UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No.     )

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MCAFEE, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held Monday, July 28, 2008

 

 

 

You are cordially invited to join us at the annual meeting of stockholders of McAfee, Inc. on Monday, July 28, 2008, at 2:00 p.m. Pacific Daylight Time at our corporate headquarters located at 3965 Freedom Circle, Santa Clara, California 95054.

 

Our 2008 annual meeting of stockholders will be held for the following purposes:

 

1. To elect three Class III directors for two-year terms and three Class I directors for three-year terms;

 

2. To approve our Executive Bonus Plan to permit the deductibility of performance-based awards pursuant to Section 162(m) of the Internal Revenue Code;

 

3. To approve amendments to our 1997 Stock Incentive Plan, as amended, to increase the number of shares reserved for issuance, to make certain administrative changes and to permit the deductibility of performance-based awards pursuant to Section 162(m) of the Internal Revenue Code;

 

4. To ratify the appointment of Deloitte & Touche LLP as our independent public accountants for the year ending December 31, 2008; and

 

5. To transact any other business as may properly come before the meeting or any adjournment or postponement of the meeting.

 

Only stockholders owning our shares at the close of business on June 18, 2008 are entitled to attend and vote at the meeting. For ten days prior to the meeting, a complete list of these stockholders will be available during ordinary business hours at our corporate headquarters located at 3965 Freedom Circle, Santa Clara, California 95054.

 

It is important that your shares are represented and voted at the annual meeting. Whether or not you plan to attend the annual meeting, please complete, sign, date and promptly return the accompanying proxy in the enclosed postage-paid envelope or vote by telephone or the Internet by following the instructions on the proxy card. Returning the proxy does not deprive you of your right to attend the annual meeting.

 

On behalf of our board of directors, I would like to thank you for your continued interest in McAfee. I look forward to seeing you at the annual meeting.

 

By order of our board of directors,

 

Mark D. Cochran

Executive Vice President,

General Counsel and Corporate Secretary

 

Santa Clara, California

June 25, 2008

 

TABLE OF CONTENTS

 

MCAFEE, INC.
3965 Freedom Circle
Santa Clara, California 95054

 

The accompanying proxy is solicited by our board of directors for use at the 2008 annual meeting of stockholders to be held on Monday, July 28, 2008, at 2:00 p.m. Pacific Daylight Time at our corporate headquarters located at 3965 Freedom Circle, Santa Clara, California 95054, or any adjournment or postponement of the meeting. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully.

 

We will bear the cost of soliciting proxies and we will reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to stockholders. We may use the services of our officers, directors, and others to solicit proxies, personally or by telephone, without additional compensation. We have engaged the firm of Morrow & Co. to assist us in the solicitation of proxies. We have agreed to pay Morrow & Co. a fee of $12,500 plus expenses for these services.

 

In some instances, we may deliver only one copy of this proxy statement to multiple stockholders sharing a common address. If requested in writing, we will promptly provide a separate copy of this proxy statement to a stockholder sharing an address with another stockholder. Requests in writing should be sent to our corporate secretary at our corporate headquarters. Stockholders sharing an address who currently receive multiple copies and wish to receive only a single copy should contact their broker or send a signed, written request to us at the address above.

 

These proxy solicitation materials will be mailed to all stockholders entitled to vote at the meeting, beginning on or about June 27, 2008

 

We are mailing or otherwise delivering to you the proxy statement, proxy card and annual report on Form 10-K, as amended, for the year ended December 31, 2007. These proxy materials are also available to you on the Internet. The proxy statement, proxy card and annual report on Form 10-K for the year ended December 31, 2007 are available at investor.mcafee.com. You may access your proxy card on the Internet by following the instructions on the proxy card included at the end of the proxy statement. Please note that you will not be required to provide any personal information, other than the identification number provided on the proxy card, to execute a proxy.

 

Who may vote?  You may vote if you own shares of our stock at the close of business on June 18, 2008 (the “record date”). As of the record date, there were 156,769,389 shares outstanding.

 

Can I revoke my proxy or change my vote?  Yes. Subject to any rules that your broker, trustee or nominee may have, if you are a stockholder whose shares are registered in your name, you may revoke your proxy or change your vote at any time before your proxy is voted at the annual meeting by:

 

 

If you hold your shares in “street name” (through a broker, bank or other nominee), you cannot revoke your proxy and will not be permitted to vote in person at the meeting unless you first obtain a legal proxy issued in your name from your broker, bank or other nominee (which is referred to as the “record holder”).

What is the minimum number of stockholders that must attend for the meeting to be valid?  The holders of a majority of the outstanding shares of our stock as of the record date must be present in person or by proxy for the meeting to be authorized to transact business. This minimum number of required shares is referred to as a “quorum.”

 

How many votes are required to approve an item of business?  The three directors receiving the most votes in each class will be elected. Stockholders may not cumulate their votes, which means that they cannot allocate more than one vote to a director candidate for each share they hold. All other proposals require the affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting.

 

We count abstentions for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of votes cast with respect to a proposal (other than the election of directors). Accordingly, abstentions on a given proposal will have the same effect as a vote against the proposal, but it will not affect the election of directors. We count broker non-votes (shares held by a broker for which the beneficial stockholder has not given specific voting instructions) for purposes of determining the presence or absence of a quorum for the transaction of business, but not for purposes of determining the number of votes cast with respect to the particular proposal. Thus, a broker non-vote is not deemed to be a vote cast and, accordingly, will not affect the outcome of the voting on a proposal.

 

What is the deadline for making stockholder proposals for next year’s annual meeting of stockholders?  In order for stockholder proposals to be considered for inclusion in our proxy statement and proxy card and to be considered at the 2009 annual meeting, stockholders who wish to present proposals at that meeting must submit their proposals so that we receive them no later than February 27, 2009 (120 calendar days prior to the anniversary of the mailing date of this proxy statement.) If the date of next year’s annual meeting is changed by more than 30 days before or after the anniversary date of this year’s annual meeting, the deadline for inclusion of proposals in our proxy statement will instead be a reasonable time before we begin to print and mail our proxy materials. Such proposals also will need to comply with SEC regulations under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Proposals should be addressed to:

 

McAfee, Inc.

Attn: Corporate Secretary

3965 Freedom Circle

Santa Clara, CA 95054

Fax: (408) 346-5348

 

We intend to hold our 2009 annual meeting of stockholders on a more traditional annual meeting calendar. Accordingly, we will instruct our stockholders as to the deadline for receipt of stockholder proposals for next year’s annual meeting in a quarterly report on Form 10-Q scheduled to be filed with the SEC later this year.

 

Under our bylaws, a stockholder’s notice of business to be brought before an annual meeting must set forth, as to each proposed matter: (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on our books, of the stockholder proposing such business, (c) the class and number of shares that are beneficially owned by the stockholder, (d) any material interest of the stockholder in such business, (e) the name and address of any party or parties on whose behalf the stockholder is acting, a detailed description of any agreements, arrangements or understandings between the stockholder and such party or parties with respect to us and any material interest of such party or parties in such business, and (f) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 120 days prior to the day and month of the prior year’s proxy statement for that annual meeting, provided, however, that in the event that no annual meeting was held in the prior year or the date of the annual meeting is more than 30 days prior to the anniversary date of the prior year’s annual meeting, then notice by the stockholder to be timely must be received no later than the first to occur of (i) the end of our prior fiscal year or (ii) the 10^th day following the date on which public announcement of the date of such meeting is first made.

 

The rules of the Securities and Exchange Commission (“SEC”) establish a different deadline for submitting stockholder proposals that are not intended to be included in our proxy statement with respect to discretionary

voting. The discretionary vote deadline for the 2009 annual meeting of stockholders is May 13, 2009 (45 calendar days prior to the anniversary of the mailing date of this proxy statement). If the date of next year’s annual meeting of stockholders is changed by more than 30 days from this year’s annual meeting, then notice must be received a reasonable time before we send our proxy materials for the 2009 annual meeting. If a stockholder gives notice of a proposal after the discretionary vote deadline, our proxy holders will be allowed to use their discretionary voting authority to vote against the stockholder proposal when and if the proposal is raised at our 2009 annual meeting of stockholders. We have not been notified by any stockholder of his or her intent to present a stockholder proposal from the floor at this year’s annual meeting of stockholders.

 

Proposal No. 1 — Election of Directors

 

The total number of authorized directors is eleven members. We currently have eleven board members. The board of directors is divided into three classes, with three members in each of Classes II and III and five members in Class I. Mr. Bucknam and Ms. Wilson will serve the remainder of their current terms as Class I directors and they have decided not to stand for re-election to the board of directors at the 2008 annual meeting. The total number of authorized directors will be decreased to nine prior to the 2008 annual meeting.

 

Three of our current Class I directors were elected to three-year terms in 2005, so the board of directors has nominated three Class I directors for election to a three-year term at the 2008 annual meeting. In addition, the board of directors has nominated each current Class III director for election to a two-year term. Under ordinary circumstances the Class III directors would have been nominated for election in 2007 for three-year terms ending at our annual meeting of stockholders in 2010. However, we did not hold an annual meeting of stockholders in 2007 due to a pending restatement of our historical financial statements.

 

If elected:

 

 

All of the nominees for election at this meeting are currently directors. Messrs. O’Leary and Pangia were previously elected by the stockholders. Messrs. Darcy and Bass were appointed by the board of directors in January 2008 to fill existing vacancies. Messrs. Miller and Zingale were appointed by the board of directors in May 2008. The nominees in each Class receiving the highest number of affirmative votes will be elected as directors.

