As filed with the Securities and Exchange Commission on November 9, 2001
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETWORKS ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 000-20558 77-0316593
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
(408) 988-3832
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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GEORGE SAMENUK
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
(408) 988-3832
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copy to:
JEFFREY D. SAPER, ESQ.
KURT J. BERNEY, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) FEE
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5.25% Convertible Subordinated Notes due 2006 $345,000,000 100% $345,000,000 $86,250
----------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per share...... (2) (2) (2) (3)
================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
(2) Includes 19,092,418 shares of common stock initially upon conversion of the
notes at the conversion price of $18.07 per share of common stock. Pursuant
to Rule 416 under the Securities Act, such number of shares of common stock
registered hereby shall include an indeterminate number of shares of common
stock that may be issued in connection with a stock split, stock dividend,
recapitalization or similar event.
(3) Pursuant to Rule 457(i) under the Securities Act, there is no additional
filing fee with respect to the shares of common stock issuable upon
conversion of the notes because no additional consideration will be received
in connection with the exercise of the conversion privilege.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED _______________, 2001
NETWORKS ASSOCIATES, INC.
$345,000,000
5.25% Convertible Subordinated Notes Due 2006 and
the Common Stock Issuable Upon Conversion of the Notes
We issued the notes in a private placement in August 2001. This
prospectus will be used by selling securityholders to resell their notes and the
common stock issuable upon conversion of their notes.
The notes are convertible prior to maturity into common stock at an
initial conversion price of $18.07 per share, subject to adjustment in certain
events. We will pay interest on the notes on February 15 and August 15 of each
year, beginning on February 15, 2002. The notes will mature on August 15, 2006,
unless earlier converted or redeemed.
We may redeem all or a portion of the notes on or after August 20, 2004.
In addition, the holders may require us to repurchase the notes upon a change of
control of the company if we are not the surviving company.
The reported last sale price of our common stock on the Nasdaq National
Market on ____________, 2001 was $[___] per share. Our common stock is traded on
the Nasdaq National Market under the symbol "NETA."
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The securities offered hereby involve a high degree of risk. SEE "RISK
FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR INFORMATION THAT YOU SHOULD
CONSIDER BEFORE PURCHASING THESE SECURITIES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This prospectus is dated , 2001
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
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Where You Can Find More Information................................................3
Summary ...........................................................................5
The Offering.......................................................................8
Risk Factors......................................................................10
Risks Related to Network Associates...............................................10
Risks Related to the Notes and the Common Stock into which the Notes
are Convertible.................................................................30
Use of Proceeds...................................................................35
Ratio of Earnings to Fixed Charges................................................35
Dividend Policy...................................................................35
Description of Notes..............................................................36
United States Federal Income Tax Consequences.....................................53
Selling Securityholders...........................................................59
Plan of Distribution..............................................................63
Indemnification of Directors and Officers.........................................65
Legal Matters.....................................................................65
Experts ..........................................................................65
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WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Commission, in accordance with the Securities Exchange Act of 1934. You may read
and copy our reports, proxy statements and other information filed by us at the
public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at 500 West Madison Street, Room 1400, Chicago, Illinois 60661
and at 233 Broadway, New York, New York 10279. Copies of such materials can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information about the public reference rooms. Our
reports, proxy statements and other information filed with the Commission are
available to the public over the Internet at the Commission's World Wide Web
site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" into this
prospectus the information we filed with the Commission. This means that we can
disclose important information by referring you to those documents. The
information incorporated by reference is considered to be a part of this
prospectus. Information that we file later with the Commission will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made by us with the Commission
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until this offering
is complete:
- Our Annual Report on Form 10-K for the fiscal year ended December 31,
2000 as filed with the Commission on April 2, 2001;
- Our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 as filed with the Commission on May 15, 2001;
- Our Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 2001 as filed with the Commission on August 6, 2001;
- Our Current Report on Form 8-K as filed with the Commission on August
8, 2001;
- Our Current Report on Form 8-K as filed with the Commission on August
14, 2001;
- Our Current Report on Form 8-K as filed with the Commission on
October 11, 2001; and
- The description of our Common Stock which is contained in our
Registration Statement on Form 8-A filed with the Commission on
August 21, 1992 pursuant to Section 12 of the Exchange Act, the
description of our preferred share purchase rights on Form 8-A filed
on October 22, 1998, the description of our zero coupon convertible
subordinated debentures on Form S-3 filed on May 6, 1998, and any
description of any of our securities which is contained in any
registration statement filed after the date hereof under Section 12
of the Exchange Act, including any amendment or report filed for the
purpose of updating any such description.
-3-
You may request a copy of these filings, at no cost, by contacting us at
the following address:
Investor Relations
Networks Associates, Inc.
3965 Freedom Circle
Santa Clara, California 95054
Telephone: (877) 346-3575
You should rely only on the information incorporated by reference or
provided in this prospectus or a prospectus supplement or amendment. We have not
authorized anyone else to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume the information in this prospectus is accurate
as of any date other than the date on the front this prospectus.
-4-
SUMMARY
This summary highlights some information from this prospectus, and it
may not contain all of the information that is important to you. It is qualified
in its entirety by the more detailed information and consolidated financial
statements, including the notes to the consolidated financial statements,
incorporated by reference in this prospectus. You should read the full text of,
and consider carefully the more specific details contained in or incorporated by
reference into this prospectus. When used in this prospectus, the terms
"Networks Associates," "we," "our" and "us" refer to Networks Associates, Inc.
and its subsidiaries and not to the selling securityholders.
NETWORK ASSOCIATES
We are a leading supplier of network security and network management
solutions. The majority of our revenue has historically been derived from our
McAfee anti-virus product group and our Sniffer network availability and
performance management product group. These two flagship product groups form the
base from which the balance of our product groups has developed.
In recent years, we have focused our efforts on building a full line of
complementary network security and network management solutions. On the network
security side, we strengthened our anti-virus lineup by adding complementary
products in the firewall, intrusion detection, encryption, and virtual private
networking categories. On the network management side, we built upon our Sniffer
line by adding products in the help desk, asset management, network monitoring,
and network reporting categories. We continuously seek to expand our product
lines. In order to more effectively market our products, we have combined
complementary products into separate product groups, as follows:
- McAfee, which primarily markets the McAfee Active Virus Defense
product group;
- Sniffer Technologies, which primarily markets the Sniffer Total
Network Visibility product group;
- PGP Security, which primarily markets the PGP Total Network Security
product group and which in the fourth quarter of 2001 will be
integrated into our other product groups as described below; and
- Magic Solutions, which primarily markets the Magic Total Support Desk
product group.
These product groups represent our infrastructure segment. The
organization around our product groups is designed to allow us to, among other
things, react quickly to customers' changing needs and specialize our sales
forces. In addition to our product groups, we also have one publicly-traded
subsidiary, McAfee.com. McAfee.com is an applications service provider, or ASP,
targeted at consumers and small to medium-sized businesses.
In the fourth quarter of 2001, we plan to integrate the activities of
our PGP product group into our McAfee and Sniffer product groups and other
products lines will be sold. The PGP product group in recent quarters has
accounted for 7% to 9% of net revenue. Specifically, the PGP VPN, PGPfire (our
distributed firewall) for corporate users and the PGP E-Business Server will be
marketed and sold as McAfee products. The CyberCop vulnerability assessment
technology will be integrated into the Sniffer product line. We will
-5-
look for buyers for the PGP desktop encryption and Gauntlet firewall product
lines. In connection with the PGP integration, we expect, among other things:
- to record a restructuring charge of approximately $9.0 to $11.0 million
during the fourth quarter of 2001, consisting primarily of the costs related
to severance packages for affected employees and other exit costs;
- expense savings of approximately $50 million in fiscal 2002, primarily in
the areas of operating expenses; and
- overall revenue to be adversely impacted in at least the near-term as we
integrate some of PGP's security products and seek to sell others.
PRODUCT GROUPS
MCAFEE
McAfee's products and services provide solutions designed to enforce
anti-virus policies and measure the performance of anti-virus activities. The
McAfee product group consists of products and services that provide multi-layer
anti-virus protection, management and reporting for desktops, servers,
GroupWare, Internet technologies, and wireless technologies. McAfee's services
are provided by McAfee's Anti-Virus Emergency Response Team or AVERT. AVERT
augments McAfee's product offerings by identifying new viruses and deploying
anti-virus solutions to our customers. McAfee customers are primarily corporate
customers, including customers in the managed service market, such as ASPs, and
managed service providers, or MSPs. Beginning in the fourth quarter of 2001, PGP
VPN, PGPfire (our distributed firewall) for corporate users and PGP E-Business
Server will be branded and sold as McAfee products.
SNIFFER TECHNOLOGIES
Sniffer Technologies' products and services provide customers with
network and application management solutions designed to maximize network
availability and performance. Sniffer Technologies' products capture data,
monitor network traffic and collect key network statistics for computer
networks. Sniffer Technologies' products are also designed to optimize network
and application performance and increase network reliability by uncovering and
analyzing network problems and recommending solutions to such problems,
automatically and in real-time for mid-level and high-speed networks. Sniffer
Technologies' customers are primarily corporate customers, including customers
in the managed service market. Beginning in the fourth quarter of 2001, PGP's
CyberCop Scanning tools technology will be integrated into the Sniffer
Technologies product group.
PGP SECURITY
In the fourth quarter of 2001, as described above, the PGP Security
product group will be integrated into the Sniffer and McAfee product groups. The
following describes PGP's business prior to this integration. PGP Security's
products help organizations worldwide secure their networks using firewall,
encryption, intrusion detection, risk assessment and Virtual Private Network or
VPN technologies. PGP Security's products include E-Business Server, Gauntlet
Firewall, CyberCop Scanner and E-ppliance. PGP Security's services are offered
by its vulnerability research team known as COVERT whose mission is to identify
and resolve serious customer vulnerabilities before attackers are able to
exploit them. PGP Security's customers include individuals, government agencies,
financial institutions, and corporations, including e-businesses.
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MAGIC SOLUTIONS
Magic Solutions' products provide customers with a set of tools to
manage their customer support and problem management needs. Magic Solutions'
product group consists of products that promote information sharing, facilitate
workflow, and improve service delivery. Magic Solutions' customers are primarily
corporations.
MCAFEE.COM
McAfee.com is a security ASP delivering security applications software
and related services through an Internet browser. The McAfee.com applications
allow users to detect and eliminate viruses on their PCs, repair their PCs from
damage caused by viruses, optimize their hard drives and update their PCs' virus
protection system with current software patches and upgrades. McAfee.com also
offers customers access to McAfee.com Personal Firewall, McAfee.com Wireless
Security Center and McAfee.com Internet Privacy Service. McAfee.com's customers
include individuals and corporations.
Under the terms of our licensing agreement with McAfee.com, McAfee.com's
business has historically been targeted exclusively at consumers. We recently
entered into a reseller agreement with McAfee.com allowing it to expand its
product offerings with McAfee.com for Business. McAfee.com for Business is a new
website serving the security needs for small and medium-sized businesses
delivering managed applications services that allow businesses to provide
anti-virus and firewall security for their desktop PCs.
As of September 30, 2001, we owned 36,000,000 shares of McAfee.com Class
B common stock, entitled to three votes per share and representing approximately
79% of McAfee.com's outstanding common stock and 92% of its total voting power.
SALES AND MARKETING
Our sales and marketing efforts are directed primarily at large
corporate and government customers, as well as to resellers, distributors and
system integrators worldwide. Our North American direct sales force,
constituting the majority of our sales force, is organized by product group. We
also have direct sales and support operations in Europe, Asia, South America and
Australia. To complement our direct sales efforts, we market many of our
products through corporate resellers, distributors, and retailers. In addition,
original equipment manufacturers, or OEMs, license our products and bundle them
with PC hardware or software.
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Network Associates' principal executive office is located at 3965
Freedom Circle, Santa Clara, California 95054 and its telephone number is (408)
988-3832.
Recent developments
On October 11, 2001, we announced our operating results for the third
quarter ended September 30, 2001. Our third quarter consolidated net revenues
were $209.0 and our net loss was 11.3 million, or $(0.08) per diluted shares. In
the third quarter of 2000, our consolidated net revenues were $238.7 million
with net income of $4.1 million, or $0.03 per share
-7-
THE OFFERING
Securities Offered................ $345,000,000 aggregate principal amount of
5.25% Convertible Subordinated Notes due
2006.
Maturity.......................... August 15, 2006, unless earlier converted
or redeemed by us at our option or
repurchased by us at your option.
Interest Rate..................... 5.25% per year. Interest will be payable
semi-annually in arrears on February 15
and August 15 of each year, commencing
February 15, 2002. The initial interest
payment will include accrued interest from
August 17, 2001.
Conversion Rights................. Holders may convert their notes into our
common stock at any time, unless
previously redeemed or repurchased, at a
conversion price of $18.07 per share
(equal to a conversion rate of
approximately 55.3403 shares per $1,000
principal amount of notes), subject to
adjustment if some events affecting our
common stock occur.
Redemption of Notes We may redeem all or a portion of the
at Our Option................. notes for cash at any time on or after
August 20, 2004, at the redemption prices
set forth in this prospectus, plus accrued
and unpaid interest to, but excluding, the
redemption date. We will therefore be
required to make six interest payments
before being able to redeem any notes.
Sinking Fund...................... None.
Change of Control................. Upon a change of control of Network
Associates, each holder may require us to
purchase all or a portion of its notes at
a repurchase price equal to 100% of the
principal amount of the notes to be
repurchased, plus accrued and unpaid
interest thereon to, but excluding, the
repurchase date, in cash or, at our
option, subject to satisfaction of certain
conditions, in whole or in part, in our
common stock or other applicable
securities if we are not the surviving
corporation of the change of control
transaction.
