 1996, the effective tax rate was 38.0% and
54.6%, respectively. The Company's effective tax rate reflects the
non-deductibility for tax purposes of $11.2 million in acquisition costs
expensed during the six months ended June 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.*
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $117.8 million in cash and cash
equivalents and $78.2 million in marketable securities, for a combined total of
$196.0 million.
Net cash provided by operating activities was $27.4 million and $21.4
million for the six months ended June 30, 1997 and 1996, respectively. Net cash
provided by operating activities for the six months ended June 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. Net cash provided by operating activities for the six
months ended June 30, 1996 consisted primarily of net income plus and 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 June 30, 1997, the Company's accounts receivable balance as a
percentage of sales for the quarter then ended meaningfully increased over the
prior period. This increase was due to, among other factors, the Company's
decision to extend payment terms rather than to reduce prices in response to
increasing price competition in the maturing anti-virus market; the Company's
increased emphasis on international sales (typically having longer payment
terms); a higher percentage of indirect sales through indirect channels; the
effect on receivables of the Company's transition to the VirusScan 3.0 product
relating to exchanges with resellers of updated inventory for older VirusScan
2.0 inventory; and a shift in the Company's product mix to more
server/enterprise based products. Due in part to these trends and to the
seasonal nature of the third quarter (where a higher percentage of the Company's
sales have historically been, and are expected to be, concentrated in the last
month of the quarter), the Company expects this trend to continue into the
quarter ended September 30, 1997.* 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. In
addition, to the extent that the Company's receivable balance increases, the
Company will be subject to greater general credit risks with respect thereto.*
Net cash used in investing activities was $25.8 million in the six
months ended June 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 six months ended June 30,
1996 was $17.8 million, primarily reflecting purchases of marketable securities.
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
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MCAFEE ASSOCIATES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------
Net cash provided by financing activities was $39.8 million and $15.6
million in the six months ended June 30, 1997 and 1996, respectively, consisting
primarily of the proceeds and tax benefits associated with the exercise of
nonqualified stock options.
The Company believes that its available cash and anticipated cash flow from
operations will be sufficient to fund the Company's working capital and capital
expenditure requirements for at least the next twelve months.*
- --------------------------------------------------------------------------------
* 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 17 for a discussion
of certain factors that could effect future performance.
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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.
Prior to July 1, 1995, McAfee recognized substantially all license
revenue ratably over a two-year license period, during which time users
generally received all product upgrades, updates and technical support at no
additional charge. As a result, quarterly fluctuations in licensing activity
have had a reduced quarter-to-quarter impact on McAfee's net revenue and net
income. However, since July 1, 1995, McAfee generally recognizes 80% of its
revenue from licenses at the time of the initial licensing transaction, which
more directly impacts net revenue and net income in the quarters in which the
licensing activity occurs. Furthermore, since McAfee's cost of net revenue is
low, and operating expenses are relatively fixed, any revenue shortfall in a
quarter will result in a substantially similar shortfall in net income. As a
result of this change in revenue recognition in July 1995, McAfee believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of future performance.
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 Company has had significant growth in
net revenue and net income. 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.* In addition, although the Company has historically experienced
greater order growth rates as compared to revenue growth rates in sequential
quarters, that was not the case in the quarter ended June 30, 1997 and the
Company has seen a general convergence of these growth rates.* 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.*
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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 7.7% from 6.0% in the six month
periods ended June 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.
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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.
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 June 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.
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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 ("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 its 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/Cheyenne Software, 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
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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. With the acquisition of Vycor
Corporation, the Company faces new competition from vendors in the help desk
market. 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. 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 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 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
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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 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 June 30,
1997, Ingram Micro Devices accounted for 19% 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. 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 not to date applied for or
obtained any patents or registered any of its copyrights and has only registered
selected 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.
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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 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 they
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.
Furthermore, McAfee has obtained only one foreign registration of its "McAfee"
trademark, and publication in two jurisdictions, due to the significant costs
involved. As a result, McAfee may not be able to prevent a third party from
using its trademarks in many foreign jurisdictions.
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.
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. For example, in April 1997, Symantec
Corporation ("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". On July 20, 1997, Symantec sought leave to amend
its complaint to include additional allegations of copyright infringement and
trade secret misappropriation pertaining to McAfee's "VirusScan" product.
Symantec seeks injunctive relief and unspecified money damages. The Company is
continuing to investigate the facts surrounding Symantec's claims. Should
further investigation or discovery reveal substantial use by McAfee of
Symantec's proprietary or confidential information, such usage 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 additional 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 six months ended June 30, 1997, net revenue from
international licenses represented approximately 26% of McAfee's net revenue.