 

See “Directors, Executive Officers and Corporate Governance” below for additional detail regarding the board of directors.

 

The board of directors recommends that you vote “for” the election of Messrs. Darcy, O’Leary and Pangia as Class III directors, and “for” the election of Messrs. Bass, Miller and Zingale as Class I directors.

 

Proposal No. 2 — Approval of the Executive Bonus Plan

 

We believe that performance-based bonuses are an important factor in attracting, motivating and retaining key employees who are essential to our success and to increasing stockholder value. The Executive Bonus Plan helps us achieve these goals and also enables us to take a federal income tax deduction for certain compensation paid under the Bonus Plan.

 

At the recommendation of the compensation committee, the board of directors has approved the Executive Bonus Plan, subject to the approval of our stockholders. The affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting will be required to approve this proposal.

 

The board of directors recommends a vote “for” the approval of the Executive Bonus Plan.

If our stockholders do not approve the adoption of the Executive Bonus Plan, it will not be adopted. If that happens, we may not be entitled to take a deduction for incentive cash compensation paid to our chief executive officer and certain other highly compensated executive officers. If you would like more information about the Executive Bonus Plan, a summary of its terms is included in Appendix A to this proxy statement.

 

Proposal No. 3 — Approval of Amendments to the 1997 Stock Incentive Plan, as Amended

 

We believe that equity awards are an important factor in attracting, motivating, and retaining qualified personnel who are essential to our success. The 1997 Stock Incentive Plan, as amended (the “Incentive Plan”), provides a significant incentive by allowing employees to receive or purchase shares of our common stock.

 

Currently, a maximum of 38.5 million shares may be granted under the Incentive Plan. As of the record date, 37.6 million shares had been granted and 0.9 million shares remained available for grant. The proposed amendments to the Incentive Plan would increase the number of shares available for grant under the Plan by five million shares, bringing the total that may be granted under the Incentive Plan to 43.5 million shares. As of the record date, no benefits or amounts relating to the additional five million shares have been received by, or allocated to, any individuals.

 

The amendments will also clarify that, for awards with performance-based vesting conditions, the compensation committee (or any other committee comprised solely of at least two outside directors) will establish performance-based targets and will also determine whether performance-based vesting conditions are achieved.

 

In addition, the amendments will clarify that awards with performance-based vesting conditions may have performance periods of any duration, as determined by the compensation committee.

 

Finally, the amendments to the Incentive Plan will provide that awards may be transferred pursuant to a domestic relations order or other comparable legal document as a result of the end of a marriage.

 

The board of directors and/or the compensation committee, as appropriate, have approved the amendments to the Incentive Plan, subject to the approval of our stockholders where appropriate. The affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting will be required to approve this proposal.

 

The board of directors recommends a vote “for” the approval of the amendments to the 1997 Stock Incentive Plan, as amended.

 

If stockholders do not approve the proposed amendments to the Incentive Plan, as amended, we would soon be unable to continue making grants under the Incentive Plan. This would make it extremely difficult for us to attract new talent. If you would like more information about the 1997 Stock Incentive Plan, a summary of its terms is included in Appendix B to this proxy statement.

 

Proposal No. 4 — Ratification of Independent Public Accountants

 

The audit committee of our board of directors has selected Deloitte & Touche LLP (“Deloitte”), an independent registered public accounting firm, to audit our financial statements for the year ending December 31, 2008. This selection is being presented to the stockholders for ratification at the meeting as a matter of good corporate practice, though the approval of the stockholders is not actually required. A representative of Deloitte is expected to attend the annual meeting in order to respond to appropriate questions from stockholders and will have the opportunity to make a statement if they so desire or to respond to appropriate questions from stockholders.

 

Audit Fees

 

Deloitte & Touche LLP (“Deloitte”) served as our principal independent accountant for the years ended December 31, 2007 and 2006. Audit fees billed to us by Deloitte related to 2007 and 2006 for the audit of our consolidated financial statements included in our annual report on Form 10-K and its audit of our internal control over financial reporting, review of the quarterly reports on Form 10-Q, statutory audits for foreign entities and securities filings totaled $5,423,000 and $9,397,000, respectively.

Audit-Related Fees

 

Audit-related fees billed to us by Deloitte related to 2007 and 2006 for assurance services and services related to our audits and reviews of our consolidated financial statements that are not considered audit fees totaled $4,000 in each year. These fees included amounts paid for consulting on accounting matters.

 

Tax Fees

 

Fees billed to us by Deloitte related to 2007 and 2006 for tax related services, including compliance, planning and tax advice, totaled $26,000 and $505,000, respectively.

 

All Other Fees

 

Fees billed to us by Deloitte related to 2007 and 2006 for online accounting research tool subscriptions totaled $3,000 and $2,000, respectively. No other fees were billed to us by Deloitte during 2007 or 2006.

 

Our audit committee charter includes a requirement that the audit committee of the board of directors pre-approve the services provided by our independent public accountants, including both audit and non-audit services. The pre-approval of non-audit services performed by our independent public accountants includes making a determination that the provision of the services is compatible with maintaining the independence of our independent accountants. All of the services performed by Deloitte described above under the captions “Audit-Related Fees,” “Tax Fees” and “All Other Fees” were pre-approved by our audit committee.

 

The affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting will be required to approve this proposal.

 

The board of directors recommends a vote “for” ratification of the appointment of Deloitte & Touche LLP as our independent accountants.

 

The names of our current executive officers, director nominees and continuing directors and related biographical information are set forth below.

 

Directors Nominees and Continuing Directors

 

 

 

 

Executive Officers

 

 

Director Biographies

 

Thomas E. Darcy has been a director of our company since January 2008. Since August 2007, Mr. Darcy has served as executive vice president, chief financial officer and director of Tocagen Inc., a biopharmaceutical company. Mr. Darcy previously served as executive vice president for strategic projects at Science Applications International Corporation, a provider of scientific, engineering, systems integration and technical services and solutions, since November 2005, and retired in April 2007. Prior to that, Mr. Darcy served Science Applications International as corporate executive vice president beginning in 2003 and chief financial officer beginning in 2000. Prior to joining Science Applications International, Mr. Darcy was with the accounting firm currently known as PricewaterhouseCoopers LLP from 1973 to 2000, where he served as partner from 1985 to 2000.

 

Denis J. O’Leary has been a director of our company since July 2003. From 1993 to 2003, Mr. O’Leary was executive vice president of J.P. Morgan Chase & Co., having joined the bank in June 1978. During his career at J.P. Morgan Mr. O’Leary held a number of senior positions including director of finance, chief information officer, and head of retail branch banking. Mr. O’Leary currently serves on the board of directors of Fiserv, Inc.

 

Robert W. Pangia has been a director of our company since April 2001. Since 2003, Mr. Pangia has been a general partner and the managing member of Ivy Capital Partners, LLC, a private equity fund. Prior to 2003, Mr. Pangia was self-employed as a private investor. From 1987 to 1996, Mr. Pangia held a number of senior level management positions at PaineWebber Incorporated, including director of investment banking. Mr. Pangia currently serves on the board of directors of Biogen Idec Inc.

 

Carl Bass has been a director of our company since January 2008. Mr. Bass joined Autodesk, Inc, a design innovation technology company, in 1993 and currently serves as its chief executive officer, president and director. From 2004 to 2006, Mr. Bass served as chief operating officer. From 2002 to 2004, Mr. Bass served as senior executive vice president, design solutions group. From 2001 to 2002, Mr. Bass served as executive vice president, emerging business and chief strategy officer. He has also held other executive positions within Autodesk.

 

Jeffrey A. Miller has been a director of our company since May 2008. He has served as president of JAMM Ventures Inc., a consulting and venture capital firm, since 2002. From 2002 to 2007, Mr. Miller also served as a venture partner with Redpoint Ventures, a venture capital firm focused on investments in information technology. Prior to his tenure at Redpoint, Miller served as chief executive officer of Documentum, Inc., a provider of content and storage management software, from 1993 to 2001. Mr. Miller currently serves on the board of directors of Data Domain, Inc.

 

Anthony Zingale has been a director of our company since May 2008. He served as president and chief executive officer of Mercury Interactive, a provider of business technology optimization (BTO) solutions that included the quality, performance, availability and governance of enterprise software applications, from 2004 until it was acquired by Hewlett Packard at the end of 2006. Prior to that, Mr. Zingale was a private investor from 2001 to 2004. From 2000 to 2001, Mr. Zingale served as president of Nortel Network’s billion-dollar eBusiness Solutions Group. Prior to that, Mr. Zingale served as president and chief executive officer of Clarify, a customer relationship

management (CRM) provider, from 1997 until it was acquired by Nortel Networks in 2000. Mr. Zingale currently serves on the board of directors of Coverity, Inc. and Jive Software, Inc.

 

Leslie G. Denend has been a director of our company since June 1995. From December 1997 to April 1998, Mr. Denend was president of our company. From 1993 to 1997, Mr. Denend was chief executive officer and president of Network General Corporation, which merged with McAfee Associates to form McAfee, Inc. Mr. Denend serves on the board of directors of Verifone, Inc. and United Services Automobile Association (USAA).