Events of Default................. If there is an event of default on the
notes, the principal amount and premium,
if any, on the notes plus accrued and
unpaid interest to the date of
acceleration may be declared immediately
due and payable subject to certain
conditions set forth in the indenture.
These amounts automatically become due and
payable in the case of certain types of
bankruptcy or insolvency events of default
involving Network Associates.
Subordination..................... The notes are unsecured and will be
subordinated to all of our existing and
future senior indebtedness, as defined in
the indenture, and are pari passu with
respect to the $885,500,000 principal
amount at maturity of our outstanding Zero
Coupon Convertible Debentures
-8-
due 2018 (the "debentures"). The
definition of senior indebtedness for
purposes of the notes initially includes
only secured indebtedness of Network
Associates, but at such time as less than
$60 million aggregate principal amount at
maturity of the debentures remains
outstanding, senior indebtedness will
include both secured and unsecured
obligations of Network Associates. As of
September 30, 2001, we had no indebtedness
outstanding that would have constituted
senior indebtedness (including
indebtedness that would only be included
within the definition of senior
indebtedness at such time as less than $60
million aggregate principal amount at
maturity of the debentures remains
outstanding). As of September 30, 2001,
our subsidiaries had approximately $539
million of indebtedness and other
liabilities outstanding, excluding
intercompany liabilities and liabilities
of a type not required to be reflected on
a balance sheet in accordance with
generally accepted accounting principles,
to which the notes would have been
effectively subordinated.
Use of Proceeds................... We will not receive any proceeds from the
sale by any selling securityholder of the
notes or the underlying common stock.
Trading........................... The notes are eligible for trading in the
PORTAL market.
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RISK FACTORS
Before you invest in the notes or shares of common stock underlying the
notes, you should be aware of various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included or incorporated by reference in this prospectus, before you
decide whether to purchase the notes or the shares of common stock underlying
the notes. The risks set forth below are not the only risks we face. If any of
the following risks occur, our business, financial condition and results of
operations could be materially adversely affected. In such case, the trading
price of the notes and common stock could decline, and you may lose all or part
of your investment.
Keep these risk factors in mind when you read "forward-looking"
statements elsewhere in this prospectus and in the documents incorporated herein
by reference. These are statements that relate to our expectations for future
events and time periods. Generally, the words "anticipate," "expect," "intend"
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements
RISKS RELATED TO NETWORK ASSOCIATES
OUR QUARTERLY FINANCIAL RESULTS WILL LIKELY FLUCTUATE.
Our quarterly operating results have varied greatly in the past and will
likely vary greatly in the future depending upon a number of factors. Many of
these factors are beyond our control. Our revenues, gross margins and operating
results may fluctuate significantly from quarter to quarter due to, among other
things:
- volume, size and timing of new licenses and renewals of existing
licenses;
- our ability to timely and accurately obtain end-user sales
information and information related to inventory levels from our
distributors;
- introduction of new products, product upgrades or updates by us or
our competitors;
- our ability to successfully integrate PGP Security's products and
technology into our McAfee and Sniffer product groups;
- the mix of products we sell;
- the size and timing of our non-cash stock-based charges;
- changes in product prices by us or our competitors;
- trends in the computer industry and general economic conditions;
- our ability to develop, market and sell our products;
-10-
- current and future costs or charges related to acquisitions or
dispositions of technology or businesses, including our planned
disposition of the Gauntlet firewall and our PGP desktop and wireless
encryption products;
- fluctuations in our expenditure levels related to our efforts to
expand our international sales organization;
- our investment experience related to our strategic minority equity
investments;
- the components of our revenue, particularly that portion attributable
to our ASP/MSP subscription model, that is deferred;
- the effectiveness of our channel strategy and our mix of direct and
indirect revenues;
- pressure on employee wages as competition for skilled employees
increases; and
- costs related to extraordinary events including litigation or any
reductions in forces.
Our business is impacted by seasonal trends and global or regional
macroeconomic trends. For example, our net revenue is typically higher in the
fourth quarter, as many customers complete annual budgetary cycles, and lower in
the summer months when many businesses experience lower sales, particularly in
the European market. Our European business has been adversely impacted in recent
periods primarily because of the continued weakness of the Euro against the
dollar. For some time, our business in Asia and Latin America has been adversely
impacted by the adverse economic conditions there. Our business in the U.S. and
elsewhere may be adversely impacted by customer concerns about weakening
economic conditions and longer payment cycles associated with weak economic
conditions.
We have not been profitable for the last two years. In addition to risks
we face in operating our business, continued economic weakness in the U.S. and
other countries could slow or prevent our efforts to successfully expand
internationally and regain profitability.
THE TIMING AND AMOUNT OF OUR REVENUES ARE SUBJECT TO A NUMBER OF FACTORS THAT
MAKE IT DIFFICULT TO ESTIMATE OPERATING RESULTS PRIOR TO THE END OF A QUARTER.
We do not maintain a significant level of backlog. As a result, product
revenues in any quarter are dependent on contracts entered into or orders booked
and shipped in that quarter. Historically, we have experienced a trend toward
higher order receipt, and therefore, a higher percentage of revenue shipments
toward the end of the last month of a quarter. This trend makes predicting
revenues more difficult.
We market a significant portion of our products to end-users through
intermediaries, such as distributors. We recognize revenue on products sold by
our distributors when the distributor sells our products to their customers. To
determine our business performance at any point in time or for any given period,
we must timely and accurately gather sales information from our intermediaries'
information systems, at an increased cost to us. Our intermediaries' information
systems may be less accurate or reliable than our internal systems. The timing
of closing larger orders sold directly to end-users of our products increases
the risk of quarter-to-quarter fluctuation. If orders forecasted for a specific
customer for a particular quarter are
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not realized or revenues are not otherwise recognized in that quarter, our
operating results for that quarter could be materially adversely affected.
WE FACE RISKS ASSOCIATED WITH THE PLANNED INTEGRATION OF OUR PGP PRODUCT GROUP
INTO OUR MCAFEE AND SNIFFER PRODUCT GROUPS.
In the fourth quarter of 2001, we plan to integrate the activities of
our PGP product group into our McAfee and Sniffer product groups with some PGP
products being sold. Risks faced by us in conjunction with this planned
integration include:
- overall net revenue may be adversely impacted for at least the near-term as
we integrate some of PGP's security products and seek to sell other PGP
product lines;
- actual restructuring charges in Q4 2001 may exceed our initial estimate of
$9.0 to 11.0 million;
- we may not realize our estimated expense savings of approximately $50
million in fiscal 2002 in full or on a timely basis;
- we may experience increased customer dissatisfaction or customer losses as a
result of the integration, particularly from customers that license the
Gauntlet firewall and PGP desktop and wireless encryption technologies that
we plan to sell;
- we may experience difficulty in integrating the PGP technologies and
products and the integration could result in delays in the development of
new products or enhancements to existing products;
- management's focus on the integration may distract attention from our
day-to-day business and may disrupt key research and development, marketing
or sales efforts; and
- we may be unable to dispose of the Gauntlet firewall and PGP desktop and
wireless encryption technologies on favorable terms, on a timely basis, or
at all.
OUR CUSTOMERS MAY CANCEL OR DELAY THEIR PURCHASES OF OUR PRODUCTS, OR IT COULD
TAKE LONGER FOR US TO SELL OUR PRODUCTS.
Our products may be considered to be capital purchases by certain
customers or prospective customers. Capital purchases are often discretionary
and, therefore, are canceled or delayed if the customer experiences a downturn
in its business prospects or as a result of economic conditions in general. As a
result of weakening economic conditions, the period of time necessary to sell
our products may increase and we may be required to spend more on our sales
efforts. Cancellations, delays, longer sales cycles and greater sales expenses
could adversely affect our results of operations.
WE SELL OUR PRODUCTS THROUGH A LIMITED NUMBER OF DISTRIBUTORS, WHO MAY NOT
VIGOROUSLY MARKET OUR PRODUCTS OR MAY HAVE DIFFICULTY IN TIMELY PAYING FOR
PURCHASED PRODUCTS, AND THE LOSS OF A SIGNIFICANT DISTRIBUTOR COULD INTERRUPT
THE DISTRIBUTION OF OUR PRODUCTS.
Our distributors may sell other vendor's products that are complementary
to, or compete with, our products. While we encourage our distributors to focus
on our products through market and support programs, these distributors may give
greater priority to products of other suppliers, including competitors.
-12-
Some of our distributors in the past have, and in the future may,
experience financial difficulties worldwide, which may adversely impact our
collection of accounts receivable. We regularly review the collectibility and
credit worthiness of our distributors to determine an appropriate allowance for
doubtful accounts. Our uncollectable accounts could exceed our current or future
allowance for doubtful accounts, which would adversely impact our operating
results.
Substantially all of our indirect sales are made through a limited
number of distributors. In addition, our agreements with distributors may be
terminated by either party without cause. As a result, we may experience a
significant interruption in the distribution of our products if one of our
significant distributors terminates its distribution agreement. Such an
interruption could have an adverse impact on our financial condition, results of
operation and cash flow.
WE FACE RISK ASSOCIATED WITH EMPLOYEE RETENTION AND NEW EMPLOYEE ASSIMILATION.
Many of our employees are located in areas and have skills in fields
where there is high worker mobility and work force turnover. The departure of a
large number of our employees or a meaningful number of key non-executive
employees could have a material adverse impact on many facets of our business,
including our ability to develop new products, upgrade existing products, sell
our products and provide adequate internal infrastructure. After April 22, 2000,
the end of the 12-month lock-up period for options repriced in April 1999, we
experienced a larger than normal level of employee departures as many of these
employees elected to terminate their employment with us. We anticipate that we
will continue to have difficulties in retaining employees because many of our
employees hold options to purchase our stock at prices significantly above the
current market price for our stock.
We hired a significant number of new employees in 2000 and the first
nine months of 2001 and we may continue to add new employees to fill positions
vacated by departing employees and to expand our business. We will face
challenges in attracting and assimilating qualified new employees, in
particular, in key international markets, such as Japan, the United Kingdom,
Germany and other regions. Recently, we hired new heads of our Asia-Pacific,
European and Latin American operations. We expect that there may be reduced
levels of productivity as these individuals are trained and otherwise adapt to
our organization.
PENDING OR FUTURE LITIGATION COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS
OF OPERATION AND FINANCIAL CONDITION.
From time to time, we have been subject to litigation, including pending
putative class action securities litigation against us, our directors and our
officers and pending patent infringement claims. Pending or future litigation
could result in substantial costs, could cause the diversion of management's
attention and resources and could have a material adverse effect on our
business, results of operations, financial condition and cash flow.
WE FACE RISKS RELATED TO ORGANIZING OUR SALES EFFORTS INTO PRODUCT GROUPS.
To more effectively market our products, we have combined complementary
products into separate product groups: McAfee, which markets the McAfee Active
Virus Defense product group; Sniffer Technologies, which markets the Sniffer
Total Network Visibility product line; PGP Security, which markets the PGP Total
Network Security product group; and Magic Solutions, which markets the Magic
Total Support Desk product group. This structure is intended to allow us to
react faster to customers' needs and to focus each product group's sales force
on selling its respective product line and the individual point products
-13-
contained in those product groups. Our U.S. professional services organization
is also organized around our product groups.
In October 2001, our Board of Directors approved a plan to integrate the
activities of our PGP product group into our McAfee and Sniffer product groups
and other product lines will be sold. Specifically, the PGP VPN, PGPfire and the
PGP E-Business Server will be marketed and sold as McAfee products. The CyberCop
technology will be integrated into the Sniffer product line.
Our customers and potential customers may not respond to this structure
and this structure may be unsuccessful due to, among other things:
- uncertainty and customer dissatisfaction surrounding our shift in
focus to our product group strategy, including uncertainty as to our
level of support for our combined product groups, previously marketed
as one line and integration of our various product groups and related
products;
- customer confusion or irritation related to multiple sales calls from
different members of our sales forces;
- a loss of potential cross selling opportunities and a lack of lead
sharing between the separate product groups' sales representatives
who are primarily compensated for sales made by them of products
within their respective product groups;
- the possibility that our centralized general and administrative group
may be unable to meet on a timely basis or at all each product
group's individualized infrastructure and support requirements; and
- one or more of our product groups may lack sufficient qualified
professional services personnel to support its products.
WE COULD EXPERIENCE CUSTOMER AND MARKET CONFUSION DUE TO SIMILARITIES IN THE
NAMES USED BY OUR PRODUCT GROUPS AND SUBSIDIARIES.
Historically, we have spent a significant portion of our total marketing
efforts and advertising spending building awareness of the Network Associates
name. In more recent periods, our marketing efforts and advertising spending
have been focused on building brand awareness at the product group and
subsidiary level, rather than at the Network Associates corporate level. This
has created and could continue to create confusion in the marketplace and in the
investor community. People may be unclear about the relationships between
Network Associates and our product groups and our subsidiaries, which often have
potentially confusing names and products. For example, our online consumer
anti-virus products, our retail and large corporate anti-virus products and our
hosted anti-virus products to date have been marketed and sold, respectively, by
our publicly traded McAfee.com subsidiary, our retail division which is called
McAfee Retail and our McAfee product group.
-14-
OUR REVENUES MAY BE ADVERSELY IMPACTED BY OUR SHIFT TO A TWO-YEAR SUBSCRIPTION
LICENSE THAT INCLUDES ONLY ONE-YEAR OF MAINTENANCE.