McAfee expects that net revenue from international licenses will continue to
account for a
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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. 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 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
24
<PAGE> 25
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.
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.
25
<PAGE> 26
MCAFEE ASSOCIATES, INC.
FORM 10-Q, June 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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on June 5,
1997. The following matters were submitted to vote of shareholders.
(a) Election of Directors
Name: Leslie G. Denend
Date of term expiration: 2000 Annual Shareholders Meeting
Shares in Favor: 46,266,692
Shares Withheld: 440,556
(b) Adoption of the Company's 1997 Stock Incentive Plan
Shares in Favor: 24,721,691
Shares Against: 18,872,031
Shares Abstained: 56,378
No Vote: 3,057,148
(a) Ratification of appointment of Coopers & Lybrand LLP as certified
Public Accountants of the Company for next fiscal year ending
December 31, 1997.
Shares in Favor: 46,671,257
Shares Against: 13,612
Shares Abstained: 22,379
26
<PAGE> 27
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 June 30, 1997.
(b) Exhibits. The exhibits listed in the accompanying Exhibit Index are
filed or incorporated by reference as part of this Report.
27
<PAGE> 28
MCAFEE ASSOCIATES, INC.
FORM 10-Q, June 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.
-------------------------------------
Date: August 14, 1997 Name: Prabhat K. Goyal
Title: Vice President Administration,
Chief Financial Officer and
Secretary
28
<PAGE> 29
McAFEE ASSOCIATES, INC.
Form 10-Q, June 30, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
----------- ------------- --------
<S> <C> <C>
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 See Exhibit 10.44, 10.49 and 10.50.
10.5* 1992 Stock Option Plan, incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 ("1994 Form 10-K"), as
amended.
10.7* Outside Directors Stock Option Plan, incorporated by
reference to Exhibit 10.7 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1992.
10.8 Lease Agreement for the Company's facility at 2710 Walsh
Avenue dated May 10, 1993, between the Company and John
Arillaga and Richard T. Peery Separate Property Trusts,
incorporated by reference to Exhibit 10.8 to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30,
1993.
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
----------- ------------- --------
<S> <C> <C>
10.10 Asset Acquisition Agreement among the Company and
Brightwork, Jack Bell, Thomas Dolan, Rosemarie Dubrowsky,
Greg Gianforte, Kerry Giftos, Roman Michalowski and Philip
Raffiani dated March 16, 1994, together with the Escrow
Agreement among the Company, Brightwork, BDI Partners, and
Silicon Valley Bank as Escrow Agent, dated March 30, 1994
(Exhibit 2.3(b) to the Asset Acquisition Agreement) and the
Employment Agreement, dated March 30, 1994 between the
Company and Greg Gianforte (Exhibit 8.5 to the Asset
Acquisition Agreement) incorporated by reference to Exhibit
2.1 to the Company's Report on Form 8-K dated March 30,
1994, as filed with the Securities and Exchange Commission
on April 12, 1994.
10.11 Asset Acquisition Agreement by and between the Company and
ADS dated April 19, 1994, incorporated by reference to
Exhibit 2.1 to the Company's Report on Form 8-K, dated May
6, 1994, as filed with the Securities and Exchange
Commission on May 20, 1994.
10.12* Confidential Resignation Agreement and Mutual General
Release of Claims between the Company and William S.
McKiernan dated April 18, 1994, incorporated by reference
from Exhibit 10.12 to the Company's Report on Form 10-Q for
the fiscal quarter ended June 30, 1994.
10.14* Employment Agreement between the Company and Gregory
Gianforte dated June 30, 1994, as amended September 28,
1994, incorporated by reference to Exhibit 10.14 of the
1994 Form 10-K.
10.15 Lease Agreement between Jerral Office Associates, a New
Jersey limited partnership, and Brightwork Development,
Inc. dated October 19, 1992, as amended May 26, 1994 to
substitute the Company as the tenant, incorporated by
reference to Exhibit 10.15 of the 1994 Form 10-K.
10.16* Employee Stock Purchase Plan, as amended.
10.17 Lease Agreement between John Arrillaga, Trustee, UTA dated
7/20/77 (John Arrillaga Separate Property Trust), Richard
Peery, Trustee, UTA dated 7/20/77 (Richard T. Peery
Separate Property Trust) and the Company dated November 2,
1994, incorporated by reference to Exhibit 10.17 of the
1994 Form 10-K.
10.18* Offer letter to Richard Kreysar dated December 16, 1994,
incorporated by reference to Exhibit 10.18 of the 1994 Form
10-K.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
----------- ------------- --------
<S> <C> <C>
10.19* Offer letter to Dennis Cline dated September 21, 1994,
incorporated by reference to Exhibit 10.19 of the 1994 Form
10-K.