 

David G. DeWalt has served as our chief executive officer and president, and as a director, since April 2007. Prior to joining McAfee, Mr. DeWalt served as executive vice president and president customer operations and content management software, at EMC Corporation from 2005 to 2007 and as its executive vice president, EMC Software Group from 2003 to 2005. EMC is a provider of information infrastructure technology and solutions. Mr. DeWalt joined EMC in 2003 upon its acquisition of Documentum, Inc., where he served as its chief executive officer and president from 2001 to 2003. Prior to joining Documentum, Mr. DeWalt was founding principal and vice president of Eventus Software, a web content software company, where he was responsible for marketing and sales, consulting services and support, product management and business development. Mr. DeWalt currently serves on the board of directors of Polycom, Inc.

 

Charles J. Robel has been a director of our company since June 2006 and has served as the non-executive chairman of our board of directors since October 2006. He served as a managing member and chief operating officer at Hummer Winblad Venture Partners, a venture capital fund, from 2000 to 2005. Mr. Robel began his career at PricewaterhouseCoopers LLP, from which he retired as a partner in 2000. Mr. Robel currently serves on the board of directors of Autodesk, Inc., DemandTec, Inc. and Informatica Corporation.

 

Executive Officer Biographies

 

Information pertaining to Mr. DeWalt, who is both a director and an executive officer, may be found in the section above entitled “Director Biographies.”

 

Albert A. “Rocky” Pimentel has served as our chief financial officer and chief operating officer since May 2008. Prior to that, Mr. Pimentel served as executive vice president and chief financial officer of Glu Mobile, Inc., a publisher of mobile games, since 2004. Prior to joining Glu Mobile, Mr. Pimentel served as executive vice president and chief financial officer of Zone Labs, Inc., an end-point security software company, from 2003 until it was acquired in 2004 by Checkpoint Software, Inc. From 2001 to 2003, he served as a partner of Redpoint Ventures. Prior to joining Redpoint, he served as chief financial officer for WebTV Networks, Inc., a provider of set-top Internet access devices and services acquired by Microsoft Corporation, and LSI Logic Corporation, a semiconductor and storage systems developer.

 

Christopher S. Bolin has served as our executive vice president and chief technology officer since April 2004. Mr. Bolin served as our senior vice president of engineering from 2002 to 2004, vice president of engineering from 2000 to 2002, and director of engineering from 1999 to 2000.

 

Mark D. Cochran has served as our executive vice president and general counsel since September 2007, and as our corporate secretary since January 2008. Prior to joining McAfee, Mr. Cochran served as vice president and general counsel of Hyperion Solutions Corporation, a provider of business performance management software, from 2005 to 2007. Prior to joining Hyperion, Mr. Cochran was vice president, general counsel and secretary of Brocade Communications Systems, Inc., a storage networking company, from 2003 to 2004. From 1999 to 2003, he served as vice president and general counsel at AvantGo, a provider of mobile enterprise software and now subsidiary of Sybase Inc.

 

Michael P. DeCesare was appointed executive vice president, worldwide sales operations in October 2007. Prior to that, Mr. DeCesare served as senior vice president, worldwide field operations of EMC Corporation, from 2004 to 2007, and as executive vice president of worldwide field operations for Documentum (then a division of EMC), from 2002 until 2004. Prior to joining Documentum, Mr. DeCesare served as executive vice president, worldwide sales and alliances, at Asera Inc., a provider of e-business infrastructure that accelerates implementation of enterprise software applications, from 2001 to 2002.

Keith S. Krzeminski has served as our chief accounting officer since March 2008. Mr. Krzeminski has also served as our senior vice president, finance since joining us in March 2007. Prior to that, Mr. Krzeminski served as senior vice president and chief financial officer of Home Interiors & Gifts, Inc., a marketer and manufacturer of home décor products, from 2005 to 2006. Before joining Home Interiors & Gifts, Mr. Krzeminski worked for Electronic Data Systems Corporation (“EDS”), a global information technology services company, where he served in several capacities during his six-year tenure. From 2004 to 2005, he served as vice president of planning and financial analysis. Mr. Krzeminski served as chief financial officer of EDS’ product lifecycle management software and services business, from 2003 to 2004. From 2002 to 2003, Mr. Krzeminski served as global finance director of EDS’ applications and information technology consulting business. Mr. Krzeminski joined EDS in 1999 as chief accounting officer, where he served until 2002.

 

Our executive officers serve at the discretion of the board of directors. There are no family relationships among any of our directors and executive officers.

 

Board of Directors and Board Committees

 

During 2007, the board of directors held fourteen meetings. Each director, with the exceptions of Messrs. Robert Dutkowsky and Dale Fuller, who resigned from the board of directors in 2007, attended at least 75% of all board and applicable committee meetings during 2007. The board of directors has determined that each of its members, other than Mr. DeWalt, is “independent” as defined under the New York Stock Exchange corporate governance standards, and has no material relationship with us. Mr. Robel serves as non-executive chairman of the board of directors and has been designated as our “lead” independent director for presiding over executive sessions of the board of directors without management.

 

Our board of directors has a standing audit committee, compensation committee and governance and nominations committee. Each committee has a written charter, which is available on our investor relations website at investor.mcafee.com under “Governance Documents,” or by calling or writing the corporate secretary at our corporate headquarters. During 2006, our board of directors formed a special committee comprised of Messrs. Bucknam, Robel and Fuller to review our historical stock option grant practices and related accounting and other issues. Mr. Fuller resigned from the special committee upon his appointment in October 2006 as our interim chief executive officer and president. The special committee held seventeen meetings during 2007.

 

Audit Committee

 

The audit committee reviews, acts and reports to our board of directors on various auditing and accounting matters, including the appointment of our independent accountants, the scope of our annual audits, fees to be paid to the independent accountants, the approval of services to be performed by our independent accountants, the performance of our independent accountants and our accounting practices. The audit committee held twelve meetings during 2007. Messrs. Denend, Pangia and Robel served as members of the audit committee during 2007, with Mr. Robel serving as chairman during 2007. In January 2008, Mr. Darcy was appointed to the audit committee and in February he was appointed chairman. Mr. Robel served as the audit committee “financial expert” (as defined under the SEC rules implementing Section 404 of The Sarbanes-Oxley Act) during 2007, and Mr. Darcy has served as an additional audit committee “financial expert” since joining the committee in January 2008. Mr. Denend no longer serves as a member of the audit committee.

 

Compensation Committee

 

The compensation committee is primarily responsible for reviewing and approving all executive officer and non-employee director compensation programs and decisions, administering our various equity compensation plans, and providing advice to the board of directors and management regarding other compensation and benefit programs. The compensation committee held twelve meetings during 2007. Messrs. O’Leary and Pangia and Ms. Wilson were members of the compensation committee during 2007, with Mr. O’Leary serving as chairman during 2007. In February 2008, Mr. Denend was appointed as chairman of the compensation committee. Mr. Pangia no longer serves as a member of the compensation committee. On the day after we file this proxy statement,

Messrs. Miller and Zingale will join the compensation committee and Ms. Wilson will depart from the compensation committee.

 

Governance and Nominations Committee

 

The governance and nominations committee addresses issues relating to the board and board committees, including identifying prospective director nominees, developing and recommending governance principles applicable to us, overseeing the evaluation of the board of directors and management and recommending nominees for the board committees. The committee also reviews and provides guidance relating to broader corporate governance practices and initiatives. The governance and nominations committee held four meetings during 2007. Messrs. Bucknam and Denend and Ms. Wilson were members of the committee during 2007, with Mr. Bucknam serving as chairman during 2007. In February 2008, Messrs. Robel and Bass were appointed to serve as members of the governance and nominations committee, with Mr. Robel to serve as chairman of the governance and nominations committee. In May 2008, Mr. Zingale was appointed to serve as a member of the governance and nominations committee. Messrs. Bucknam and Denend and Ms. Wilson no longer serve as members of the governance and nominations committee.

 

Identification and Evaluation of Candidates for Board Membership

 

In evaluating director nominees, the governance and nominations committee evaluates each individual in the context of the board of directors as a whole, with the objective of recommending individuals who will best serve our interests and the interests of our stockholders. Nominees for director are selected based on a range of criteria, including:

 

 

The governance and nominations committee may also consider other factors as it may deem are in our best interests and the best interests of our stockholders.

 

For nominations of directors to be elected at an annual meeting of stockholders, the governance and nominations committee identifies nominees by first determining the current members of the board of directors willing to continue in service. Those willing to continue in service are evaluated based on skills and experience that are relevant to our business to determine whether they will be considered for re-nomination. The committee balances the value of continuity of service by existing members of the board of directors with the value of the fresh perspective that a new board member would bring. If the board of directors decides not to nominate a member for re-election, the governance and nominations committee identifies the desired skills and experience of a new nominee in light of the criteria above and any other factors the governance and nominations committee may deem are in our best interests and the best interests of our stockholders. Current members of the governance and nominations committee and board of directors are polled for suggestions for individuals meeting the criteria of the governance and nominations committee. The committee may engage third-party consultants to assist in identifying, evaluating and narrowing down the list of potential nominees. For nominations of directors to be appointed by the board of directors to fill a vacancy on the board, the committee follows a similar process to determine the desired skills and experience for a nominee, and to identify and evaluate candidates.