Historically, our two-year subscription license included two years of
maintenance. However, in 2001, we introduced two-year subscription licenses that
include the first year of maintenance. During the first year of the subscription
license, the customer has the option to purchase the second year of maintenance.
We believe this new offering allows the customer greater flexibility in
selecting the appropriate level of maintenance support. However, if customers
delay the purchase of their second year of maintenance support, this could
adversely affect our near term revenue and cash flows.
COMPETITORS MAY INCLUDE PRODUCTS SIMILAR TO OURS IN THEIR HARDWARE OR SOFTWARE
AND RENDER OUR PRODUCTS OBSOLETE.
Vendors of hardware and of operating system software or other software
(such as firewall or e-mail software) may enhance their products or bundle
separate products to include network security and management software similar to
our products. The widespread inclusion of products that perform the same or
similar functions as our products within computer hardware or other software
could render our products obsolete and unmarketable. Furthermore, even if these
incorporated products are inferior or more limited than our products, customers
may elect to accept the incorporated products rather than purchase our products.
If we are unable to develop new network security and management products to
further enhance operating systems or other software and to successfully replace
any obsolete products, our business could suffer.
WE EXPECT SIGNIFICANT STOCK-BASED COMPENSATION CHARGES.
We expect to incur stock-based compensation charges related to employee
options repriced in April 1999. The size of these charges could be significant
depending on movements in the market value of our common stock and, in some
cases, the market value of McAfee.com common stock. We may also incur additional
stock-based compensation charges related to executive compensation arrangements.
WE HAVE RECENTLY EXPERIENCED SIGNIFICANT CHANGES IN SENIOR MANAGEMENT.
On January 3, 2001, our board of directors appointed George Samenuk as
our chief executive officer and president. Mr. Samenuk was also subsequently
named chairman of our board. On December 26, 2000, the Company announced that
Peter Watkins would leave as president and chief operating officer effective
December 31, 2000, and William Larson and Prabhat Goyal, our then chief
executive officer and chief financial officer, respectively, would leave their
positions upon the appointment of the new chief executive officer. After leaving
their positions Messrs. Larson, Watkins and Goyal agreed to continue serving the
Company as special advisors for one year. In April 2001, Stephen C. Richards was
hired as our new executive vice president and chief financial officer. We
recently hired new heads of our Asia-Pacific, European and Latin American
operations. In October 2001, Zachary Nelson, who was recently named our chief
strategy officer, left that position but he will continue to serve as a special
advisor to the Company through October 2002.
We intend to continue to add new members to senior management,
particularly in the international market. Changes in management may be
disruptive to our business and may result in the departure of existing employees
and/or customers. It may take significant time to locate, retain and integrate
qualified management personnel. It may take significant time to integrate
recently hired senior management personnel, who may ultimately be unable to
effectively work together.
-15-
OUR MANAGEMENT AND TECHNICAL PERSONNEL ARE CRITICAL TO OUR BUSINESS, THESE
INDIVIDUALS MAY NOT REMAIN WITH US IN THE FUTURE.
Our ability to achieve our revenue and operating performance objectives
will depend in large part on our ability to attract and retain technically
qualified and highly skilled sales, consulting, technical, marketing and
management personnel. These individuals are not typically subject to an
employment agreement or non-competition agreement. Competition for these
employees is intense and is expected to remain so for the foreseeable future. We
have seen upward pressure on wages as a result of this intense competition for
employees, which could cause an increase in our operating expenses. We may not
be successful in retaining our existing key personnel and in attracting and
retaining the personnel we require, and our failure to retain and hire key
employees could adversely affect our business and operating results. Additions
of new, and departures of existing, employees, particularly in key positions,
can be disruptive and can result in departures of existing employees, which
could adversely affect our business.
COMPUTER "HACKERS" MAY DAMAGE OUR PRODUCTS AND SERVICES.
Due to our high profile in the security software market, we have been a
target of computer hackers who have, among other things, created viruses to
sabotage or otherwise attack our products and services, including our various
websites. A number of websites have been subject to denial of service attacks,
where a website is bombarded with information requests eventually causing the
website to overload, which causes a delay or disruption of service. If
successful, any of these events could damage users' computer systems. In
addition, since we do not control diskette duplication by distributors or our
independent agents, diskettes containing our software may be infected with
viruses.
WE DEPEND ON REVENUE FROM OUR FLAGSHIP ANTI-VIRUS AND SNIFFER PRODUCTS.
We have historically derived a majority of our net revenues from our
flagship McAfee anti-virus software products and Sniffer network fault and
performance management products. These products are expected to continue to
account for a significant portion of our net revenues for the foreseeable
future. Because of this concentration of revenue, our business could be harmed
by a decline in demand for, or in the prices of, these products as a result of
competition, technological change, a change in our pricing model, inclusion of
anti-virus or network management and analysis software as a standard part of
hardware or operating system software or other software, or a maturation in the
markets for these products.
WE FACE RISKS ASSOCIATED WITH PAST AND FUTURE TRANSACTIONS.
Our industry has experienced, and is expected to continue to experience,
a significant amount of consolidation. As part of our growth strategy, we may
buy or make investments in complementary companies, products and technologies.
Since 1995 we have completed a large number of significant acquisitions
involving both public and private companies including the acquisition of
CyberMedia and Dr. Solomon in 1998 and Network General and PGP in 1997. We and
McAfee.com have also completed a number of smaller acquisitions and we have
acquired a number of our international distributors.
The integration of an acquired company or technology involves a complex,
time consuming and expensive process. Following any acquisition, we must operate
as a combined organization utilizing common information communication systems,
operating procedures, financial controls and human resource practices. In order
to successfully integrate our completed and other potential acquisitions, we may
need to, among other things, successfully:
-16-
- attract and retain key management and other personnel;
- integrate the acquired products into our product offerings both from
engineering and sales and marketing perspective;
- integrate and support preexisting supplier, distribution and customer
relationships;
- coordinate research and development efforts;
- integrate sales forces; and
- consolidate duplicate facilities.
The difficulties of integrating an acquired company may be exacerbated
by the geographic distance between the companies, the complexity of the
technologies and operations being integrated, and the disparate corporate
cultures being combined. Successful acquisitions may be more difficult to
accomplish in the high technology industry than in other industries, and will
require the dedication of our management resources. Management's focus on the
integration of operations may distract attention from our day-to-day business,
and may disrupt key research and development, marketing or sales efforts. In
addition, it is common in the technology industry for aggressive competitors to
attract customers and recruit key employees away from companies during the
integration phase of an acquisition.
We have made a number of venture and minority investments in private and
publicly-traded companies with complementary products, services and
technologies. As of September 30, 2001, the minority venture investments we
continue to hold totaled $1.2 million at estimated fair value. The $1.2 million
in minority venture investments include investments in public and private
companies, amounting to $1.0 million and $200,000, respectively. We classify our
investments in public companies in short-term marketable securities and classify
our investments in private companies in other long-term assets. In the third
quarter of 2001, we recorded a $1.0 million impairment charge in connection with
these investments. For the nine months ended 2001, we recorded a $19.1 million
impairment charge in connection with these investments. We plan to continue
investing and may make acquisitions of other strategic investments in the
future.
Our available cash and securities may be used to buy or invest in
companies or products, which could result in significant acquisition-related
charges to earnings and dilution to our stockholders. Moreover, if we buy a
company, we may have to incur or assume that company's liabilities, including
liabilities that are unknown at the time of acquisition, which may result in a
material adverse effect on us.
WE WILL EXPERIENCE SIGNIFICANT AMORTIZATION CHARGES AND FACE THE RISK OF FUTURE
NON-RECURRING CHARGES IN THE EVENT OF IMPAIRMENT.
In connection with our previous acquisitions accounted for under the purchase
method of accounting, until we adopt the new Statements of Financial Accounting
Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," we will
experience significant charges related to the amortization of purchased
goodwill. We will continue to experience significant charges related to
amortization of technology. In addition, if we determine that purchased
technology and goodwill are impaired, we will be required to take a related
non-recurring charge to earnings. For the three and nine months ended September
30, 2001, our amortization expense related to purchased technology and goodwill
was $15.5 million and $48.0 million,
-17-
respectively. We plan to adopt SFAS 142 beginning in fiscal 2002 at which time
our goodwill will no longer be amortized but instead reviewed at least annually
for impairment.
WE MAY BE REQUIRED TO USE A LARGE PORTION OF OUR CASH BALANCES, ISSUE A
SIGNIFICANT AMOUNT OF OUR COMMON STOCK OR INCUR ADDITIONAL INDEBTEDNESS IN
CONNECTION WITH THE REPURCHASE OF OUR OUTSTANDING DEBENTURES.
On February 13, 1998, we issued zero coupon debentures, which have an
aggregate face amount at maturity of $885.5 million and generated net proceeds
to us of approximately $337.6 million (after deducting fees and expenses). The
initial price for the debentures was $391.06 per $1,000 of principal amount at
maturity. At the option of the holder, we are required to repurchase the
debentures as of February 13, 2003, February 13, 2008 and February 13, 2013 at
purchase prices equal to the initial issue price plus the accretion of original
issue discount on the debentures to such dates (or $494.52, $625.35 and $790.79
per $1,000 of principal amount at maturity, respectively). In the case of such a
required repurchase, at our option, we may pay the aggregate repurchase price in
cash, shares of our common stock or a combination of cash and common stock. The
number of shares of common stock so issued by us would be based on the fair
value of our common stock at the time of any required repurchase. On the same
dates and at the same repurchase prices, we may at our option redeem the
outstanding debentures for cash. As of September 30, 2001, our aggregate cash,
cash equivalents and marketable securities were approximately $956.8 million,
including $89.0 million held by McAfee.com. In the quarter ended September 30,
2001, we repurchased zero coupon debentures, which had an aggregate face amount
at maturity of $140.0 million, at a net price of $442.50 per $1,000 of principal
amount at maturity. Assuming that as of February 13, 2003 all currently
outstanding zero coupon debentures are redeemed the aggregate redemption price
would equal approximately $368.6 million.
In anticipation of any repurchase or optional redemption of the
debentures, we may issue additional indebtedness other than the notes to pay all
or a portion of the repurchase or redemption price. This indebtedness may be
issued in a greater amount than, or on terms less favorable than, the
outstanding debentures.
OUR HARDWARE BASED PRODUCTS FACE MANUFACTURING, SUPPLY, INVENTORY, LICENSING AND
OBSOLESCENCE RISKS.
Some of our Sniffer products and E-ppliance products include, in
addition to our software, a hardware platform as well as software licensed from
other companies. We expect the number of our hardware-based products to increase
as, among other things, the data rate in computer networks increases, making a
software-only solution a less viable solution. Third-party manufacturers do the
manufacturing of these products under contract for us. Reliance on third-party
manufacturers involves a number of risks, including the lack of control over the
manufacturing process and the potential absence or unavailability of adequate
capacity. In the event that any third party manufacturers cannot or will not
continue to manufacture our products in required volumes, on a cost-effective
basis, in a timely manner or at all, we will have to secure additional
manufacturing capacity. Even if such additional capacity is available at
commercially acceptable terms, the qualification process could be lengthy and
could create delays in product shipments.
Our hardware-based products contain critical components supplied by a
single or a limited number of third parties. We have been required to purchase
certain computer platforms around which we design our network fault and
performance management products to ensure an available supply of these products
for our customers. Any significant shortage of these platforms or other
components or the failure of the third-party supplier to maintain or enhance
these products could lead to cancellations of customer orders or delays in
placement of orders.
-18-
Some of our hardware-based products incorporate licensed software, such
as operating system software. Our ability to successfully market these products
depends on our ability to obtain reasonably priced licenses from third-party
software providers, as well as on our ability to successfully integrate our
hardware and software with this third party.
Hardware based products may face greater obsolescence risks than
software products. If our hardware products are not easily upgradable to meet
future market needs, they may become obsolete. In addition to lost future sales,
we could incur losses or other charges in disposing of obsolete inventory, both
of which could also materially adversely affect our results of operations.
WE FACE RISKS RELATED TO OUR APPLICATION SERVICE PROVIDER STRATEGY.
With our ASP or hosted products and services, customers "rent versus
buy" the software. For example, McAfee.com is dedicated to updating, upgrading
and managing PCs over the Internet for consumers and small to medium-sized
businesses. This web-based model is a relatively new concept, and there is a
risk that our ASP products and services may fail to gain market acceptance. The
growth, market acceptance and ultimate profitability of our ASP services is
highly uncertain and subject to a number of factors, including:
- our ability to successfully adapt existing products or develop new or
enhanced products that operate in a fast, secure and reliable manner
over the Internet;
- increased expenditures associated with the creation of a new business
or delivery platform, such as product development, marketing and
technical and administrative support;
- the introduction of new products by third-party competitors;
- potential unwillingness of customers to pay for ASP
subscription-based products and services and our ability to properly
price our products and services to generate the greatest revenue
opportunities;
- our ability to cost effectively offer our ASP products and services;
- reluctance by businesses and consumers to change their software
purchasing behavior in favor of services hosted on our, or
third-party, servers; and
- concerns of businesses and consumers about whether the Internet is
fast, reliable and secure enough to deliver critical network security
and availability services effectively.
Our corporate ASP services were historically offered through our
myCIO.com subsidiary. In the first quarter of 2001 we reintegrated the
operations of myCIO.com with our own.
OUR MANAGED SERVICE PROVIDER STRATEGY EXPOSES US TO RISKS IN ADDITION TO THOSE
GENERALLY EXPERIENCED AS AN ASP.