10.20 401(k) Plan, incorporated by reference to Exhibit 10.20 of
the 1994 Form 10-K.
10.21* Change in control agreement between McAfee and Robert S.
Chappelear dated April 14, 1995, incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement No.
33-93296 on Form S-4 ("the S-4").
10.22* Change in control agreement between McAfee and Dennis Cline
dated April 14, 1995, incorporated by reference to Exhibit
10.2 of the S-4.
10.23* Change in control agreement between McAfee and Richard D.
Kreysar dated April 14, 1995, incorporated by reference to
Exhibit 10.3 of the S-4.
10.24* Change in control agreement between McAfee and Robert J.
Schwei dated April 14, 1995, incorporated by reference to
Exhibit 10.4 of the S-4.
10.25* Change in control agreement between McAfee and R. Terry
Duryea dated May 1, 1995, incorporated by reference to
Exhibit 10.5 of the S-4.
10.26* Change in control agreement between McAfee and Peter
Watkins dated May 1, 1995, incorporated by reference to
Exhibit 10.6 of the S-4.
10.27* Change in control agreement between McAfee and William L.
Larson dated April 14, 1995, incorporated by reference to
Exhibit 10.7 of the S-4.
10.28 Management Agreement between McAfee and Saber Software
Corporation dated July 20, 1995, incorporated by reference
to Exhibit 10.8 of the S-4.
10.29 Cross Distribution Agreement between McAfee and Saber
Software Corporation dated July 21, 1995, incorporated by
reference to Exhibit 10.9 of the S-4.
10.30 Dilg Settlement Agreement and Release and Covenant Not to
Sue dated as of October 24, 1995 between Saber Software
Corporation and Dilg Properties, Inc. ("Dilg"),
ContactPerfect Corporation ("CPC"), Jerry D. Blackburn, J.
Robert Dilg, and Alvin D. Gilbert, incorporated by
reference to Exhibit 10.30 of the Company's Form 10-Q for
the Quarter Ended September 30, 1995 (the "September 30,
1995 10-Q").
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
----------- ------------- --------
<S> <C> <C>
10.31 Sale and Purchase Agreement Relating to 850 shares between
Patrick Legranche and the Company dated July 27, 1995,
incorporated by reference to Exhibit 10.31 of the Company's
September 30, 1995 10-Q.
10.32 Sales and Purchase Agreement Relating to 1,650 shares
between Serge Gauthron, Patrick Legranche, Valorisation
Informatique de Fichiers and the Company dated July 27,
1995, incorporated by reference to Exhibit 10.32 of the
Company's September 30, 1995 10-Q.
10.33 Common Stock Purchase Warrant to purchase 10,000 shares of
the Company's Common Stock held by RT Software dated July
27,1995, incorporated by reference to Exhibit 10.33 of the
Company's September 30, 1995 10-Q.
10.34 Share Purchase Agreement between International Data
Security Limited (an Australian company), the Company and
International Data Security Limited (an English company)
dated September 13, 1995, incorporated by reference to
Exhibit 10.34 of the Company's September 30, 1995 10-Q.
10.35 Agreement and Plan of Merger dated March 6, 1996 and among
McAfee 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").
10.36* Change of Control Agreement between McAfee and Mark
Woodward dated November 10, 1995, incorporated by reference
to Exhibit 10.36 of the Company's 1995 10-K.
10.37* Confidential Agreement and Release of Claims between McAfee
and Robert Chappelear dated January 30, 1996, incorporated
by reference to Exhibit 10.37 of the Company's 1995 10-K.
10.38 Sublease Agreement dated November 15, 1995 between the
Company and Digital Video Systems, incorporated by
reference to Exhibit 10.38 of the Company's 1995 10-K.
10.39 Amendment No. 1 to Lease dated September 27, 1995 by and
between the Company and Arrilliga Family Trust and Richard
T. Peery Separate Property Trust, incorporated by reference
to Exhibit 10.39 of the Company's 1995 10-K.
10.40 1995 Stock Incentive Plan, incorporated by reference to
Exhibit 10.40 of the Company's Form 10-Q for the Quarter
ended June 30, 1996.
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
----------- ------------- --------
<S> <C> <C>
10.41 Lease by and between Herndon Associates, a Virginia general
partnership and the Company dated July 22, 1996,
incorporated by reference to Exhibit 10.41 of the Company's
Form 10-Q for the Quarter ended June 30, 1996.