 

We do not have a formal policy concerning stockholder recommendations to the governance and nominations committee. However, the committee considers any nominee recommended by a stockholder if the nomination is submitted as described below. In order to be considered timely for our 2009 annual meeting, written notice of a stockholder’s nominee must be received by our corporate secretary by February [  ], 2009. (Notwithstanding the

foregoing deadlines, we intend to hold our 2009 annual meeting of stockholders on a more traditional annual meeting calendar. We will instruct our stockholders as to the deadlines for receipt of stockholder proposals for next year’s annual meeting in our quarterly report on Form 10-Q scheduled to be filed with the SEC later this year. Each deadline will be a reasonable time before we begin to print and send our proxy materials related to our 2009 annual meeting.) The notice must include the name and address of the stockholder and nominee; a representation that the stockholder is a holder of record of our stock and intends to appear in person or by proxy at the annual meeting to nominate the nominee; a description of all arrangements or understandings between the stockholder and nominee and any other persons pursuant to which the nomination is made; all other information regarding the nominee as required to be included in a proxy statement filed with the SEC had the nominee been nominated by the board of directors; and the consent of the nominee to serve as a director.

 

A stockholder desiring to recommend a nominee to the governance and nominations committee should review all of the requirements contained in our bylaws that address the process by which a stockholder may nominate an individual to stand for election to the board of directors. Our bylaws are available on our investor relations website at investor.mcafee.com under “Governance Documents.”

 

We strive to be a leader in corporate governance best practices. Therefore, the governance and nominations committee will periodically consider whether to adopt a formal policy concerning stockholder recommendations of board nominees.

 

Communications with the Board of Directors

 

Stockholders and other interested parties who would like to communicate directly with the board of directors should send their communications in writing to our corporate secretary at our corporate headquarters at McAfee, Inc., 3965 Freedom Circle, Santa Clara, California, 95054. Our corporate secretary will review the communication and deliver it to the director or directors named in the correspondence, provided that it relates to our business and it is not determined to be inappropriate for consideration by the board of directors. If the communication requires a response, the corporate secretary will work with the appropriate director(s) to prepare and send a response.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file certain reports of ownership with the SEC. Such officers, directors and stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file. All reports required to be filed during 2007 pursuant to Section 16(a) of the Exchange Act by directors, executive officers and 10% beneficial owners were filed on timely basis, except with respect to the Form 3 filing reporting Mr. DeCesare’s initial holdings in our securities upon his designation as a Section 16 person by the board of directors on October 2, 2007, and the Form 4 filings reporting the October 29, 2007 stock option grants to Messrs. DeCesare and Cochran. Each of these three reports was subsequently filed with the SEC.

 

Other Corporate Governance Matters

 

The board of directors has adopted corporate governance guidelines, a code of business conduct and ethics, and a separate code of ethics that applies to our chief executive officer, chief financial officer, corporate controller and other senior finance organization employees (“Senior Executive Code”). These guidelines and codes establish minimum standards of professional responsibility and ethical conduct. They can be viewed at investor.mcafee.com under “Governance Documents,” or may be obtained without charge by writing the corporate secretary at our corporate headquarters. If we make any substantive amendments to the Senior Executive Code or grant any waiver, including any implicit waiver, from a provision of the code to our chief executive officer, chief financial officer or corporate controller, we will disclose the amendment or waiver on that website or in a report on Form 8-K.

 

Our bylaws require our chairman of the board of directors to attend stockholder meetings. Although we do not have a formal policy regarding attendance by any other members of the board of directors at our annual meeting of stockholders, our other directors are encouraged to attend the meeting. Four of our board members, including our

chairman and chief executive officer, attended the 2006 annual meeting. We did not hold an annual meeting of stockholders in 2007.

 

 

This compensation discussion and analysis explains our 2007 executive compensation programs and compensation paid under those programs. Most of the discussion relates to our “named executive officers” for 2007, who were:

 

 

 

 

All executive compensation decisions are approved by the compensation committee of the board of directors. The compensation committee currently consists of three non-employee directors who meet the independence requirements established by SEC and the New York Stock Exchange.

 

Our executive compensation programs for named executive officers consist primarily of cash compensation in the form of base salary and performance-based cash bonuses, and equity awards in the form of stock options, restricted stock units and restricted stock awards. We are now granting performance stock units, which are restricted stock units that vest based on achievement of specific objectives, rather than based solely on continued employment. All named executive officers except Messrs. Decker and King are entitled to severance and/or change of control benefits.

 

Salaries are generally established based on market comparables among our peer companies. Performance-based cash bonuses and equity awards are linked to company and individual executive performance against “key performance metrics” that are established at least annually for each executive. The compensation committee also considers other factors, such as leadership effectiveness, integrity, innovation, work ethic and competitive benchmarking in determining bonus and equity awards. The size and timing of equity awards are determined based on all of these factors. Vesting is based on continued service and, for certain grants, on the achievement of performance metrics. When it makes executive compensation decisions, the compensation committee focuses on “total direct compensation” (the total compensation to be paid if all performance goals are fully met) as well as on specific elements of compensation.

 

The compensation committee relies primarily on performance-based compensation and equity to attract, reward and retain a talented and dedicated executive team and to ensure a strong connection between executive compensation and our financial performance. Base salaries are a minor portion of total compensation, and perquisites are generally minimal, so these are not significant elements in attracting or retaining executives.

In 2008, we continue to refine the performance-based components of our executive compensation programs. We are expanding our use of performance stock units. We adopted a new Executive Bonus Plan (subject to stockholder approval at our 2008 annual meeting of stockholders) to replace our 2007 cash bonus program. Payments under the new plan are tied solely to achievement of objective performance criteria.

 

 

 

Our executive compensation programs have three primary objectives:

 

 

The compensation committee reviews total compensation for each executive annually, and determines the appropriate amount and mix of compensation based on the following principles:

 

 

 

The compensation committee evaluates executive compensation with a goal of establishing compensation components that the compensation committee believes are similar to those provided to executives in comparable companies that have comparable performance. Accordingly, our executive officers’ compensation has three primary components:

 

 

 

Cash bonuses and equity awards for executives are linked to performance assessments against quarterly and/or annual key performance metrics (“KPMs”). KPMs generally include a combination of financial metrics, including revenue-related and profit-related objectives reflected in our internal business plan, because they are the most direct indicators of increased stockholder value.

 

KPMs may also include, among others, measures of customer success and employee success — both of which have a less direct, but nonetheless significant, impact on stockholder value. Financial metrics are drawn from our internal business plan, but in situations where these financial performance metrics are also line items in our GAAP financial statements, the metrics may differ from the GAAP line items. These non-GAAP metrics exclude items that

are not, in management’s view, related to the ongoing operating performance, such as restructuring charges, the amortization expense associated with purchased intangible assets, and non-cash stock-based compensation expense, among others. KPMs typically also include operational goals that are specific to each executive’s respective area of responsibility. See Section D2 below for specific details on 2007 KPMs.

 

Although performance against KPMs is the primary determinant of bonus and equity compensation, the compensation committee also considers the following secondary factors, among others, to determine final compensation:

 

 

 

Base salaries are intended to provide a fixed amount of cash compensation for services rendered during the year. We believe that setting competitive base salaries assists us in hiring and retaining individuals in a competitive environment. In determining individual salaries, the compensation committee considers the scope of job responsibilities, individual contribution, business performance, job market conditions, the Radford Executive Survey, third-party compensation data and current compensation levels.

 

 

Our executive cash bonus program provides quarterly or annual cash payments to executive officers. The compensation committee establishes target cash bonus amounts for each executive officer, designated as a percentage of base salary, at the beginning of the year. Actual payments are primarily contingent on successful achievement of certain KPMs approved by the compensation committee, as described above. The compensation committee typically establishes KPMs for the CEO. The CEO then proposes KPMs for the remaining executives, which are reviewed and approved by the compensation committee.

 

During 2007, KPMs were generally set as quarterly targets, and performance against them was assessed on a quarterly basis. These quarterly check points served as preliminary indicators of potential bonus payouts. However, in most cases actual payments were determined and paid on an annual basis, shortly after completion of the year. As an exception, bonuses for Mr. Brown, our chief operating officer and chief financial officer during 2007, were determined and paid quarterly in accordance with his employment agreement. Although performance against KPMs is the primary determinant of these cash payments, in 2007 the compensation committee had discretion to consider other more subjective factors, including those listed in Section B3, to determine final payments.

 

For 2008, we adopted a new Executive Bonus Plan (subject to stockholder approval at the 2008 annual meeting of stockholders) to replace our 2007 cash bonus program. Payments under the new plan will be tied solely to objective performance criteria. The compensation committee will not have discretion to increase any award beyond what is payable based on performance, but it may, in its discretion, reduce an award. We expect that all payments under the new plan will be tax deductible because they will qualify as “performance-based” for purposes of Section 162(m) of the Internal Revenue Code. See Section E below for a more detailed discussion of tax considerations relating to executive compensation.

 

 

Equity compensation is a key element of compensation at McAfee. This is particularly true for our executive officers, for whom equity compensation generally represents a majority of total direct compensation. Equity awards with multi-year vesting periods or performance measurement periods allow us to:

 

 

 

The majority of our executive equity awards are made when an executive is initially hired, and then in subsequent years, during the first half of the year, as part of our annual performance and compensation review process. The size of initial and follow-on grants varies among executives based on equity award practices among our peer group, the scope of their responsibilities and their performance against KPMs.

 

 

Prior to fiscal 2006, our primary form of equity awards for all employees, including executives, was non-qualified stock options. In 2005, we granted a limited number of restricted stock awards (“RSAs”) to certain members of our executive team. In 2006, we began granting restricted stock units (“RSUs”) to our executive team and certain other employees. We are now shifting to more regular use of performance stock units (“PSUs”) which are RSUs with performance-based vesting. RSUs, RSAs and PSUs have some important advantages compared to stock options, particularly for employees with relatively large equity awards, for the reasons described below. The compensation committee has determined that these types of awards are particularly useful to recruit senior level executives if a prospective candidate has existing in-the-money unvested equity awards that the executive would lose if he or she joined our company.