We also make our hosted products and services available over the
Internet in what we refer to as a managed environment. These MSP solutions
differ from our ASP solutions, among other ways, in that our solutions are
customized to service a specific customer's needs and are monitored and updated
by networking professionals for that customer. To successfully offer MSP
services we must:
-19-
- effectively monitor and customize each customer's managed services;
- attract and retain qualified networking professionals to manage
customer accounts; and
- effectively price our products and services to account for the higher
costs associated with selling managed services.
We also allow intermediaries, such as Internet Service Providers, to
sell and host our products and services in a managed environment. This MSP
reseller strategy exposes us to additional risks:
- we must select, train and maintain qualified and financially stable
MSP resellers;
- it is more difficult for us to ensure customer satisfaction as we do
not have direct customer contact and we rely on our resellers to
timely and properly customize and administer our products and
services;
- we must develop and maintain mutually satisfactory revenue sharing
arrangements with our MSP resellers; and
- our MSP resellers may compete with our own MSP efforts.
WE MAY EXPERIENCE HIGHER OVERALL REVENUE IN THE NEAR-TERM BUT LOWER FUTURE
RECURRING REVENUE DUE TO POSSIBLE INCREASED LEVELS OF PERPETUAL LICENSE SALES.
We may experience an increase in the number of, and amount of, our net
revenue attributable to our sale of perpetual software licenses and hardware.
Under a perpetual license, a customer purchases the base-line software and
subsequently acquires software upgrades and updates. In contrast, under a
time-based license model, customers license the software, including upgrades and
updates, for a specified period of time. At the end of the initial license
period, the customer must renew its software time-based license to use our
software. Sales of perpetual licenses typically result in significantly higher
up-front revenue and lower recurring and future revenues as the sales price for
upgrades and updates tends to be significantly lower than that of a perpetual
license. Factors which may contribute to this increase in perpetual sales
include greater sales of hardware-based Sniffer and E-ppliance products where
software is bundled onto the hardware platform and a general customer preference
for perpetual licenses. To offset potential reductions in future revenue, among
other things, it will be incumbent upon us to introduce new software products
for sale and we may elect to unbundle some of the products previously offered by
us on a bundled subscription basis.
WE FACE RISKS RELATED TO OUR RELATIONSHIP WITH MCAFEE.COM.
We have entered into various inter-company arrangements. At September
30, 2001, we owned 36,000,000 shares of McAfee.com's Class B common stock, which
is generally entitled to three votes per share and converts to shares of
McAfee.com Class A common stock if sold by us to a third party. McAfee.com Class
A common stock is entitled to one vote per share. At September 30, 2001, our
McAfee.com holdings represented approximately 79% of McAfee.com's outstanding
capital stock and approximately 92% of its total voting power.
Pursuant to our cross license agreement with McAfee.com, we have
licensed all our technology to McAfee.com for use in the markets specified below
and McAfee.com has licensed its technology to us for our
-20-
use outside of McAfee.com's markets. Under our license and other agreements with
McAfee.com, among other things:
- subject to the reseller agreement described below, McAfee.com has the
exclusive right to use the licensed technology for providing
single-user consumer licenses for our products and services sold over
the Internet or for Internet-based products and licensing the
technology to original equipment manufacturers for sale to individual
consumers;
- we are permitted to continue to sell our consumer products through
non-online channels, such as traditional retail stores, however
McAfee.com's sales of online products and services could
significantly reduce sales of these products;
- we may not offer a product incorporating third-party technology if
those products are competitive with products offered by McAfee.com;
- McAfee.com is required to pay us a license fee of 7% of net revenue
derived from product sales that include the licensed technology;
- the license agreement is perpetual and may only be terminated by us
if McAfee.com fails to cure a material breach of the license within
30 days after we notify it of the breach, subject to mandatory
dispute resolution prior to the effectiveness of any proposed
termination;
- we are required to indemnify McAfee.com with respect to existing
litigation related to the licensed technology to which we are a
party;
- generally, we are required to cause to be elected to the McAfee.com
board of directors at least two independent directors, which term
would exclude any serving Network Associates officer or director; and
- if, without the prior approval of our continuing directors (being our
current directors and directors approved or not objected to by our
current directors), someone acquires 15% or more of our outstanding
capital stock or our continuing directors cease to constitute a
majority of our board (1) we are required to vote our shares of
McAfee.com common stock and otherwise seek to cause the McAfee.com
board of directors to consist of at least a majority of independent
directors and (2) our shares of McAfee.com Class B common stock will
be entitled to only one vote per share instead of three.
In March 2001, we entered into reseller agreements with McAfee.com.
Under these agreements, McAfee.com may resell our products to business
customers, except in Japan, and, in certain countries, we may sell McAfee.com
products to OEMs and end-users directly or through ASPs.
WE MUST ADAPT TO THE RAPIDLY CHANGING BUSINESS ENVIRONMENT BROUGHT ON BY THE
WIDESPREAD USE OF THE INTERNET.
We utilize the Internet and depend on its functionality and reliability
in many parts of our business, including sales, distribution and support of our
products. There are still many uncertainties regarding many facets of the
Internet, including reliability, security, access, tax, government regulation
and cost. We also run
-21-
the risk of not adapting to the latest changes in the Internet, which could
affect our business operations. If continued growth of the Internet does not
develop at the pace we expect, our operating results could be adversely
affected.
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE; WE FACE RISK
ASSOCIATED WITH PRODUCT DEVELOPMENT.
The network security and management market is highly fragmented and
characterized by ongoing technological developments, evolving industry standards
and rapid changes in customer requirements. Our success will depend on our
ability to:
- offer a broad range of network security and management software
products;
- continue to enhance existing products and expand product offerings;
- develop and introduce in a timely manner new products with
technological advances;
- respond promptly to new customer requirements;
- comply with evolving industry standards without delays in compliance;
- provide upgrades and updates to users frequently and at low cost; and
- remain compatible with popular operating systems such as Windows 98,
Windows 2000, Windows NT, and NetWare, and develop products that are
compatible with new or otherwise emerging operating systems,
including the introduction of Windows XP.
We may not be able to successfully develop and market, on a timely
basis, enhancements to our existing products or new products. Our product
enhancements or new products may not adequately address the changing needs of
the marketplace. New products with new technological capabilities could replace
or shorten the life cycle of our products or cause our customers to defer or
cancel purchases of our existing products.
We may continue to experience delays in software development as we have
at times in the past. Complex software products like ours may contain undetected
errors or version compatibility problems, particularly when first released,
which could delay or cost us market acceptance. For example, our anti-virus
software products have in the past falsely detected viruses that did not
actually exist. Difficulties and delays associated with new product
introductions, performance or enhancements could have a material adverse effect
on our business, financial condition and results of operation.
In the fourth quarter of 2001, we plan to integrate a number of PGP
Security products and technologies into our McAfee and Sniffer product groups.
We may be unsuccessful in integrating these technologies and the integration
process could delay the development and enhancement of new and existing
products.
Our product development efforts are impacted by the adoption or
evolution of industry standards. For example, no uniform industry standard has
developed in the market for encryption security products. As industry standards
are adopted or evolve, we may have to modify existing products or develop and
support
-22-
new versions of existing products. In addition, if no industry standard
develops, our products and our competitors' products could be incompatible,
which could prevent or delay overall development of the market for a particular
product. If our products fail to comply with existing or evolving industry
standards in a timely fashion, our business, results of operation and financial
condition could be materially and adversely affected.
Our long-term success depends on our ability to upgrade and update
existing product offerings, modify and enhance acquired products and introduce
new products which meet our customers' needs. Future upgrades and updates may
include additional functionality, respond to user problems or address
compatibility problems with changing operating systems and environments. We
believe that our ability to provide these upgrades and updates frequently and at
low costs is key to our success. For example, the proliferation of new and
changing viruses makes it imperative to update anti-virus products frequently to
avoid obsolescence. Failure to release upgrades and updates could have a
material adverse effect on our business, results of operations and financial
condition. We may not be successful in these efforts. In addition, future
changes in Windows 98, Windows 2000, Windows NT, NetWare or other popular
operating systems, could cause compatibility problems with our products.
Further, delays in the introduction of future versions of operating systems or
lack of market acceptance of these future versions would delay or reduce demand
for our future products which were designed to operate with these future
operating systems. Our failure to introduce in a timely manner new products that
are compatible with operating systems and environments preferred by desktop
computer users would have a material adverse effect on our business, results of
operation and financial condition.
IF THE NETWORK MANAGEMENT AND NETWORK SECURITY MARKETS DO NOT EVOLVE AS WE
ANTICIPATE, OUR BUSINESS COULD SUFFER.
The markets for our network management and network security products are
evolving, and their growth depends upon broader market acceptance of this
software, including help desk software. Although the number of PCs attached to
large-area networks has increased dramatically, the network management and
network security markets continue to be emerging markets. These markets may not
continue to develop or may not develop rapidly enough to benefit our business
significantly. In addition, there are a number of potential approaches to
network management and network security, including the incorporation of
management and security tools into network operating systems. Therefore, even if
network management and network security tools gain broader market acceptance,
potential purchasers may not select our products. To the extent that either the
network management or network security market does continue to develop, we
expect that competition will increase.
WE ARE SUBJECT TO INTENSE COMPETITION IN THE NETWORK MANAGEMENT AND SECURITY
MARKETS AND WE EXPECT TO FACE INCREASED COMPETITION IN THE FUTURE.
The markets for our products are intensely competitive and we expect
competition to increase in the near-term. We believe that the principal
competitive factors affecting the markets for our products include:
- performance;
- functionality;
- quality;
- customer support;
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- breadth of product group;
- frequency of upgrades and updates;
- integration of products;
- manageability of products;
- brand name recognition;
- reputation; and
- price.
We may be unable to compete effectively against existing and potential
competitors. Some of our competitors have longer operating histories, greater
name recognition, larger technical staffs, established relationships with
hardware vendors and/or greater financial, technical and marketing resources.
These factors may provide our competitors with an advantage in penetrating the
market with their network security and management products. As is the case in
many segments of the software industry, we have been encountering, and we expect
to further encounter, increasing competition. This increased competition could
reduce average selling prices and, therefore, profit margins. Competitive
pressures could result not only in price reductions but also in a decline in
sales volume, which could cause our business to suffer.
Performance and quality of our anti-virus software products are measured
by number and type of viruses detected, the speed at which the products run and
ease of use. Our principal competitor in the anti-virus market serviced by our
McAfee product groups and McAfee.com is the Peter Norton Group of Symantec.
Trend Micro remains the strongest competitor in the Asian anti-virus market.
Other competitors include numerous smaller companies and shareware authors that
may in the future develop into stronger competitors or be consolidated into
larger competitors.
Our principal competitors in the security market vary by product type.
For firewalls, our principal competitors include CheckPoint, Symantec, and
larger companies such as Cisco Systems and Microsoft. For intrusion detection
products, we compete with ISS, Symantec and Cisco. The markets for encryption
and virtual private network, or VPN, products are highly fragmented with
numerous small and large vendors. Public key infrastructure, or PKI, encryption
vendors such as Entrust Technologies offer some products that compete with our
PGP products. VPN competitors include hardware and software vendors, including
telecommunications companies and traditional networking suppliers.
Our principal competitor in the network management market is Agilent.
Other competitors include Cisco, Computer Associates, Compuware, Concord
Communications, DeskTalk Systems, GN Nettest, Network Instruments, Radcom
Technologies, Shomiti Systems and Acterna Corporation.
Our principal competitors in the help desk market are Computer
Associates, FrontRange Solutions, Peregrine and Remedy.
We also face competition from large software companies such as
Microsoft, Intel, Novell and HP, which may offer network security and management
products as enhancements to their operating system.
-24-
Finally, as the network management market develops, we may face
increased competition from a number of large companies, as well as other
companies seeking to enter the market. The trend toward enterprise-wide network
management and security solutions may result in a consolidation of the network
management and security market around a smaller number of companies who are able
to provide the necessary software and support capabilities.
WE NEED TO EXPAND AND DEVELOP AN EFFECTIVE PROFESSIONAL SERVICES ORGANIZATION;
WE RELY ON THIRD-PARTY PROFESSIONAL SERVICES.
As our products and computer networks in general increase in complexity,
customers require greater professional assistance to design, install, configure
and implement our products. To date, we have relied on our limited professional
services capabilities and increasingly on outside professional service
providers, including our distributors, resellers and system integrators. These
third party service providers may provide inadequate levels of professional
services. Moreover, reliance on these third parties places a greater burden on
them and reduces our ability to control and establish standards for providing
these support services. Our reliance on these third parties could delay our
recognition of product revenue, harm our relationships or reputation with these
third parties or the end users of our products or result in decreased future
sales of, or prices for, our products.
The failure to develop and maintain an effective professional services
organization could have a material adverse effect on our business. To more
effectively service our customers' evolving needs, we intend to significantly
expand and develop our worldwide professional services organization. We may not
succeed in these efforts. Effectively expanding and developing our professional
services organization will require that we hire and train more service
professionals who must be continually trained and educated to ensure that they
possess sufficient technical skills and product knowledge. The market for
qualified professionals is intensely competitive, making hiring and retention
difficult. We expect significant competition in this market from existing
providers of professional services and future entrants. We must also properly
price our services to attract customers, while maintaining sufficient margins
for these services. We therefore expect that we will have lower profit margins
on our service revenues. In addition, we reorganized our U.S. professional
services organization, in part, to enable the professional services organization
to become more specialized on individual products and product groups. As a
result, a particular product group may have insufficient qualified personnel to
perform its professional services needs as there will no longer be a "pool" of
professional services personnel from which to draw. A product group's lack of
sufficient professional services personnel could lead to customer
dissatisfaction, missed revenue opportunities and a loss of future business.
WE RELY ON THE CONTINUED PROMINENCE OF MICROSOFT TECHNOLOGY.
