yashesh McAfee

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COMPANY PROFILE

Industry

Computer softwareComputer security

Fate

Acquired by Intel Founded

1987

Founder(s)

John McAfee

Headquarters2821 Mission College Blvd.Santa Clara,California,United States

A rea served

Worldwide



CONT«..

Key people

Charles Robel,Chairman

David DeWalt,President & CEO

ProductsEmail and Web Security, Data Protection,

Security-as-a-Service (SaaS), Mobile Security,

Network Security, Risk and Compliance, System

Security, Virtualization Security Parent

Intel Corporation



ISSUE OF MC A FEE

McAfee carried out a multimillion dollar financial fraudbetween 1998 and 2000. During that period, McAfee

overstated its revenues by $622 million in order to meet

revenue and earnings targets and understated its

cumulative net losses by $353 million.

McAfee stuffed its distribution channel and improperlyrecorded hundreds of millions of dollars of revenue on sales

transactions with distributors in violation of the antifraud

and other provisions of the federal securities laws.

In a fraudulent scheme to oversell its products and

immediately record the revenue from those transactions,

McAfee secretly gave its distributors substantial cash

payments, price discounts, rebates, and other concessions

as inducements to continue buying, as well as to not return,

McAfee products that the distributors had no reasonable

expectation of selling to customers.



McAfee also inflated its revenues in certain

quarters during the relevant period by engaging

in sham sales transactions that lacked economicsubstance and by improperly selling its accounts

receivables in certain quarters, in order to

perpetuate the misleading impression that

McAfee had robust, non-discounted product sales.



McAfee concealed the revenue fraud from investorsthrough various ploys.

For example,

o (1) McAfee falsely recorded in its books and records certainof the payments and concessions to distributors asexpenses rather than as reductions in revenue.

o (2) McAfee impermissibly used tax reserve accounts tooffset the undisclosed payments and concessions.

o (3) McAfee improperly inflated acquisitions and otherexpense reserve accounts. In the course of this fraud,McAfee misled investors by filing with the Commissionmaterially false and misleading annual and quarterlyreports and securities registration statements. In thosefilings, McAfee stated that it was recognizing revenue onproduct sales only after product had been delivered, the feewas fixed and determinable, and collection of the resultingaccount receivable was probable. McAfee omitted materialinformation that its accounting practices, as noted above,did not conform to its stated revenue recognition policies.In so doing, McAfee deceived investors about its actualearnings and revenues.



McAfee·s accounting scheme began to unravel inthe fourth quarter of 2000 when, after eleven

consecutive quarters of McAfee·s distributionchannel stuffing, its distributors held such hugeinventories of McAfee products that they refusedto buy additional product.

Consequently, on December 26, 2000, McAfee

was forced to announce in a press release that itssales for that quarter would be only $55 million,seventy-eight percent less than the $245 millionin sales that McAfee had projected publicly onlytwo months earlier, on October 14, 2000. Also on

December 26, McAfee announced withoutexplanation the resignations of its Chief Executive Officer, Chief Financial Officer, andPresident.



This news sent McAfee·s stock price down sharply,slashing more than $1 billion from the company·s marketcapitalization. On December 26, 2000, prior to the issuance

of the press release, McAfee·s stock price had closed at$11.75. After the press release, in after hours trading,McAfee·s share price dropped sixty-six percent to open onDecember 27, 2000, at $3.97. That day, McAfee·s shareprice reached a low of $3.25 and closed at $4.50.

On October 31, 2003, nearly three years after it hadannounced the sales shortfall, McAfee restated its financialresults to correct for the fraudulent revenue and earningsinflation scheme. The October 2003 restatement was thecompany·s third restatement in five years and it affectedseven years of previously reported financial results ² from1997 through the second quarter of 2003. Among otherthings, the company acknowledged that material amountsof revenue for that period had been improperly recorded inviolation of Generally Accepted Accounting Principles(´GAAPµ). As a result, McAfee recalculated all revenuethat had been previously recognized at the time of sale to adistributor from 1998 through 2000, postponing therecognition of revenue until the time a distributor actuallysold the products.



From 1997 through 2004, McAfee failed to

maintain an adequate system of internal

accounting and financial reporting controls toensure that McAfee·s financial results were

reported accurately and fairly to investors.

In part as a result, McAfee had to restate its

reported financial results on five occasions from1999 through 2004.

On March 31, 2005, McAfee·s external auditors

determined that McAfee·s internal control over

financial reporting for such critical accountingareas as the recognition of revenue for software

contracts was materially deficient in several

areas.



Specific ploys outlined by the SEC include:

Improperly recording sales to distributors as

revenue. Providing deep price discounts and rebates as

incentives for distributors to continue buying

products, even though many channels already

were overstocked. Secretly paying distributors millions of dollars to

hold on to excess inventory rather than return it

to McAfee for credit.

Using Net Tools Inc., a wholly-owned subsidiary,

to repurchase the overstock that was returned by

distributors.



Mc Af ee pays $50 million in accounting

f raud case

McAfee Inc. will pay $50 million to defrauded

investors and appoint an independent consultant

to clean up its internal accounting controls under

a proposed settlement announced by the

Securities and Exchange Commission. In a prepared statement yesterday, the SEC said

the settlement stems from accounting fraud

charges of "channel-stuffing" that overstated

revenue by $562 million, or 131%, from Q2 1998

through 2000. McAfee, then known as Network

Associates Inc., was accused of leveraging that

inflated value to buy other companies and boost

its stock price.

yashesh McAfee

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