 

RSUs give an executive the right to receive a specified number of shares of our common stock, at no cost, if the executive remains with McAfee until the shares vest. RSAs are similar to RSUs, but the executive actually owns the shares as of the grant date (subject to vesting), rather than having a right to receive stock at vesting. Vesting of RSUs and RSAs granted through 2007 is contingent on the executive’s continued employment with us. We are now granting PSUs, with vesting based on achievement of performance objectives. For PSUs and RSUs that do not vest because an executive’s employment terminates, and PSUs that do not vest because the performance criteria are not satisfied, the unvested shares are never issued. For RSAs, if an executive’s employment terminates, the executive must generally return to us all shares that are unvested on the termination date.

 

The vesting of equity awards held by our named executives may accelerate in certain termination situations. For details, see “Severance and Change of Control Benefits” on page 30 of this document.

 

The compensation value to an executive of each RSU, PSU or RSA (assuming it will vest) equals our stock price on the grant date of the award (less $0.01 per share for RSAs), adjusted for any subsequent change in stock price that occurs prior to vesting. Thus, RSUs, PSUs and RSAs provide immediate, meaningful and measurable economic value for executives as of the grant date and an incentive to remain with McAfee through vesting. Moreover, these types of awards retain value, and encourage retention, regardless of short-term stock price fluctuations. In contrast, the entire value to executives of stock options depends on future stock price appreciation, so options have little perceived value if the stock price declines after the grant date. Because of these differences, restricted equity awards can deliver more immediate tangible value to executives at grant than stock options, with significantly fewer shares and potentially less dilution for our stockholders. We typically determine the size of RSU, PSU and RSA grants based on a ratio of one share for every two to three stock option shares that we would otherwise grant, using a Black-Scholes pricing model as a reference.

 

Recent RSU and RSA grants generally vest over three years, with one-third vesting at the end of each year. RSUs granted in 2006 generally vest 50% after two years and 50% after three years. These infrequent, but sizable vesting tranches create a strong incentive to continue employment with us over the vesting period. Although vesting of the awards through 2007 was based solely on continued service, the size of the grant to each executive was linked to performance. In addition, part of the value of the RSUs will depend on the performance of the executive team and our company during the vesting period, as measured by our stock price.

 

 

The compensation committee does not use a specific formula for allocating compensation among the compensation components described above. Rather, the committee uses a market-based approach. We assign a significant majority of our executives’ total compensation to the variable cash bonus program and equity

compensation, in order to focus our executives on achievements that will create stockholder value. We consider equity compensation to be the most important performance-based compensation component, so it represents the highest proportion of total compensation for senior executives. When the compensation committee makes executive compensation decisions, it focuses on “total direct compensation” (the total compensation to be paid if all performance goals are fully met) as well as on specific elements of compensation.

 

 

During 2007, each named executive officer other than Messrs. Decker and King had an agreement in place to provide severance and/or change of control benefits. The compensation committee believes these types of agreements are essential in order to attract and retain qualified executives and promote stability and continuity in our senior management team. We believe that the stability and continuity provided by these agreements are in the best interests of our stockholders. For details, see “Severance and Change of Control Benefits” on page 30 of this document.

 

 

In general, we do not view perquisites as a significant component of our executive compensation structure. The compensation committee occasionally approves perquisites, primarily for retention purposes or to accommodate specific, and usually temporary, circumstances of executives who do not reside near their work locations. See the “Summary Compensation Table” for more details. Our executive officers are eligible to participate in our benefit plans on the same terms as other full-time employees. These plans include medical and dental insurance, life insurance, vision, short and long-term disability insurance, 401(k) plan, employee stock purchase plan and discounts on our products.

 

 

 

The compensation committee determines compensation for our named executive officers. All three members are independent of company management. Executive compensation is reviewed annually by the compensation committee in connection with executive performance evaluations. During the first quarter of each year, the compensation committee typically conducts an evaluation of the chief executive officer’s performance, utilizing formal individual input from each of our independent directors. The compensation committee also reviews the performance of the other named executive officers with the chief executive officer. The compensation committee then evaluates total current compensation to determine if any changes are appropriate based on the considerations explained throughout this compensation discussion and analysis. The compensation committee reviews and gives considerable weight to the chief executive officer’s compensation recommendations for the other named executive officers because of his direct knowledge of the executives’ performance and contributions. No other named executive officers have any input on the compensation committee’s executive compensation decisions. The compensation committee members make independent decisions based on their collective judgment.

 

 

During 2007, the compensation committee selected and directly engaged the services of Compensia, an executive compensation consulting firm, and Heidrick & Struggles, an executive search firm. No member of the compensation committee or any named executive officer has any affiliation with either Compensia or Heidrick & Struggles. Each firm was retained by both the compensation committee and our company, but for purposes of executive compensation matters, it reported directly to the chairman of the compensation committee.

 

In connection with specific compensation decisions, the compensation committee sought input from Compensia on a range of external market factors, including appropriate comparison companies for benchmarking purposes, market survey data, and best practices for executive compensation arrangements. Although Compensia provided extensive data, it does not determine or recommend the amount or form of compensation for any executives. During the second half of 2007, Compensia also conducted an extensive review and evaluation of our

executive compensation programs. Based in part on Compensia’s review and evaluation, the committee identified certain program and process improvements to adopt for 2008.

 

We hired three key executives during 2007. In connection with determining the compensation packages for those key hires, the committee sought input, including extensive competitive market data, from Compensia and Heidrick & Struggles.

 

 

With the assistance of Compensia, the compensation committee selected the peer group of technology companies listed below for executive compensation benchmarking. Peer companies were selected in order to include (i) our most direct business competitors; (ii) companies with whom we compete for talent; and (iii) companies that are roughly comparable to us in terms of market capitalization and/or revenue. We seek to maintain stability in the peer group from year to year. However, we have eliminated a number of peer companies that have been acquired over the past few years as our industry consolidates. This has contributed to a reduction in the size of the peer group. We also make occasional changes to ensure that the peer group continues to meet the selection criteria described above. The table below shows data regarding each of the peer companies, as compared to us.

 

 

 

 

Compensia provides reports to the compensation committee comparing compensation of our most senior executive officers to that of the most senior executive officers at our peer group companies. Peer company data is derived from the Radford Executive Survey (which is focused on compensation in the technology sector) and SEC filings by our peer companies. The committee does not establish specific percentile targets for executive compensation. Rather, it makes each decision based on what it believes is necessary and appropriate to attract, motivate and/or retain the executives under the particular circumstances in which the decision is made. These circumstances include but are not limited to the external competitive landscape. In light of the recent challenges we have faced stemming from our 2006 stock option investigation, the committee’s executive compensation decisions have resulted in top quartile compensation for the named executives.

 

All 2007 equity-based awards were approved by our compensation committee. During 2007, we adopted a formal equity granting policy that includes the following refinements to our grant policies and procedures:

 

 

 

 

This section describes the executive compensation decisions made by the compensation committee for 2007. The compensation decisions made during 2007 related to the hiring of three key executives: David DeWalt as chief executive officer and president; Mark Cochran as executive vice president and general counsel; and Michael DeCesare as executive vice president of worldwide sales.

 

For executives who were already employed at the beginning of 2007, only one received a salary increase. None received any equity grants because the 2006 RSU grants were intended to cover equity compensation for 2006 and 2007. The only other specific decisions made with respect to their compensation were establishing bonus plan objectives and determining bonus amounts to be paid.

 

Please see the compensation tables following this compensation discussion and analysis for more details about 2007 compensation.

 

 

The compensation committee established 2007 KPMs for overall company performance as well as individual objectives for each named executive officer. The compensation committee also identified specific measurement methods for each KPM. As noted in Section B5 above, the performance period for some objectives was annual and for other objectives, the performance period was quarterly. The following table shows a selection of the KPMs that (i) were the most heavily weighted and therefore had the most significant impact on executive compensation and/or (ii) were consistent from quarter to quarter. The compensation committee did not rely on an explicit weighting formula between company-wide and individual KPMs. It used its discretion based on the specific roles and responsibilities of each executive.

 

 

Our strong financial performance in 2007 resulted in executives achieving 107.0% of the company-wide financial metrics in their KPMs. The compensation committee believed that achievement of the designated company-wide financial metrics was reasonably challenging, and in fact the designated metrics were not attained in two of the four fiscal quarters. We do not publicly disclose annual business plan bookings, revenue, operating income or earnings per share targets, as our business plan is highly confidential. Disclosing specific objectives would provide competitors and other third parties with insights into the planning process and would therefore cause competitive harm.

 

 

Mr. DeWalt was hired as our new chief executive officer and president in April 2007. Board members were seeking a particularly strong leader. We had recently completed a preliminary investigation of stock option grant irregularities and shortly thereafter, our chief executive officer retired and our president was terminated. When Mr. DeWalt joined us, he replaced an interim chief executive officer, and we were in the midst of preparing a restatement of our financial results to reflect changes in our accounting for numerous stock option grants. Further, the number of vacancies then existing in key positions within the company would cause a greater burden to fall on the chief executive officer. To attract an outstanding executive under these circumstances, the board of directors determined that it was necessary to offer total compensation of at least the 75th percentile for chief executive officers at relevant peer companies. In connection with negotiating Mr. DeWalt’s compensation, the board of directors and the committee considered detailed benchmarking data as well as our overall compensation philosophy and objectives.