Although we intend to support other operating systems, our mission is to
be the leading supplier of network security and management products for Windows
NT/Intel based networks. Sales of our products would be materially and adversely
affected by market developments that are adverse to the Windows operating
environments, including the failure of users and application developers to
accept Windows NT. In addition, our ability to develop products using the
Windows operating environments is dependent on our ability to gain timely access
to, and to develop expertise in, current and future developments by Microsoft,
including the introduction of Windows XP. We may not be able to gain the
necessary access from Microsoft to its product development.
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WE MAY FAIL TO SUPPORT OPERATING SYSTEMS WHICH SUCCESSFULLY COMPETE WITH
MICROSOFT'S TECHNOLOGY, INCLUDING COMPETING VERSIONS OF THE UNIX OPERATING
SYSTEM.
We are expanding our product support to include the Unix operating
system and the Linux operating system. Sales of our products could be materially
and adversely impacted by our failure to support those versions of the Unix
operating system or competing operating systems that receive broad market
acceptance. The Unix system encompasses many separate operating systems of which
we only support a few, including for example, Sun Microsystems' Solaris Unix
operating system.
WE MUST EFFECTIVELY MANAGE OUR GROWTH.
Our business has grown both internally and through acquisitions. This
growth has placed, and any future growth would continue to place, a significant
strain on our limited personnel, management and other resources. Our ability to
manage any future growth, particularly with the anticipated expansion of our
international business and our ASP businesses, and growth in distribution
business, will require us to:
- attract, train, retain, motivate and manage new employees
successfully;
- effectively integrate new employees into our operations; and
- continue to improve our operational, financial, management and
information systems and controls.
If we continue to grow, our management systems currently in place may be
inadequate or we may not be able to effectively manage this growth. We are
currently investing in our Internet infrastructure in anticipation of expected
growth from the Internet, which may fail to materialize.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WHICH OFFER ONLY LIMITED
PROTECTION AGAINST POTENTIAL INFRINGERS; WE MAY FACE LITIGATION RELATED TO OUR
PROPRIETARY TECHNOLOGY AND RIGHTS.
Our success depends significantly upon our proprietary software
technology. We rely on a combination of contractual rights, trademarks, trade
secrets, patents and copyrights to establish and protect proprietary rights in
our software. However, these protections may be inadequate or competitors may
independently develop technologies or products that are substantially equivalent
or superior to our products. We do not typically obtain signed license
agreements from our corporate, government and institutional customers who
license products directly from us. Rather, we include an electronic version of a
"shrink-wrap" license in all of our electronically distributed software and a
printed license in the box for our products distributed through traditional
distributors in order to protect our copyrights and trade secrets in those
products. Since the licensee has not signed any of these licenses, many legal
authorities believe that such licenses may not be enforceable under the laws of
many states and foreign jurisdictions. In addition, the laws of some foreign
countries either do not protect these rights at all or offer only limited
protection for these rights. The steps taken by us to protect our proprietary
software technology may be inadequate to deter misuse or theft of this
technology. For example, we are aware that a substantial number of users of our
anti-virus products have not paid any registration or license fees to us.
Changing legal interpretations of liability for unauthorized use of our
software, or lessened sensitivity by corporate, government or institutional
users to avoiding infringement of intellectual property, could have a material
adverse effect on our business, results of operations and financial condition.
-26-
There has been substantial litigation regarding the intellectual
property rights of technology companies. The increased issuance of software
patents in recent years has led to and is likely to continue to lead to
increased patent and intellectual property litigation in the software industry.
In the past we have been, and we currently are, subject to litigation related to
our intellectual property. We may also be subject to litigation in connection
with our advertising and marketing programs. Although we intend to defend
ourselves vigorously against claims asserted against us in the foregoing actions
or matters, developments arising out of this pending litigation or any other
litigation to which we are or may become a party could have a material adverse
effect on our business, results of operation and financial condition. Adverse
determinations in litigation could:
- result in the loss of our proprietary rights;
- subject us to significant liabilities, including monetary
liabilities;
- require us to seek licenses from third parties; or
- prevent us from manufacturing or selling our products.
The litigation process is subject to inherent uncertainties and we may
not prevail in these matters, or we may be unable to obtain licenses with
respect to any patents or other intellectual property rights that may be held
valid or infringed upon by our products or us. Uncertainties inherent in the
litigation process include, among other things, the complexity of the
technologies involved, potentially adverse changes in the law and discovery of
facts unfavorable to us.
In addition, as we may acquire a portion of software included in our
products from third parties, our exposure to infringement actions may increase
because we must rely upon such third parties as to the origin and ownership of
any software being acquired. Similarly, exposure to infringement claims will
increase to the extent that we employ or hire additional software engineers
previously employed by competitors, notwithstanding measures taken by these
competitors to protect their intellectual property. In the future, litigation
may be necessary to enforce and protect trade secrets and other intellectual
property rights that we own. We may also be subject to litigation to defend
against claimed infringement of the rights of others or determine the scope and
validity of the proprietary rights of others. This litigation could be costly
and cause diversion of management's attention, either of which could have a
material adverse effect on our business, results of operations and financial
condition.
OUR INTERNATIONAL OPERATION SUBJECT US TO FOREIGN CURRENCY FLUCTUATIONS AND
OTHER INHERENT RISKS RELATED TO DOING BUSINESS IN FOREIGN COUNTRIES.
For the three months ended September 30, 2001 and 2000, net revenue from
international sales represented approximately 34%, and 33%, respectively, of our
net revenue. Historically, we have relied upon independent agents and
distributors to market our products internationally. We expect that
international revenue will continue to account for a significant percentage of
net revenue and we have announced our intention to focus on international
growth. We also expect that a significant portion of this international revenue
will be denominated in local currencies. To reduce the impact of foreign
currency fluctuations, we use non-leveraged forward currency contracts. However,
our future results of operations may be adversely affected by currency
fluctuations or by costs associated with currency risk management strategies.
Other risks inherent in international revenue generally include:
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- the impact of longer payment cycles;
- greater difficulty in accounts receivable collection;
- unexpected changes in regulatory requirements;
- seasonality due to the slowdown in European business activities
during the third quarter;
- tariffs and other trade barriers;
- export restrictions on our encryption and other security products;
- uncertainties relative to regional economic circumstances including
the continued economic weakness in Asia;
- political instability in emerging markets and difficulties in
staffing;
- hiring and retaining key international employees; and
- managing foreign operations.
These factors may have a material adverse effect on our future
international license revenue. Further, in countries with a high incidence of
software piracy, we may experience a higher rate of piracy of our products.
In addition, a portion of our international revenue is expected to
continue to be generated through independent agents. Since these agents are not
our employees and are not required to offer our products exclusively, they may
discontinue marketing our products entirely. Also, we may have limited control
over these agents, limited access to the names of the customers to whom these
agents sell products and limited knowledge of the information provided by, or
representations made by, these agents to customers.
FALSE DETECTION OF VIRUSES AND ACTUAL OR PERCEIVED SECURITY BREACHES COULD
ADVERSELY AFFECT OUR BUSINESS.
Our anti-virus software products have in the past and may at times in
the future falsely detect viruses that do not actually exist. These false
alarms, while typical in the industry, may impair the perceived reliability of
our products and may therefore adversely impact market acceptance of our
products. In addition, we have in the past been subject to litigation claiming
damages related to a false alarm, and similar claims may be made in the future.
In addition, an actual or perceived breach of network or computer security at
one of our customers, regardless of whether the breach is attributable to our
products, could adversely affect the market's perception of our security
products. This could adversely affect our business, results of operations and
financial condition.
OUR CRYPTOGRAPHY TECHNOLOGY IS SUBJECT TO EXPORT RESTRICTIONS AND MAY BECOME
OBSOLETE.
All of our products are subject to the U.S. Export Administration
Regulations, governed by the U.S. Department of Commerce. Certain of our network
security products, technology and associated technical assistance, particularly
products and technology incorporating encryption, may be subject to export
-28-
restrictions. Recent changes to U.S. laws enable Network Associates to export
more products without restrictions; however, certain products still may not be
exported to foreign customers without prior approval from the U.S. government.
The list of products and end users for which export approval is required, and
the regulatory policies with respect thereto, are subject to revision by the
U.S. government at any time. The cost of compliance with U.S. and international
export laws and changes in existing laws could affect our ability to sell
certain products in certain markets, and could have a material adverse effect on
our international revenues.
In addition, some of our network security products are dependent on the
use of public key cryptography technology. This technology depends in part upon
the application of certain mathematical principles known as factoring and
discrete logarithms. The security afforded by public key cryptography technology
is based on our belief that the factoring of large prime numbers and solving the
discrete log problem is not computationally practical. Should an easy factoring
method be developed or the discrete log problem be solved, the security afforded
by encryption products using public key cryptography technology would be reduced
or eliminated. Furthermore, any significant advance in techniques for attacking
cryptographic systems could also render some or all of our existing products and
services obsolete or unmarketable. Moreover, the cryptographic algorithms used
in our products can theoretically be solved by computer systems significantly
faster and more powerful than those presently available. If these improved
techniques for attacking cryptographic systems were ever developed, our business
would be adversely affected.
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS.
Our network security and management software products are used to
protect and manage computer systems and networks that may be critical to
organizations. As a result, our sale and support of these products involves the
risk of potential product liability and related claims. Our license agreements
with our customers typically contain provisions designed to limit our exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in these license agreements may not
be effective under the laws of certain jurisdictions, particularly in
circumstances involving unsigned licenses. A product liability claim brought
against us could have a material adverse effect on our business, results of
operations and financial condition.
WE FACE RISKS ASSOCIATED WITH U.S. GOVERNMENT CONTRACTING.
We are currently engaged in several research and development contracts
with agencies of the U.S. government. We believe that the willingness of these
government agencies to enter into future contracts with us will in part be
dependent upon our continued ability to meet their expectations.
Minimum fee awards for companies entering into government contracts are
generally between 3% and 7% of the costs incurred by them in performing their
duties under the related contract. However, these fee awards may be as low as 1%
of the contract costs. Furthermore, these contracts are subject to cancellation
at the convenience of the government agencies. Although we have been awarded
contract fees of more than 1% of the contract costs in the past, minimum fee
awards or cancellations may occur in the future. Reductions or delays in federal
funds available for projects we are performing could also have an adverse impact
on our government business. Contracts involving the U.S. government are also
subject to the risks of disallowance of costs upon audit, changes in government
procurement policies, required competitive bidding and, with respect to
contracts involving prime contractors or government-designated subcontractors,
the inability of those parties to perform under their contracts. In addition,
our government customers and potential customers may not respond favorably to
the division of our business into product groups and our
-29-
business and future financial performance could suffer. Any of the foregoing
events could adversely affect our results of operations or financial conditions.
BUSINESS INTERRUPTIONS MAY IMPEDE OUR OPERATIONS AND ADVERSELY AFFECT OUR
BUSINESS.
We face a number of potential business interruption risks that are
beyond our control. The State of California has recently experienced
intermittent power shortages, sharp increases in the cost of energy and even
interruptions of service to some business customers. If power shortages continue
to be a problem our business may be materially adversely affected. Additionally,
we may experience natural disasters that could interrupt our business.
Our corporate headquarters is located near a major earthquake fault. The
impact of a major earthquake on our facilities, infrastructure and overall
operations is not known. Safety precautions have been implemented, however there
is no guarantee that an earthquake would not seriously disturb our entire
business process. We are largely uninsured for losses and business disruptions
caused by an earthquake and other natural disasters.
RISKS RELATED TO THE NOTES AND THE COMMON STOCK INTO WHICH THE
NOTES ARE CONVERTIBLE
OUR INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW
AND WE WILL BE PERMITTED TO INCUR ADDITIONAL INDEBTEDNESS IN THE FUTURE.
Our annual debt service obligations on the notes being offered hereby
will be approximately $18,112,500 per year in interest payments. In addition, we
may be required to repurchase our outstanding debentures, by paying cash, common
stock or a combination of cash and common stock, if the holders exercise their
right to put the debentures to us in February 2003. We intend to fulfill our
debt service and repayment obligations both from cash generated by our
operations and from our cash and investments. If we are unable to generate
sufficient cash to meet these obligations and need to use existing cash or
liquidate investments in order to fund our debt service obligations, we may have
to delay or curtail research and development programs.
Our current and future indebtedness could have significant additional
negative consequences, including:
- requiring the dedication of a substantial portion of our expected
cash flow from operations to service our indebtedness, thereby
reducing the amount of our expected cash flow available for other
purposes, including capital expenditures;
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing;
- limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete;
- placing us at a possible competitive disadvantage to less leveraged
competitors and competitors that have better access to capital
resources;
-30-
- affecting our ability to make interest payments on our indebtedness,
including the notes; and
- in addition, the indenture permits us to incur additional
indebtedness in the future, which could magnify the risks described
above.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THESE NOTES,
WHICH MAY REDUCE THEIR MARKET PRICE.
The notes are a new issue of securities for which there is currently no
trading market. Although the notes are eligible for trading in PORTAL, we cannot
assure you that an active trading market for the notes will develop or be
sustained. Lehman Brothers, Inc., the "initial purchaser," has informed us that
it intends to make a market in the notes. The initial purchaser, however, is not
obligated to make a market in the notes and may discontinue this market making
activity at any time without notice. In addition, market making activity by the
initial purchaser will be subject to the limits imposed by the federal
securities laws and governmental regulations. As a result, we cannot assure you
that any market for the notes will develop, or if one does develop, that it will
be actively sustained.