10.42 Purchase contract by and between Interactive Distributed
Systems Software GmbH and the Company effective June 30,
1996, incorporated by reference to Exhibit 10.42 of the
Company's Form 10-Q for the Quarter ended June 30, 1996.
10.43 Change in control agreement between McAfee and Prabhat K.
Goyal incorporated by reference to Exhibit 10.43 of the
Company's Form 10-Q for the Quarter ended June 30, 1996.
10.44 Combination Agreement by and among the Company, FSA
Combination Corp., FSA Corporation, and Daniel Freedman,
the sole shareholder of FSA Corporation, dated August 16,
1996, the Registration Rights Agreement, dated August 30,
1996 by and between the Company and Daniel Freedman, and
the Voting and Exchange Trust Agreement, dated August 30,
1996, by and among the Company, FSA Combination Corp. and
FSA Corporation, all incorporated by reference to the
Company's Report on Form 8-K, as filed with the Securities
and Exchange Commission on September 24, 1996.
10.45 Amendment No. 2 to Lease dated May 9, 1996, by and between
the Company and Arrilliga Family Trust and Richard T. Peery
Separate Property Trust, incorporated by reference to
Exhibit 10.45 of the Company's Form 10-K filed for the year
ended December 31, 1996 (the "1996 Form 10-K").
10.46 Lease Agreement for facility at 2855 Bowers Avenue dated
October 22, 1996 between the Company and Arrilliga Family
Trust and Richard T. Peery Separate Property Trust,
incorporated by reference to Exhibit 10.46 of the 1996 Form
10-K.
10.47 Lease Agreement for facility at 4099 McEwen Road, Dallas
dated November 14, 1996, between the Company and Blue Lake
Partners, Ltd., incorporated by reference to Exhibit 10.47
of the 1996 Form 10-K.
10.48 Resignation Agreement and General Release of Claims, dated
November 19, 1996 between the Company and Richard Kreysar,
incorporated by reference to Exhibit 10.47 of the 1996 Form
10-K.
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title Page No.
----------- ------------- --------
<S> <C> <C>
10.49 Stock Exchange Agreement, dated January 13, 1997, by and
among the Company, FSA Combination Corp., Kabushiki Kaisha
Jade ("Jade") and the shareholders of Jade, and the
Registration Rights Agreement, dated January 13, 1997 by
and between the Company 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 1996 Form 10-K.
10.50 Stock Exchange Agreement, dated February 28, 1997, by and
among the Company, FSA Combination Corp., Schuijers Holding
B.V. ("Schuijers") and the shareholders of Schuijers, and
the 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.
10.51 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.
10.52 Quota Purchase Assignment Agreement, dated April 14, 1997,
by and among the Company and McAfee Do Brasil Ltda.,
Compusul-Consultoria E Comercio De Informatica Ltda., and
The Stockholders of Compusul-Consultoria E Comercio 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.
</TABLE>
- -----------------------------
* Management contracts or compensatory plans or arrangements covering executive
officers or directors of McAfee.
34
<PAGE> 1
EXHIBIT 11.1
MCAFEE ASSOCIATES, INC.
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary and Fully Diluted
Weighted average common shares
outstanding for the period 50,699 47,127 50,150 46,848
Dilutive effect of options, net 3,459 5,489 3,734 5,358
------- ------- ------- -------
Shares used in per share calculation 54,158 52,616 53,884 52,206
======= ======= ======= =======
Net income $23,674 $ 9,400 $43,370 $10,483
======= ======= ======= =======
Net income per share $ 0.44 $ 0.18 $ 0.81 $ 0.20
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 117,830 117,830
<SECURITIES> 78,184 78,184
<RECEIVABLES> 60,162 60,162
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 228,710 228,710
<PP&E> 23,155 23,155
<DEPRECIATION> (8,529) (8,529)
<TOTAL-ASSETS> 292,033 292,033
<CURRENT-LIABILITIES> 54,216 54,216
<BONDS> 0 0
0 0
0 0
<COMMON> 511 511
<OTHER-SE> 231,886 231,886
<TOTAL-LIABILITY-AND-EQUITY> 232,397 232,397
<SALES> 86,271 159,628
<TOTAL-REVENUES> 86,271 159,628
<CGS> 6,418 12,336
<TOTAL-COSTS> 50,101 93,323
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 38,184 69,951
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 38,184 69,951
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,674 43,370
<EPS-PRIMARY> 0.44 0.81
<EPS-DILUTED> 0.44 0.81
</TABLE>