 

Based on the considerations described above, and our belief that compensation for a chief executive officer should be heavily weighted toward long-term equity awards, Mr. DeWalt’s initial compensation package consisted of the components described below, as part of a formal employment letter (as subsequently amended). His cash

compensation is in the second highest quartile compared to peer companies. The value of his long-term equity awards brought his total compensation into the top quartile.

 

 

Mr. DeWalt’s 2007 bonus was determined based on 107.0% achievement of our annual company-wide financial performance metrics as well as exceptional performance against his individual KPMS and his overall leadership. Based on these factors, the committee concluded that a bonus $1,250,000 was appropriate.

 

 

Mr. Bolin did not receive a salary increase in 2007, as the committee believed that his 2006 salary was still appropriate and competitive. He did not receive any equity awards because all executives received larger than usual annual grants in 2006 for retention purposes. His target cash bonus was set at 60% of base salary. Based on our achievement of financial performance metrics and Mr. Bolin’s accomplishments against his specific KPMs, he received a cash bonus equal to 101.7% of his target bonus. Mr. Bolin also received a one-time performance bonus of $100,000 in the second quarter of 2007, in recognition of special product development activities and company-wide leadership at that time.

 

Mr. Cochran was hired as our new general counsel in September 2007. Members of management as well as certain members of the board of directors and the compensation committee were actively involved in the search process. We were seeking a seasoned general counsel with the breadth and depth of experience required to support our business operations and to guide us through the legal challenges stemming from the outcome of our stock option grant investigation. Our former general counsel was terminated for cause in May 2006 as a result of his role in the improper option grant activities, and the general counsel position remained vacant until Mr. Cochran’s arrival. In order to attract an outstanding general counsel under these circumstances, the board of directors determined that it was necessary to offer a compensation package reflecting competitive second highest quartile total compensation for chief legal officers at relevant peer companies. In connection with determining Mr. Cochran’s compensation, the hiring team considered detailed benchmarking data provided by Compensia and input from Heidrick & Struggles, as well as our overall compensation philosophy and objectives.

 

Based on the considerations described above, and our belief that compensation for senior leaders should be weighted more heavily toward long-term equity awards compared to cash, Mr. Cochran’s initial compensation package consisted of the components described below (including subsequent amendments in 2007).

 

 

Mr. Cochran’s bonus for 2007 was determined based on our achievement of financial performance metrics and Mr. Cochran’s accomplishments against his specific KPMs. He received a bonus equal to 101.7% of his target bonus, on a prorated basis.

 

 

Mr. DeCesare was hired as our executive vice president, worldwide sales operations in October 2007. Members of management as well as certain members of the board of directors and the compensation committee were actively involved in the search process. We upgraded our top sales leadership position from a senior vice president level to an executive vice president level. The market for the talent we sought was extremely competitive at the time of our search. In order to attract an outstanding candidate under these circumstances, the board of directors determined that it was necessary to offer a compensation package reflecting total compensation substantially above the median for similar positions at relevant peer companies. In connection with determining Mr. DeCesare’s compensation, the hiring team considered detailed benchmarking data provided by Compensia as well as our overall compensation philosophy and objectives.

 

Based on the considerations described above, our belief that compensation for senior leaders should be weighted more heavily toward long-term equity awards compared to cash, Mr. DeCesare’s initial compensation package consisted of the components described below (including subsequent amendments in 2007). His cash compensation is in the second highest quartile among relevant peer companies. The value of his long-term equity awards brought his total compensation to the top quartile among relevant peer companies.

 

Mr. DeCesare’s bonus for 2007 was determined based on our achievement of financial performance metrics and Mr. DeCesare’s accomplishments against his specific KPMs. He received a bonus equal to 107.0% of his target bonus, on a prorated basis.

 

 

Mr. King did not receive a salary increase in 2007, as the committee believed that his 2006 salary was still appropriate and competitive. He did not receive any equity awards because all executives received larger than usual annual grants in 2006 for retention purposes. His target cash bonus for 2007 was set at 100% of base salary. Based on our achievement of financial performance metrics and Mr. King’s accomplishments against his specific KPMs, he received a cash bonus equal to 107.0% of his target bonus.

 

 

Mr. Decker’s base salary was increased by 4.3% in 2007, to $412,960 in order to maintain his salary at a comparably competitive level as other executives. He did not receive any equity awards because all executives received larger than usual annual grants in 2006 for retention purposes. His target cash bonus was set at 60% of base salary. Based on our achievement of financial performance metrics and Mr. Decker’s accomplishments against his specific KPMs, he received a cash bonus equal to 101.0% of his target bonus.

 

 

Mr. Brown was hired in 2005 as our chief financial officer to lead the turnaround efforts in improving our internal processes and financial controls. In recognition of his key role the compensation committee approved a market top quartile new hire compensation package for Mr. Brown. His top quartile target bonus contributed to his top quartile 2007 compensation, even though, like most executives, he did not receive a salary increase or equity awards in 2007.

 

Mr. Brown’s target cash bonus was set at 109% of base salary, in accordance with his employment agreement. Based on our achievement of financial performance metrics, and Mr. Brown’s accomplishments against his specific KPMs, he received aggregate cash bonuses equal to 92.5% of his target bonus, paid in quarterly installments pursuant to the terms of his employment agreement. In addition, to reward Mr. Brown for remaining with us through

completion of the restatement, and as a future retention incentive, the committee also approved a cash bonus of $100,000, which brought his aggregate bonuses to 109.0% of his target bonus. Mr. Brown was required to remain with McAfee for one year after payment of the $100,000 bonus, or he would forfeit the bonus. Mr. Brown resigned effective April 4, 2008, so he forfeited the bonus.

 

 

Mr. Fuller served as our interim chief executive officer and president from October 2006 until April 2007, when Mr. DeWalt joined McAfee as our new chief executive officer and president. Prior to assuming this role, Mr. Fuller served as one of our independent directors. He continued to serve as one of our directors while interim president and chief executive officer, but stepped down from the special committee investigating our stock option granting practices. The compensation committee approved an annualized salary of $1,500,000 for Mr. Fuller that was in effect during 2007 as well as 2006. In determining Mr. Fuller’s salary, the compensation committee considered several factors, including (i) Mr. Fuller’s prior experience as CEO of a publicly-traded technology company; (ii) the significant time and effort that would be required to restate our financials and to complete critical internal control remediation; (iii) the time-sensitive need to have leadership in place following the departures of our chairman and chief executive officer, our president and other executive turnover; and (iv) the fact that Mr. Fuller’s total direct compensation would be limited to salary and bonus and would not include the equity components normally provided to a chief executive officer.

 

Mr. Fuller did not participate in the same cash bonus plan as our other executive officers. However, following his tenure as an executive officer, the compensation committee, at its sole discretion, awarded Mr. Fuller a $435,000 bonus. Since Mr. Fuller served as our interim chief executive officer and president from October 2006 until April 2007, he earned a portion of the bonus in 2006 and the remainder of the bonus in 2007. In determining the amount of Mr. Fuller’s bonus, the compensation committee considered a variety of factors, including (i) our solid financial performance during his tenure; (ii) progress in the ongoing stock option investigation and related restatement; (iii) progress on financial and operating controls remediation; and (iv) Mr. Fuller’s overall leadership.

 

Mr. Fuller did not receive any equity awards or any director compensation during his tenure as interim chief executive officer and president. However, prior to his appointment as an executive officer, he received stock options and cash compensation in his capacity as an independent director, consistent with that provided to all of our independent directors. His outstanding director options continued to vest during his tenure as interim chief executive officer and president. In July 2007, Mr. Fuller resigned from our board of directors.

 

 

This section describes certain tax and accounting considerations relating to our executive compensation programs.

 

Tax Deductibility of Compensation Expense.  Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation to certain executives that we may deduct as a business expense in any tax year unless, among other things, the compensation is performance-based and it is paid under a compensation plan that has been approved by our stockholders. During 2007, our salary and cash bonus programs did not meet these requirements. However, for 2008, we adopted an executive bonus plan (subject to stockholder approval at our 2008 annual meeting of stockholders) to replace our 2007 cash bonus program. Payments under the new plan will be tied solely to objective performance criteria. The compensation committee will not have the discretion to increase any award beyond what is payable based on performance, but it may reduce an award. We expect that all compensation payments under the new plan will be exempt from Section 162(m) and will therefore be tax deductible.

 

The $1,000,000 limit generally does not apply to stock options so long as they are granted under a stockholder-approved plan and the exercise price is no less than the fair market value of the shares on the grant date. The $1,000,000 limit does apply to RSUs and RSAs unless either the grants or the vesting are based on performance criteria. None of our RSUs and RSAs granted through 2007 met those requirements, so the compensation expense associated with them will be subject to the $1,000,000 annual deductibility limit as they vest.

From time to time, the compensation committee may approve compensation that will not meet these requirements for deductibility in order to ensure competitive levels of total compensation for its executive officers.

 

Tax Implications for Executives.  Section 409A of the Internal Revenue Code was enacted by Congress effective as of January 2005. Section 409A imposes additional income taxes on our executive officers who receive certain types of deferred compensation if the compensation does not meet the qualification requirements of Section 409A. We generally do not offer any of those types of deferred compensation programs to our executives.

 

Section 280G of the Internal Revenue Code imposes an excise tax on payments to executives of severance or change of control compensation that exceeds the levels specified in Section 280G. Our named executive officers could potentially receive amounts that exceed the Section 280G limits as severance or change in control payments, but the compensation committee does not consider this potential impact in compensation program design.