In addition, the liquidity of the trading market in the notes and the
market price quoted for the notes may be adversely affected by changes in the
overall market for convertible securities, changes in our prospects or financial
performance or in the prospects for companies in our industry generally. If an
active market for our notes fails to develop or be sustained, the trading price
of the notes could fall. If an active trading market were to develop, the notes
could trade at prices that may be lower than the initial offering price. Whether
or not they could trade at lower prices depends on many factors, including:
- prevailing interest rates;
- the markets for similar securities;
- general economic conditions; and
- our financial condition, historical financial performance and future
prospects.
THE NOTES ARE SUBORDINATED TO ALL OUR EXISTING AND FUTURE SENIOR INDEBTEDNESS
AND THE DEBT OF OUR SUBSIDIARIES WHICH MAY INHIBIT OUR ABILITY TO REPAY YOU.
The notes are unsecured and are subordinated to all of our existing and
future senior indebtedness, as defined in the indenture, and are pari passu with
respect to the $885,500,000 principal amount at maturity of our outstanding
debentures. The definition of senior indebtedness for purposes of the notes
initially includes only secured indebtedness of Network Associates, but at such
time as less than $60 million aggregate principal amount at maturity of the
debentures remains outstanding, the senior indebtedness will include both
secured and unsecured obligations of Network Associates. In the event of our
bankruptcy, liquidation or reorganization or upon acceleration of the notes due
to an event of default under the indenture and in specified other events, our
assets will be available to pay obligations on the notes only after all senior
indebtedness has been paid in full in cash or other payment satisfactory to
holders of senior indebtedness. As a result, there may not be sufficient assets
remaining to pay amounts due on any or all of the outstanding notes. As of
September 30, 2001, we had no indebtedness outstanding that would have
constituted senior indebtedness (including obligations that would only be
included within the definition of senior indebtedness at such time as less than
$60 million aggregate principal amount at maturity of the debentures remains
outstanding). In
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addition, the indenture does not limit the creation of additional senior
indebtedness or any other indebtedness by us or our subsidiaries.
OUR CORPORATE STRUCTURE RESULTS IN SUBSTANTIAL STRUCTURAL SUBORDINATION OF THE
NOTES AND MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
The notes are obligations exclusively of Network Associates. Since a
significant portion of our operations are conducted through our subsidiaries,
our cash flow and our consequent ability to service debt, including the notes,
are dependent upon the earnings of our subsidiaries and the distribution of
those earnings to us, or upon loans or other payments of funds by those
subsidiaries to us. These subsidiaries are separate and distinct legal entities
and have no obligation to make any payments on the notes or to make any funds
available for payments on the notes, whether by dividends, loans or otherwise.
In addition, the ability of our subsidiaries to make dividend payments or loans
or advances to us may be subject to statutory or contractual restrictions and
may be contingent on the earnings of the subsidiaries.
Our right to receive assets of any of our subsidiaries upon their
liquidation or reorganization, and your consequent right to participate in those
assets, will be effectively subordinated to any claims creditors may have
against our subsidiaries, including trade creditors, unless we are recognized as
a creditor to the subsidiary.
As of September 30, 2001, our subsidiaries had approximately $539
million of indebtedness and other liabilities outstanding, excluding
intercompany liabilities and liabilities of a type not required to be reflected
on a balance sheet in accordance with generally accepted accounting principles,
to which the notes would have been effectively subordinated. In addition, the
indenture does not limit the creation of additional indebtedness by our
subsidiaries.
OUR ABILITY TO REPURCHASE NOTES WITH CASH UPON A CHANGE OF CONTROL MAY BE
LIMITED.
In certain circumstances involving a change of control, as defined in
"Description of the Notes--Repurchase at Option of Holders Upon a Change of
Control" you may require us to repurchase some or all of your notes. We may have
insufficient financial resources at such time or may be unable to arrange
financing to pay the repurchase price of the notes in cash. Our ability to
repurchase the notes in such event may be limited by law, by the terms of other
agreements relating to our senior indebtedness and by such indebtedness and
agreements as may be entered into, replaced, supplemented or amended from time
to time. We may be required to refinance our senior indebtedness in order to
make such payments. We may not have the financial ability to repurchase the
notes in cash if payment for our senior indebtedness is accelerated.
OUR STOCK PRICE HAS BEEN VOLATILE AND IS LIKELY TO REMAIN VOLATILE, WHICH MAY
ADVERSELY AFFECT THE PRICE OF OUR STOCK AND THE NOTES.
During the 12-month period ended September 30, 2001, our stock price was
extremely volatile ranging from a per-share high of $23.00 to low of $4.13.
Announcements, litigation developments, and our ability to meet the expectations
of investors with respect to our operating and financial results may contribute
to current and future stock price volatility. We may not discover, or be able to
confirm, revenue or earnings shortfalls until the end of a quarter, which could
result in an immediate drop in our stock price. In addition, similar events with
respect to McAfee.com, our publicly traded subsidiary, and fluctuations in its
stock price may also contribute to the volatility of our stock price. In the
past, following periods of volatility in the market price of a company's stock,
securities class action litigation has often been instituted. A number of
putative class actions were brought against our officers, directors and us. This
litigation, and any other
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litigation if instituted, could result in substantial costs and a diversion of
management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET OR OPTION EXERCISES AND
SALES COULD LOWER THE STOCK PRICE.
A substantial number of the shares of our common stock are subject to
stock options and our outstanding debentures and the notes may be converted into
shares of common stock. We cannot predict the effect, if any, that future sales
of shares of common stock or notes, or the availability of shares of common
stock or notes for future sale, will have on the market price of our common
stock or notes. Sales of substantial amounts of common stock, including shares
issued upon the exercise of stock options or the conversion of the notes or our
outstanding debentures, or the perception that such sales could occur, may
adversely affect prevailing market prices for our common stock and notes.
OUR MANAGEMENT HAS DISCRETION OVER THE USE OF PROCEEDS FROM THE NOTE OFFERING.
We intend to use the proceeds of the note offering for general corporate
and working capital purposes and for the possible repayment, repurchase or
refunding of our outstanding obligations, including our debentures. Any such
repurchase or repayment will be subject to market and other business conditions.
We frequently evaluate potential acquisitions of complementary businesses,
products and technologies. However, we do not have any agreements or
understandings, and there are currently no negotiations, with respect to any
acquisitions. Our management will have broad discretion over the use of the net
proceeds from the note offering, and investors will be relying on the judgment
of our management regarding the application of the proceeds.
DELAWARE LAW, OUR CHARTER DOCUMENTS AND CERTAIN PROVISIONS IN THE INDENTURE OF
OUR OUTSTANDING DEBENTURES AND THE INDENTURE FOR THE NOTES MAY IMPEDE OR
DISCOURAGE A TAKEOVER, WHICH COULD CAUSE THE MARKET PRICE OF ITS SHARES TO
DECLINE.
Our board of directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote of action by its stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock.
In October 1998, our board of directors adopted a shareholders rights
plan. Each right under this plan entitles the record holder to buy 1/1000 of a
share of our series B participating preferred stock at an exercise price of
$200.00. The rights will become exercisable following the tenth day after a
person or group announces acquisition of 15% or more of our common stock or
announces commencement of a tender or exchange offer the consummation of which
would result in ownership by the person or group of 15% or more of our common
stock. If the rights become exercisable, the holders of the rights (other than
the person acquiring 15% or more of our common stock) will be entitled to
acquire in exchange for the $200 exercise price shares of our common stock or
shares of any company in which we are merged having a value of $400. We are
entitled to redeem the rights at $0.01 per right at any time on or before the
tenth day following acquisition by a person or group of 15% or more of our
common stock.
Certain provisions of Delaware law and our certificate of incorporation
and bylaws, such as a classified board, could delay or make a merger, tender
offer or proxy contest involving Network Associates more difficult. While these
provisions and our rights plan are intended to enable our board of directors to
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maximize stockholder value, they may have the effect of discouraging takeovers,
which may not be in the best interest of certain stockholders. Our rights plan
and these provisions could have an adverse effect on the market value of our
common stock.
The indenture governing our outstanding debentures, as well as the
indenture for the notes, may require that we offer to repurchase such debentures
or the notes following the occurrence of certain types of change in control
transactions. These repurchase provisions could have the effect of discouraging
a merger or takeover of us, which may not be in the best interest of certain
stockholders and could have an adverse effect on the market value of our common
stock.
THE NOTES MAY NOT BE RATED OR MAY RECEIVE A LOWER RATING THAN ANTICIPATED.
We believe it is likely that one or more rating agencies may rate the
notes. If one or more rating agencies assigns the notes a rating lower than
expected by investors, the market price of the notes and our common stock could
be harmed.
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USE OF PROCEEDS
We will not receive any proceeds from the sale by any selling
securityholder of the notes or the underlying common stock.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each period indicated is as
follows:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ----- -----------
Ratio of earnings to fixed
charges ................... 23.6x 21.0x 8.5x --x(1) --x(1) --x(1)
These computations include us and our consolidated subsidiaries. In
calculating the ratio of earnings to fixed charges, "earnings" consist of net
income (loss) before provisions for income taxes plus fixed charges. "Fixed
charges" consist of:
- interest expense plus the portion of rental expense under operating
leases deemed by us to be representative of the interest factor, and
- amortization of debt issuance costs.
(1) During the 6 months ended June 30, 2001 and the fiscal years
ended December 31, 2000 and 1999, there was a deficiency of earnings to cover
fixed charges of approximately $96.4 million, $97.8 million and $131 million,
respectively.
DIVIDEND POLICY
We have not paid any cash dividends since our reorganization into a
corporate form in October 1992. We intend to retain future earnings for use in
our business and do not anticipate paying cash dividends in the foreseeable
future.
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DESCRIPTION OF NOTES
We issued the notes under an indenture dated as of August 17, 2001
between us and State Street Bank and Trust Company of California, N.A., as
trustee. The following summarizes some, but not all, of the provisions of the
notes and the indenture. A copy of the indenture, the resale registration rights
agreement and the form of certificate evidencing the notes have been filed as
exhibits to this registration statement.
References in this section to "Network Associates," "us," "we," and
"our" are solely to Networks Associates, Inc. and not to our subsidiaries.
GENERAL
We issued $345,000,000 in aggregate principal amount of the notes in a
private placement in August 2001. The notes are general unsecured obligations of
Network Associates and are junior in right of payment as described under
"--Subordination of Notes." The Notes are convertible into our common stock as
described under "--Conversion Rights." The Notes were issued only in
denominations of $1,000, or in multiples of $1,000. The Notes will mature on
August 15, 2006, unless earlier redeemed at our option by us or purchased by us
at your option upon a change of control.
The notes bear interest at the rate of 5.25% per year. We will pay
interest semiannually on February 15 and August 15 of each year beginning
February 15, 2002, subject to limited exceptions if the notes are converted,
redeemed or purchased prior to the interest payment date. The record dates for
the payment of interest are February 1 and August 1. We may, at our option, pay
interest on the notes by check mailed to the holders. However, a holder with an
aggregate principal amount in excess of $5,000,000 will be paid by wire transfer
in immediately available funds at their election. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
We will maintain an office in New York, New York where the notes may be
presented for registration, transfer, exchange or conversion. The office is
initially an office or agency of the trustee.
CONVERSION RIGHTS
You may convert any outstanding notes (or portions of outstanding notes)
into our common stock, at any time prior to maturity, unless previously redeemed
or purchased, initially at the conversion price of $18.07 per share (equal to a
conversion rate of approximately 55.3403 shares per $1,000 principal amount of
notes), subject to adjustment as described below. We will not issue fractional
shares of common stock upon conversion of notes. Instead, we will pay a cash
adjustment based upon the closing sale price of our common stock on the business
day immediately preceding the conversion date. You may convert notes only in
denominations of $1,000 and whole multiples of $1,000.
You may exercise conversion rights at any time prior to the close of
business on the final maturity date of the notes. However, if you are a holder
of notes that have been called for redemption, you must exercise your conversion
rights prior to the close of business on the second business day preceding the
redemption date, unless we default in payment of the redemption price. In
addition, if you have exercised your right to require us to repurchase your
notes because a change of control has occurred, you may convert your notes into
our common stock only if you withdraw your notice and convert your notes prior
to the close of business on the business day immediately preceding the change of
control repurchase date.
Except as provided below, if you convert your notes into our common
stock on any day other than an interest payment date, you will not receive any
interest that has accrued on these notes. By delivering to the
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holder the number of shares issuable upon conversion, determined by dividing the
principal amount of the notes being converted by the conversion price, together
with a cash payment, if any, in lieu of fractional shares, we will satisfy our
obligation with respect to the notes. That is, accrued but unpaid interest will
be deemed to be paid in full rather than canceled, extinguished or forfeited. If
you convert after a record date for an interest payment but prior to the
corresponding interest payment date, you will receive interest accrued and paid
on such notes on the interest payment date, notwithstanding the conversion of
such notes prior to such interest payment date, because you will have been the
holder of record on the corresponding record date. However, at the time of
surrender of such notes for conversion, you must pay us an amount equal to the
interest that has accrued and will be paid on the notes being converted on the
interest payment date. The preceding sentence does not apply, however, to a
holder that converts, after a record date for an interest payment date but prior
to the corresponding interest payment date, notes that we call for redemption
prior to such conversion on a redemption date that is on or prior to third
business day after such interest payment date.
You will not be required to pay any taxes or duties relating to the
issuance or delivery of our common stock if you exercise your conversion rights,
but you will be required to pay any tax or duty which may be payable relating to
any transfer involved in the issuance or delivery of the common stock in a name
other than your name. Certificates representing shares of common stock will be
issued or delivered only after all applicable taxes and duties, if any, payable
by you have been paid.