 

Accounting Considerations.  The compensation committee also considers the accounting expense and cash flow implications of various forms of executive compensation. For salary or cash bonus compensation, we record or accrue compensation expense in our financial statements in an amount equal to dollar amount of the cash payment. Accounting rules require us to record an expense in our financial statements for equity awards as well, even though equity awards are not paid to employees in cash. As of January 1, 2006, all equity awards (stock options, RSAs, RSUs and PSUs) result in compensation expense. The compensation committee believes that the advantages of equity awards, as described throughout this compensation discussion and analysis, more than outweigh the non-cash accounting expense associated with them.

 

Compensation Committee Report on Compensation Discussion and Analysis

 

The compensation committee of the board of directors has furnished the following report:

 

The compensation committee has reviewed and discussed the foregoing compensation discussion and analysis with management. Based on that review and discussion, the compensation committee has recommended to the board of directors that the compensation discussion and analysis be included in this proxy statement.

 

THE COMPENSATION COMMITTEE

 

Leslie G. Denend, Chairman

Denis J. O’Leary

Liane Wilson

 

 

Compensation Committee Interlocks and Insider Participation

 

No member of our compensation committee during 2007 has ever been an officer or employee of McAfee or of any of our subsidiaries or affiliates. During 2007, none of our executive officers served on the board of directors or on the compensation committee of any other entity, any officers of which served either on our board of directors or on our compensation committee.

 

This table summarizes the compensation earned by our named executive officers during 2007.

 

 

 

 

 

 

 

 

This table shows grants of plan-based awards made by us to our named executive officers during 2007.

 

 

 

 

This table shows outstanding equity awards for our named executive officers as of December 31, 2007.

 

 

 

 

This table shows all stock options exercised and value realized upon exercise, and all stock awards vested and value realized upon vesting for our named executive officers during 2007.

 

 

Severance and Change of Control Benefits

 

We have entered into employment agreements providing severance and/or change of control benefits with Messrs. DeWalt, Bolin, Cochran, DeCesare and Brown. These severance and change of control benefits are

intended to attract and retain qualified executives and promote stability and continuity in our senior management team.

 

The employment agreement we have entered into with Mr. DeWalt provides that if he is terminated other than for “cause” or resigns for “good reason,” then subject to execution of a release of claims, he will receive, less applicable tax withholdings: (i) a lump sum payment equal to his annual base salary; (ii) a lump sum payment equal to the current year’s target bonus; (iii) accelerated vesting on the next unvested tranche of the New Hire RSUs; and (iv) reimbursement for continued health benefits for him and his covered dependents under our health plans for 12 months. If such termination occurs within 12 months following a “change of control” involving McAfee, then subject to execution of a release, he will receive, less applicable tax withholdings: (i) a lump sum payment equal to his annual base salary; (ii) a lump sum payment equal to the current year’s target bonus; (iii) accelerated vesting on his New Hire Options equal to the greater of (A) 12 months accelerated vesting, or (B) 50% of the then-unvested shares; and (iv) reimbursement for continued health benefits for him and his covered dependents under our health plans for 12 months.

 

The employment agreement with Mr. Bolin provides that if he is terminated other than for “cause” or if he resigns for “good reason,” he will be entitled to (i) severance payments equal to six months of his base salary, (ii) one-third of his target bonus and (iii) six months of continued health and other welfare and fringe benefits. In addition, if such termination occurs within six months of a change of control involving McAfee, all of his remaining unvested stock options and shares of restricted stock (but not including restricted stock units) will become fully vested and if applicable, any repurchase rights on his shares will lapse.

 

Our compensation arrangement with Mr. Cochran provides that if he is terminated by us without “cause” or if he resigns for “good reason,” then subject to execution of a release of claims, he will receive, less applicable tax withholdings: (i) a lump sum payment equal to his annual base salary and bonus; (ii) accelerated vesting of his New Hire Options that would have otherwise vested over the next 12 months; and (iii) reimbursement for continued health benefits for him and his covered dependents under our health plans for 12 months.

 

Our compensation arrangement with Mr. DeCesare provides that if he is terminated by us without “cause” or if he resigns for “good reason,” then subject to execution of a release of claims, he will receive, less applicable tax withholdings: (i) a lump sum payment equal to his annual base salary and bonus; (ii) accelerated vesting of his New Hire Options that would have otherwise vested over the next 12 months; and (iii) reimbursement for continued health benefits for him and his covered dependents under our health plans for 12 months.

 

The employment agreement with Mr. Brown provided that if he was terminated by us other than for “cause” or resigned for “good reason,” he was entitled to (i) twelve monthly severance payments equal to his monthly base salary, and payment of all of his target bonus for twelve months or four quarters depending upon whether the bonus measurement period is annual or quarterly, (ii) twelve months of continued health and other welfare and fringe benefits, and (iii) accelerate vesting (and, if applicable, the lapsing of any repurchase right) with respect to all of his shares of restricted stock (but not including restricted stock units) and all stock options held by him. In addition, if he was terminated without cause following, or within 90 days prior to, a change of control of McAfee, all of his shares of restricted stock (but not including restricted stock units) that would have vested within one year of the triggering event, and all stock options held by him would become fully vested and if applicable, any repurchase rights on such shares will lapse. These benefits no longer apply as Mr. Brown resigned from McAfee effective April 4, 2008.

 

For certain of our named executive officers with employment agreements, we have also agreed to reimburse them for certain taxes that may arise pursuant to the employment agreements.

 

The table below reflects the amount of compensation to Messrs. DeWalt, Bolin, Cochran, DeCesare and Brown in the event of termination of such executive’s employment due to involuntary termination not for cause, resignation for good reason, death, disability and termination upon change of control. Regardless of the manner in which an executive’s employment terminates, he is entitled to receive amounts already earned during his term of employment, such as base salary earned through the date of termination and accrued vacation pay. The amounts shown assume that each termination was effective as of December 31, 2007, and thus includes amounts earned through the end of 2007. The value of stock-related compensation assumes that the value of our common stock is $37.50, which

was the closing trading price on the last trading day of 2007. The value of continuing coverage under our welfare and fringe benefits plans reflects our actual cost for those benefits as of December 31, 2007. All of these amounts are estimates of the amounts that would be paid out to the executives upon their termination. The actual amounts can only be determined at the time the executives’ employment actually terminates.

 

 

Directors fees, paid only to directors who are not employees, are as follows:

 

 

 

On January 30, 2007, our board of directors approved an increase in the annual cash compensation for Mr. Robel, serving in his capacity as our non-executive chairman of the board of directors, to a total of $200,000 per year, in addition to the other cash compensation received in connection with his other board service and committee memberships. This increase was in recognition of the additional responsibilities Mr. Robel assumed in connection with our internal investigation of stock option practices and our related restatement of financial results. Mr. Robel’s annual cash compensation for services as our non-executive chairman of the board of directors was reduced to $100,000 effective January 1, 2008.

 

Under our 1993 Stock Option Plan for Outside Directors, each non-employee director is automatically granted an option to purchase 30,000 shares of our common stock when he or she first become a director. Each year after the initial grant each director is entitled to receive an additional option grant to purchase up to 15,000 shares of our common stock. (These grant sizes were reduced from 40,000 shares and 20,000 shares, respectively, in October 2007.) All options under this plan are granted with an exercise price equal to the closing price of our common stock on the date of grant. Each initial grant vests one-third on each of the first, second and third anniversaries of the date of grant. Each subsequent grant vests in full on the first anniversary of the date of grant. All options granted under this plan become fully exercisable in the event of certain mergers, sales of assets or sales of the majority of our voting stock.

 

Our employee directors are eligible to receive options and be issued shares of common stock directly under the 1997 Stock Incentive Plan and are eligible to participate in our 2002 Employee Stock Purchase Plan and, if an executive officer, to participate in the Executive Bonus Plan.

 

The following table shows the compensation paid or accrued during 2007 to the non-employee individuals serving on our board of directors in 2007.

 

 

 

 

The following table shows as of June 6, 2008, the number of shares of our common stock owned by (i) our chief executive officer, (ii) each of our other named executive officers during 2007, (iii) each of our current directors, and (iv) each stockholder known by us as of that date to be the beneficial owner of more than 5% of our outstanding common stock.

 

 

 

 

 

Equity Compensation Plans

 

The number of options, the weighted average per share exercise price of such options and the number of shares remaining available for issuance under all of our equity compensation plans as of December 31, 2007 are reflected in the following table.

 

 

 

 

The following describes our equity compensation plans that have not been approved by stockholders.

 

2000 Nonstatutory Stock Option Plan

 

In January 2000, the board of directors approved the 2000 Nonstatutory Stock Option Plan (the “2000 Plan”). There are 11,500,000 shares of common stock reserved under the 2000 Plan for issuance on exercise of outstanding options. No shares remained available for future grants under the 2000 Plan. The 2000 Plan provided for the grant of nonqualified stock options to employees, consultants and in certain cases, officers and directors. The plan administrator determined the exercise price of options granted under the 2000 Plan and when such options could be exercised. The 2000 Plan provides that vested options may be exercised for three months after termination of employment other than due to death or disability and for one year after termination of employment as a result of death or disability. The 2000 Plan permits options to be exercised with cash, check, certain other shares of our common stock, promissory notes, cancellation of indebtedness, waiver of compensation due or consideration received by us under “cashless exercise” programs. In the event that we merge with or into another corporation, or sell substantially all of our assets, the 2000 Plan provides that each outstanding option will fully vest and become exercisable unless provision is made for options to be assumed or substituted for by the successor corporation.

 

1999 Nonstatutory Stock Plan

 

In May 1999, the board of directors approved the 1999 Nonstatutory Stock Plan (the “1999 Plan”). There are 1,000,000 shares of common stock reserved under the 1999 Plan for issuance on exercise of outstanding options. There are no shares available for future grants under the 1999 Plan. The 1999 Plan provided for the grant of nonqualified stock options to employees, officers, directors and consultants. The plan administrator determined the exercise price of options granted under the 1999 Plan and when such options could be exercised. The 1999 Plan permits options to be exercised with cash, check, certain other shares of our common stock, promissory notes, cancellation of indebtedness, waiver of compensation due or consideration received by us under “cashless exercise” programs. In the event that we merge with or into another corporation, or sell substantially all of our assets, the 1999 Plan provides that each outstanding option will fully vest and become exercisable unless provision is made for options to be assumed or substituted for by the successor corporation.

1997 Non-Officer Stock Plan

 

In January 1997, the board of directors approved the 1997 Non-Officer Stock Plan (the “1997 Non-Officer Plan”). There are 3,000,000 shares of common stock reserved under the 1997 Non-Officer Plan for issuance on exercise of outstanding options. There are no shares available for future grants under this plan. The 1997 Non-Officer Plan provided for the grant of nonqualified nonstatutory stock options to employees and consultants who are not officers of the company at exercise prices determined by the committee administering the plan, but in no event less than 85% of the fair market value of the common stock on the date of the grants. Each stock option agreement entered into under the 1997 Non-Officer Plan specified the exercise price, the date on which all or any installment of the option was to become exercisable and the term of the option. The 1997 Non-Officer Plan permits options to be exercised with cash or cash equivalents, certain other shares of common stock, promissory notes (provided, however, that the par value of the shares being purchased shall be paid in cash) and waiver of compensation due or consideration received by us under “cashless exercise” programs. In the event that we merge with or into another corporation, or sell substantially all of our assets, the 1997 Non-Officer Plan provides that the committee administering the plan may determine, at the time of granting an option or thereafter, that all or part of such option shall fully vest and become exercisable.

 

Foundstone, Inc. 2000 Stock Plan

 

On October 1, 2004, we completed the acquisition of Foundstone, Inc. In connection with the acquisition, we assumed the Foundstone, Inc. 2000 Stock Plan (the “Foundstone Plan”). The Foundstone Plan provides for the grant of incentive stock options, nonqualified nonstatutory stock options and stock purchase rights to employees, directors and consultants at exercise prices determined by the committee administering the plan, but in no event less than 85% of the fair market value of the common stock on the date of the grant. However, due to restrictions imposed by the Internal Revenue Service we will only grant nonqualified nonstatutory stock options under the Foundstone Plan in the future and due to restrictions imposed by the New York Stock Exchange following the acquisition of Foundstone, we may not grant awards under the Foundstone Plan to individuals who were employed by McAfee, Inc. or its subsidiaries, immediately prior to the acquisition of Foundstone. Each stock option agreement entered into under the Foundstone Plan shall specify the exercise price, the date on which all or any installment of the option is to become exercisable and the term of the option. The Foundstone Plan permits options to be exercised with cash or cash equivalents, certain other shares of common stock, promissory notes or consideration received by us under “cashless exercise” programs. In the event that we merge with or into another corporation, or sell substantially all of our assets, the Foundstone Plan provides that the successor corporation (or a parent or subsidiary) may assume outstanding options and awards under the Plan or substitute a substantially similar option or award. If the successor corporation does not assume or substitute the outstanding options and awards, they will fully vest and become exercisable and all forfeiture restrictions will lapse. There are 747,144 shares of common stock reserved under the Foundstone Plan, of which 379,699 are available for issuance as of December 31, 2007.

 

SafeBoot Option Plan 2006

 

On November 19, 2007, we completed the acquisition of SafeBoot Holding B.V., a Netherlands-based data and device encryption company. In connection with the acquisition, we assumed the SafeBoot Option Plan 2006 (the “SafeBoot Plan”). Stichting Administratiekantoor SafeBoot, a Netherlands foundation (the “Stichting”), performs certain plan administrator functions. The SafeBoot Plan provides for the grant of nonqualified stock options to employees. However, due to restrictions imposed by the New York Stock Exchange following the acquisition of SafeBoot Holding B.V., we may not grant stock options under the SafeBoot Plan to individuals who were employed by McAfee, Inc. or its subsidiaries, immediately prior to the acquisition of SafeBoot. In the event that we merge with or into another corporation, or sell substantially all of our assets, the Stichting may elect to fully accelerate the vesting of each outstanding option, or negotiate the assumption or substitution of the options by the successor corporation. There are 500,000 shares of common stock reserved under the SafeBoot Plan, of which 14,979 are available for issuance as of December 31, 2007.

Related Party Transactions

 

On October 2, 2006, Robert M. Dutkowsky, then a member of our board of directors, was appointed chief executive officer and a director of Tech Data Corporation, one of our customers. Mr. Dutkowsky resigned from our board of directors on January 30, 2007 and Tech Data Corporation ceased to be a related party. We recognized revenue from sales to Tech Data Corporation of $6.9 million during January 2007 and $37.1 during the fourth quarter of 2006. Our outstanding accounts receivable balance related to Tech Data Corporation was $14.9 million and our deferred revenue balance related to Tech Data Corporation was $76.6 million at January 31, 2007.

 

We have entered into indemnity agreements with certain employees, officers and directors that provide, among other things, that we will indemnify such employee, officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party by reason of his or her position as an employee, officer, director or other agent with us, and otherwise to the fullest extent permitted under Delaware law and our bylaws. In this regard, we have received, or expect to receive, requests for indemnification by certain current and former officers and directors in connection with our review of our historic stock option granting practices and the related restatement, governmental inquiries, and stockholder derivative litigation described in Item 3 of our Form 10-K for the year ended December 31, 2007. The maximum amount of potential future indemnification is unknown; however, we have directors’ and officers’ liability insurance policies that enable us to recover a portion of future indemnification claims paid, subject to retentions, conditions and limitations of the policies. As a result of this insurance coverage, we believe that the fair value of these indemnification claims is not material.

 

The board of directors has determined that each of its members, other than Mr. DeWalt, is “independent” as defined under the New York Stock Exchange corporate governance standards, and has no material relationship with us. Mr. Robel serves as chairman of the board of directors and has been designated as our “lead” independent director for presiding over executive sessions of the board of directors without management. Mr. Robel served as the audit committee “financial expert” (as defined under the SEC rules implementing Section 404 of The Sarbanes-Oxley Act) during 2007, and Mr. Darcy has served as an additional audit committee “financial expert” since February 2008.

 

The audit committee of the board of directors consists of three independent directors, Messrs. Darcy, Pangia and Robel. None of the members of our audit committee have served as our employees or officers. The audit committee is responsible for acting on behalf of the board of directors in the oversight of all aspects of our financial reporting, internal control and audit functions. The audit committee has the sole authority and responsibility to select, evaluate, compensate and replace our independent registered public accountants. Our management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls.

 

In fulfilling its oversight responsibilities, the audit committee reviewed and discussed the audited consolidated financial statements contained in the annual report on Form 10-K for the year ended December 31, 2007 with management. The audit committee discussed with management our major financial risk exposures and the steps management has taken to monitor and control such exposure, including our risk assessment and risk management policies. The audit committee also met with our internal auditors, with and without management present, to discuss the results of various internal audit projects, some of which included an examination and evaluation of certain elements of our internal control structure.

 

The audit committee discussed with Deloitte & Touche LLP, our independent registered public accountants, the overall scope and plans for their audit. The audit committee also met with Deloitte, with and without management present, to discuss the results of their examination, management’s response to any significant findings, their observations of our internal controls over financial reporting, the overall quality of our financial reporting, the selection, application and disclosure of critical accounting policies, new accounting developments and accounting-related disclosure, the key accounting judgments and assumptions made in preparing the financial statements and whether the financial statements would have materially changed had different judgments and assumptions been made, and other pertinent items related to our accounting, internal controls and financial reporting.

 

In connection with the audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2007, the audit committee also:

 

 

During 2007, management completed the documentation, testing and evaluation of our system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations. The audit committee was kept apprised of the progress of the evaluation and provided oversight and advice to management during the process. In connection with this oversight, the audit committee received periodic updates provided by management and Deloitte at each regularly-scheduled audit committee meeting. At the conclusion of the process, the audit committee reviewed a report by management on the effectiveness of our internal control over financial reporting. The audit committee also reviewed Deloitte’s Report of Independent Registered Public Accounting Firm included in our annual report on Form 10-K related to its audit of our internal control over financial reporting.

 

In reliance on these reviews and discussions, the audit committee recommended to the board of directors that the audited financial statements be included in the annual report on Form 10-K for the year ended December 31, 2007 for filing with the Securities and Exchange Commission.

 

THE AUDIT COMMITTEE

 

Thomas E. Darcy, Chairman
Robert W. Pangia
Charles J. Robel

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

 

The following graph shows a five-year comparison of cumulative total returns for our common stock and the CRSP Total Return Index for (i) the NYSE stock market, (ii) the S&P Information Technology stocks, (iii) the NASDAQ stock market and (iv) the NASDAQ Computer and Data Processing stocks, each of which assumes an initial value of $100 and reinvestment of dividends. The information presented in the graph and table is as of December 31 of each year. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.