To convert interests in a global note, you must deliver to DTC the
appropriate instructions form for conversion pursuant to DTC's conversion
program. To convert a definitive note, you must:
- complete the conversion notice on the back of the note, or a
facsimile of the conversion notice;
- deliver the completed conversion notice and the notes to be converted
to the specified office of the conversion agent;
- pay all funds required, if any, relating to interest on the notes to
be converted to which you are not entitled, as described in the
second preceding paragraph; and
- pay all taxes or duties, if any, as described in the preceding
paragraph.
The conversion date will be the date on which all of the foregoing
requirements have been satisfied. The notes will be deemed to have been
converted immediately prior to the close of business on the conversion date. A
certificate for the number of shares of common stock into which the notes are
converted, including any cash in lieu of any fractional shares, will be
delivered as soon as practicable on or after the conversion date.
We will adjust the initial conversion price in certain circumstances
subject to certain exceptions, including:
- issuances of our common stock as a dividend or distribution on all of
our common stock;
- certain subdivisions and combinations of our common stock;
- issuances to all holders of our common stock of certain rights or
warrants to purchase our common stock at less than the current market
price of our common stock;
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- distributions to all holders of our common stock of shares of our
capital stock, evidences of our indebtedness or assets, including
securities, but excluding:
- our common stock;
- the rights and warrants referred to in the third bullet point
above;
- any dividends and distributions in connection with a
reclassification, change, consolidation, merger, combination,
sale or conveyance resulting in a change in the conversion
consideration pursuant to the second succeeding paragraph; or
- any dividends or distributions paid exclusively in cash;
but including securities of our subsidiaries to the extent we do
not elect to reserve such securities on a pro rata basis for the
benefit of holders of notes as described below;
- distributions consisting exclusively of cash to all holders of our
common stock to the extent that such distributions, combined together
with:
- all other such all-cash distributions made within the preceding
12 months for which no adjustment has been made, plus
- any cash and the fair market value of other consideration paid
for any tender offers by us or any of our subsidiaries for our
common stock expiring within the preceding 12 months for which no
adjustment has been made,
exceeds 10% of our market capitalization on the record date for
such distribution; and
- purchases of our common stock pursuant to a tender offer made by us
or any of our subsidiaries to the extent that the same involves an
aggregate consideration that, together with:
- any cash and the fair market value of any other consideration
paid in any other tender offer by us or any of our future
subsidiaries for our common stock expiring within the 12 months
preceding such tender offer for which no adjustment has been
made, plus
- the aggregate amount of any all-cash distributions referred to in
the preceding bullet point to all holders of our common stock
within 12 months preceding the expiration of a tender offer for
which no adjustments have been made,
exceeds 10% of our market capitalization on the expiration of
such tender offer.
We will not make an adjustment in the conversion price unless such
adjustment would require a change of at least 1% in the conversion price then in
effect at such time. We will carry forward and take into account in any
subsequent adjustment any adjustment that would otherwise be required to be
made. Except as stated above, we will not adjust the conversion price for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing.
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If we:
- reclassify or change any of our common stock, other than changes
resulting from a subdivision or combination; or
- consolidate or combine with or merge into any person or sell or
convey to another person all or substantially all of our property and
assets.
and the holders of our common stock receive capital stock, other securities or
other property or assets, including cash or any combination thereof, with
respect to or in exchange for their common stock, the holders of the notes may
convert the notes into the consideration they would have received if they had
converted their notes immediately prior to such reclassification, change,
consolidation, combination, merger, sale or conveyance.
If we distribute shares of common stock of a subsidiary of ours to all
holders of our common stock, we may elect to reserve the pro rata portion of
such shares for the benefit of the holders of notes in lieu of adjusting the
conversion price pursuant to the fourth bullet point of the description of
conversion price adjustments set forth above.
Under the provisions of our rights plan, upon conversion of the notes
into common stock, to the extent that the rights plan is still in effect upon
such conversion, the holders will receive, in addition to the common stock, the
rights described in the rights plan, whether or not the rights have separated
from the common stock at the time of conversion, subject to certain limited
exceptions, and in such case there will be no adjustment to the conversion
price.
If a taxable distribution to holders of our common stock or other
transaction occurs which results in any adjustment of the conversion price, you
may, in certain circumstances, be deemed to have received a distribution subject
to U.S. income tax as a dividend. In certain other circumstances, the absence of
an adjustment may result in a taxable dividend to the holders of our common
stock. See "United States Federal Income Tax Consequences" below.
We may from time to time, to the extent permitted by law, reduce the
conversion price of the notes by any amount for any period of at least 20 days.
In that case, we will give at least 15 days' notice of such decrease. We may
make such reductions in the conversion price, in addition to those set forth
above, as our board of directors deems advisable to avoid or diminish any income
tax to holders of our common stock resulting from any dividend or distribution
of stock or fights to acquire stock or from any event treated as such for income
tax purposes.
OPTIONAL REDEMPTION BY NETWORK ASSOCIATES
OPTIONAL REDEMPTION
We may not redeem the notes in whole or in part at any time prior to
August 20, 2004. At any time on or after August 20, 2004, we may redeem some or
all of the notes on at least 20 but not more than 60 days' notice, at the
following redemption prices, expressed in percentages of the principal amount:
DURING THE TWELVE MONTHS COMMENCING REDEMPTION PRICE
----------------------------------- ----------------
C>
August 20, 2004....................................... 101.3125%
August 15, 2005....................................... 100.0000%
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We will pay interest accrued and unpaid to, but excluding, the
redemption date on notes called for redemption. If the redemption date is an
interest payment date, we will pay the interest to the holder of record on the
corresponding record date, which may or may not be the same person to whom we
will pay the redemption price.
PARTIAL REDEMPTION
If we do not redeem all of the notes, the trustee will select the notes
to be redeemed in principal amounts of $1,000 or whole multiples of $1,000 by
lot or on a pro rata basis. If any notes are to be redeemed in part only, we
will issue a new note or notes in principal amount equal to the unredeemed
principal portion thereof. If a portion of your notes is selected for partial
redemption and you convert a portion of your notes, the converted portion will
be deemed to be taken from the portion selected for redemption.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a change of control occurs, you will have the right to require us to
repurchase all of your notes, or any portion of those notes that is equal to
$1,000 or a whole multiple of $1,000 at a repurchase price equal to 100% of the
principal amount of the notes to be repurchased, plus interest accrued and
unpaid to, but excluding, the repurchase date. Notwithstanding the foregoing,
you will not have a right to require us to repurchase the notes unless prior to
that repurchase we have made any applicable change of control offers required by
our then outstanding senior indebtedness and have purchased all then outstanding
senior indebtedness validly tendered for payment in connection with such change
of control offers.
At our option, instead of paying the repurchase price in cash, we may
pay the repurchase price in whole or in part our common stock (or in the case of
a merger in which we are not the surviving corporation, common stock, ordinary
shares or American Depository, shares of the surviving corporation or its direct
or indirect parent corporation) or a combination of the applicable securities
and cash. The number of shares of the applicable common stock, securities or a
combination of the applicable common stock or securities will be valued at 95%
of the average closing prices of the applicable common stock or securities, for
the five trading days immediately preceding and including the third trading day
prior to the repurchase date. However, we may not pay the purchase price in the
applicable common stock or securities or a combination of the applicable common
stock or securities and cash, unless we satisfy certain conditions prior to the
repurchase date as provided in the indenture, including:
- registration of the shares of the applicable common stock or
securities to be issued upon repurchase under the Securities Act and
the Exchange Act, if required;
- qualification of the shares of the applicable common stock or
securities to be issued upon repurchase under applicable state
securities laws, if necessary, or the availability of an exemption
therefrom; and
- listing of the applicable common stock or securities on a United
States national securities exchange or quotation thereof in an
inter-dealer quotation system of any registered United States
national securities association.
Within 30 days after the occurrence of a change of control, we are
required to give you notice of the occurrence of the change of control and of
your resulting repurchase right. Unless otherwise required by law, the
repurchase date is 30 days after the date we give notice of a change of control.
To exercise the repurchase right, you must deliver prior to the close of
business on the business day immediately preceding the
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repurchase date, written notice to the trustee of your exercise of your
repurchase right, together with the notes with respect to which your right is
being exercised. You may withdraw this notice by delivering to the paying agent
a notice of withdrawal prior to the close of business on the business day
immediately preceding the repurchase date.
A "change of control" will be deemed to have occurred when any of the
following has occurred:
(i) the acquisition by any person of beneficial ownership,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of purchase, merger or other acquisition
transactions of shares of our capital stock entitling that person to
exercise 50% or more of the total voting power of all shares of our
capital stock entitled to vote generally in elections of directors,
other than any acquisition by us, any of our subsidiaries or any of our
employee benefit plans; or
(ii) our consolidation or merger with or into any other person,
any merger of another person into us, or any conveyance, transfer, sale,
lease or other disposition of all or substantially all of our properties
and assets to another person, other than one or more of our wholly-owned
subsidiaries, other than the occurrence of any of the following events:
(a) any transaction a result of which holders of 50% or more of
the total voting power of all shares of our capital stock entitled to
vote generally in elections of directors immediately prior to the
transaction have, directly or indirectly, at least 50% of the total
voting power of all shares of capital stock of the surviving entity
entitled to vote generally in elections of directors of the surviving
entity immediately after the transaction; and
(b) any merger solely for the purpose of changing our
jurisdiction of incorporation and resulting in a reclassification,
conversion or exchange of outstanding shares of common stock solely
into shares of common stock of the surviving entity.
However, a change of control will be deemed not to have occurred if:
(a) the closing sale price per share of our common stock for any
five trading days within the period of 10 consecutive trading days
ending immediately after the later of the change of control or the
public announcement of the change of control, in the case of a change of
control under the first clause above, or the period of 10 consecutive
trading days ending immediately before the change of control, in the
case of a change of control under the second clause above, equals or
exceeds 110% of the conversion price of the notes (as adjusted); or
(b) at least 90% of the consideration in the transaction or
transactions (other than payments for fractional shares and cash
payments pursuant to dissenters' appraisal rights) otherwise
constituting a change of control consists of shares of common stock
traded or to be traded immediately following such change of control on a
national securities exchange or the Nasdaq National Market and, as a
result of such transaction or transactions, the notes become convertible
solely into such common stock (and any rights attached thereto).
The beneficial owner shall be determined in accordance with Rule 13d-3 of the
Exchange Act. The term "person" includes any syndicate or group which would be
deemed to be a "person" under Section 13 (d)(3) of the Exchange Act.
The term "all or substantially all" as used in the definition of change
in control will likely be interpreted under applicable state law and will be
dependent upon particular facts and circumstances. There
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may be a degree of uncertainty in interpreting this phrase. As a result, we
cannot assure you how a court would interpret this phrase under applicable law
if you elect to exercise your rights following the occurrence of a transaction
which you believe constitutes a transfer of "all or substantially all" of our
assets.
Rule 13e-4 under the Exchange Act, requires the dissemination of certain
information to security holders if an issuer tender offer occurs and may apply
if the repurchase option becomes available to holders of the notes. We will
comply with this rule to the extent applicable at that time.
We may, to the extent permitted by applicable law and any agreement or
indenture governing our then outstanding indebtedness, at any time purchase the
notes in the open market or by tender at any price or by private agreement. Any
note so purchased by us may, to the extent permitted by applicable law, be
reissued or resold or may be surrendered to the trustee for cancellation. Any
notes surrendered to the trustee may not be reissued or resold and will be
canceled promptly.
The change of control feature of the notes may in certain circumstances
make more difficult or discourage a takeover of Network Associates and, thus,
the removal of incumbent management. The repurchase right is not the result of
our knowledge of any effort to accumulate any common stock or to obtain control
of Network Associates by means of a merger, tender offer, solicitation or
otherwise, or part of a plan by us to adopt a series of anti-takeover
provisions. Instead, this right is the result of negotiations between us and the
initial purchaser.
The foregoing provisions would not necessarily protect holders of the
notes if highly leveraged or other transactions involving us occur that may
adversely affect holders.
Our ability to repurchase notes upon the occurrence of a change in
control is subject to important limitations. The occurrence of a change of
control could cause an event of default under, or be prohibited or limited by,
the terms of senior indebtedness that we may incur in the future. As a result,
any repurchase of the notes would, absent a waiver, be prohibited under the
subordination provisions of the indenture until the senior indebtedness is paid
in full. Further, we cannot assure you that we would have the financial
resources, or would be able to arrange financing, to pay the repurchase price
for all the notes that might be delivered by holders of notes seeking to
exercise the repurchase right. Any failure by us to repurchase the notes when
required following a change of control would result in an event of default under
the indenture, whether or not such repurchase is permitted by the subordination
provisions of the indenture. Any such default may, in turn, cause a default
under other indebtedness, including senior indebtedness, that we may incur in
the future. See "--Subordination of Notes" below.
SUBORDINATION OF NOTES
The notes are subordinated to the prior payment in full in cash or other
payment satisfactory to the holders of senior indebtedness of all of our
existing and future senior indebtedness. The subordination provisions of the
indenture will not prevent the occurrence of any event of default under the
indenture.
In the event we distribute our assets upon our dissolution, winding up,
bankruptcy, insolvency, liquidation, reorganization, or similar proceeding,
holders of our senior indebtedness will be entitled to receive payment in full,
in cash or other payment satisfactory to the holders of senior indebtedness,
before we may make any payments of principal of, or premium, if any, and
interest, including any additional interest, on the notes. Until all senior
indebtedness is paid in full in cash or other payment satisfactory to the
holders of senior indebtedness, any payment on the notes to which the holders of
notes would be entitled shall be made to the holders of senior indebtedness. In
the event of our dissolution, winding up, bankruptcy, insolvency,
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liquidation, reorganization or similar proceeding, holders of senior
indebtedness may receive more, ratably, and the holders of notes may receive
less, ratably, than our other creditors.
If the notes are declared due and payable prior to maturity because of
an event of default, we are obligated to notify promptly holders of senior
indebtedness. We may not make any payments on the notes until 120 days have
passed after the occurrence of this acceleration of the notes. We may then make
payments on the notes if we are permitted to make such payments under the
indenture at that time.
We may not make any payment on the notes if:
- a payment default on senior indebtedness occurs and is continuing,
without regard to any applicable period of grace, or
- any other nonpayment default occurs and is continuing on designated
senior indebtedness that permits holders of the designated senior
indebtedness to accelerate its maturity and the trustee receives a
payment blockage notice from us or from a representative of the
designated senior indebtedness.
We may resume payments on the notes:
- in case of a payment default, the earlier of the date on which the
payment default is cured, waived or ceases to exist, and
- in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured, waived, or ceases to exist, or 179
days after the date on which the applicable payment blockage notice
is received by the trustee if the terms of the indenture otherwise
permit payment at that time.
No new period of payment blockage for a non-payment default may be commenced
pursuant to a payment blockage notice unless and until 365 days have elapsed
since the initial effectiveness of the immediately prior payment blockage
notice. No nonpayment default that existed or was continuing on the date of
delivery of any payment blockage notice to the trustee shall be, or shall be
made, the basis for a subsequent payment blockage notice unless such default
shall not have been cured or waived for a period of not less than 90 days.
"senior indebtedness" means the principal of, premium, if any, interest,
including any interest accrued after bankruptcy, original issue discount, rent,
end of term payments, fees, costs, expenses, liquidated damages, indemnities,
repurchase and other put obligations and other amounts on indebtedness, whether
outstanding on the date of the indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by us, including all deferrals,
renewals, extensions, refundings, amendments, modifications or supplements to
the above.
However, senior indebtedness does not include:
(1) any indebtedness of Network Associates that is not secured,
but this requirement shall only apply so long as there is at least $60
million aggregate principal amount at maturity of our debentures
outstanding;
(2) the notes;
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(3) the debentures;
(4) indebtedness to any subsidiary of Network Associates, a
majority of the voting stock of which is owned, directly or indirectly,
by Network Associates:
(5) accounts payable or other indebtedness to trade creditors
created or assumed by us in the ordinary course of business; and
(6) any particular indebtedness in which the instrument creating
or evidencing the same or the assumption or guarantee thereof expressly
provides that the indebtedness shall not be senior in right of payment
to, or is on the same basis with, or is subordinated or junior to, the
notes.
"indebtedness" means:
- all of our obligations and other liabilities for borrowed money,
including overdrafts, foreign exchange contracts, currency exchange
agreements, interest rate protection agreements, and any loans or
advances from banks;
- all of our obligations and other liabilities evidenced by bonds,
debentures, notes or similar instruments, whether or not the recourse
of the lender is to the whole of our assets or to only a portion of
our assets;
- all of our reimbursement obligations and other liabilities with
respect to letters of credit, bank guarantees or bankers'
acceptances;
- all of our obligations and liabilities in respect of leases required,
in conformity with generally accepted accounting principles, to be
accounted for as capitalized lease obligations on our balance sheet;
- all of our obligations and liabilities in respect of leases required,
in conformity with generally accepted accounting principles, to be
accounted for as operating lease, provided either (A) such operating
lease requires, at the end of the term thereof, that we make any
payment other than accrued periodic rent in the event that we do not
acquire the leased real property and related fixtures subject to such
lease, or (B) we have an option to acquire the leased real property
and related fixtures, whether such option is exercisable at any time
or under specified circumstances;
- all of our obligations with respect to an interest rate swap, cap or
collar agreement or other similar instrument or agreement;
- all of our direct or indirect guaranties or similar agreements in
respect of, and obligations or liabilities to purchase or otherwise
acquire or otherwise assure a creditor against loss in respect of
indebtedness, obligations or liabilities of another person of the
kind described in the above bullet points;
- any indebtedness or other obligations described in the above bullet
points secured by any mortgage, pledge, lien or other encumbrance
existing on property which is owned or held by us
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regardless of whether the indebtedness or other obligation secured
thereby shall have been assumed by us; and
- any and all deferrals, renewals, extensions, refundings, amendments,
modifications or supplements, to any indebtedness, obligation or
liability of the kind described in the above bullet points.
"designated senior indebtedness" means any particular senior
indebtedness that expressly provides that such senior indebtedness shall be
"designated senior indebtedness" for purposes of the indenture, however such
agreement may place limitations and conditions on the right of such senior
indebtedness to exercise the rights of designated senior indebtedness.
The notes are obligations exclusively of Network Associates. Since a
significant portion of our operations are conducted through our subsidiaries,
our cash flow and our consequent ability to service debt, including the notes,
are dependent upon the earnings of our subsidiaries and the distribution of
those earnings to us, or upon loans or other payments of funds by those
subsidiaries to, us. These subsidiaries are separate and distinct legal entities
and have no obligation to make any payments on the notes or to make any funds
available for payments on the notes, whether by dividends, loans or otherwise.
In addition, the ability of our subsidiaries to make dividend payments or loans
or advances to us may be subject to statutory or contractual restrictions and
may be contingent on the earnings of the subsidiaries.
Our right to receive assets of any of our subsidiaries upon their
liquidation or reorganization, and your consequent right to participate in those
assets, will be effectively subordinated to any claims creditors may have
against our subsidiaries, including trade creditors, unless we are recognized as
a creditor to the subsidiary.
As of September 30, 2001, we had no indebtedness outstanding that would
have constituted senior indebtedness, and as of the same date our subsidiaries
had approximately $539 million of indebtedness and other liabilities
outstanding, excluding intercompany liabilities and liabilities of a type not
required to be reflected on a balance sheet in accordance with generally
accepted accounting principles, to which the notes would have been effectively
subordinated. In addition, the notes will rank on the same basis as our $885.5
million principal amount at maturity of debentures currently outstanding so long
as there is at least $60 million aggregate principal amount at maturity of the
debentures remaining outstanding. Neither we nor our subsidiaries are limited
from incurring additional indebtedness, including senior indebtedness, under the
indenture.
If either the trustee or any holder of the notes receives any payment or
distribution of our assets in contravention of any of the subordination
provisions of the indenture on the notes before all senior indebtedness is paid
in full in cash or other payment satisfactory to the holders of senior
indebtedness, then such payment or distribution will be held by the recipient in
trust for the benefit of holders of senior indebtedness or their representatives
to make payment in full in cash or other payment satisfactory to the holders of
senior indebtedness of all senior indebtedness.
We will be obligated to pay reasonable compensation to the trustee and
to indemnify the trustee against any losses, liabilities or expenses incurred by
it in connection with its duties relating to the notes. The trustee's claims for
such payments will be senior to those of holders of the notes in respect of all
funds collected or held by the trustee.
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EVENTS OF DEFAULT
Each of the following constitutes an event of default under the
indenture:
(1) our failure to pay when due the principal of or premium, if
any, on any of the notes at maturity, upon redemption or exercise of a
repurchase right or otherwise, whether or not such payment is prohibited
by the subordination provisions of the indenture;
(2) our failure to pay an installment of interest on any of the
notes for 30 days after the date when due, whether or not such payment
is prohibited by the subordination provisions of the indenture;
(3) our failure to perform or observe any other term, covenant or
agreement contained in the notes or the indenture for a period of 60
days after written notice of such failure, requiring us to remedy the
same, shall have been given to us by the trustee or to us and the
trustee by the holders of at least 25% in aggregate principal amount of
the notes then outstanding;
(4) (A) we or one of our significant subsidiaries fails to make
any payment at maturity, including any grace period, in respect of any
obligation for borrowed money evidenced by a bond, debenture, note or
similar instrument (an "instrument") in an amount in excess of $25
million and such failure continues or (B) we or one of our significant
subsidiaries defaults with respect to any instrument, which default
results in the acceleration of indebtedness evidenced by such instrument
in an amount in excess of $25 million without such indebtedness having
been discharged or such acceleration having been cured, waived,
rescinded or annulled, in case of (A) and (B) above, for a period of 60
days after written notice to us by the trustee or to us and the trustee
by the holders of not less than 25% in principal amount of the notes,
provided that if any such failure, default or acceleration referred to
above shall cease or be cured, waived, rescinded or annulled, then the
event of default shall be deemed to be likewise cured and any
acceleration with respect thereto rescinded; or
(5) certain events of bankruptcy, insolvency or reorganization
with respect to us or one of our significant subsidiaries.
The indenture provides that the trustee shall, within 90 days of the
occurrence of a default, give to the registered holders of the notes notice of
all uncured defaults known to it, but the trustee shall be protected in
withholding such notice if it, in good faith, determines that the withholding of
such notice is in the best interest of such registered holders, except in the
case of a default in the payment of the principal of, or premium, if any, or
interest on, any of the notes when due or in the payment of any redemption or
repurchase obligation.
If an event of default specified in clause (5) above occurs and is
continuing with respect to us, then automatically the principal of and premium,
if any, of all the outstanding notes and the interest thereon shall become
immediately due and payable. If an event of default shall occur and be
continuing, other than with respect to clause (5) above (the default not having
been cured or waived as provided under "--Modifications, Amendments and
Meetings" below), the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding may declare the notes due and
payable at their principal amount and premium, if any, together with accrued
interest, and thereupon the trustee may, at its discretion, proceed to protect
and enforce the rights of the holders of notes by appropriate judicial
proceedings. Such declaration may be rescinded or annulled either with the
written consent of the holders of a majority in aggregate principal amount of
the notes then outstanding or a majority in aggregate principal amount of the
notes represented at a
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meeting at which a quorum (as specified under "--Modifications, Amendments and
Meetings" below) is present, in each case upon the conditions provided in the
indenture.
The indenture contains a provision entitling the trustee, subject to the
duty of the trustee during default to act with the required standard of care, to
be indemnified by the holders of notes before proceeding to exercise any right
or power under the indenture at the request of such holders. The indenture
provides that the holders of a majority in aggregate principal amount of the
notes then outstanding through their written consent, or the holders of a
majority in aggregate principal amount of the notes then outstanding represented
at a meeting at which a quorum is present by a written resolution, may direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or exercising any trust or power conferred upon the trustee.
We are required to furnish annually to the trustee a statement as to the
fulfillment of our obligations under the indenture.
CONSOLIDATION, MERGER OR ASSUMPTION
We may, without the consent of the holders of notes, consolidate with,
merge into or transfer all or substantially all of our assets to any other
corporation, limited liability company, partnership, trust or other business
entity organized under the laws of the United States or any of its political
subdivisions provided that:
- the surviving corporation, limited liability company, partnership,
trust or other business entity assumes all our obligations under the
indenture and the notes;
- at the time of such transaction, no event of default, and no event
which, after notice or lapse of time, would become an event of
default, shall have happened and be continuing; and
- certain other conditions are met.
We will be discharged of our obligations under the notes upon the
surviving entity assuming our obligations under the indenture and the notes and
meeting the other requirements specified in the indenture.
MODIFICATIONS, AMENDMENTS AND MEETINGS
CHANGES REQUIRING APPROVAL OF EACH AFFECTED HOLDER
The indenture (including the terms and conditions of the notes) cannot
be modified or amended without the written consent or the affirmative vote of
the holder of each note affected by such change to:
- change the maturity of the principal of or any installment of
interest on any note;
- reduce the principal amount of, or any premium or interest on any
note;
- change the currency of payment of such note or interest thereon;
- impair the right to institute suit for the enforcement of any payment
on or with respect to any note;
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- modify our obligations to maintain an office or agency in New York
City;
- except as otherwise permitted or contemplated by the indenture,
adversely affect the repurchase option of holders upon a change of
control or the conversion rights of holders of the notes;
- modify the subordination provisions of the indenture in a manner
adverse to the holders of notes;
- modify the redemption provisions of the indenture in a manner adverse
to the holders of notes;
- reduce the percentage in aggregate principal amount of notes
outstanding necessary to modify or amend the indenture or to waive
any past default; or
- reduce the percentage in aggregate principal amount of notes
outstanding required for the adoption of a resolution or the quorum
required at any meeting of holders of notes at which a resolution is
adopted.
CHANGES REQUIRING MAJORITY APPROVAL
The indenture, including the terms and conditions of the notes, may be
modified or amended either:
- With the written consent of the holders of at least a majority in
aggregate principal amount of the notes at the time outstanding; or
- by the adoption of a resolution at a meeting of a quorum of holders
by at least a majority in aggregate principal amount of the notes
represented at such meeting.
CHANGES REQUIRING NO APPROVAL
The indenture, including the terms and conditions of the notes, may be
modified or amended by us and the trustee, without the consent of the holder of
any note, for the purposes of, among other things:
- adding to our covenants for the benefit of the holders of notes;
- adding collateral to secure the obligations under the notes;
- surrendering any right or power conferred upon us;
- providing for conversion rights of holders of notes if any
reclassification or change of our common stock or any consolidation,
merger or sale of all or substantially all of our assets occurs;
- providing for the assumption of our obligations to the holders of
notes in the case of a merger, consolidation, conveyance, transfer or
lease, adding guarantors or obligors on the notes in addition to
Network Associates;
- reducing the conversion price, provided that the reduction will not
adversely affect the interests of the holders of notes;
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- complying with the requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act of 1939, as amended;
- curing any ambiguity or correcting or supplementing any defective
provision contained in the indenture; provided that such modification
or amendment does not, in the good faith opinion of Network
Associates and the trustee, adversely affect the interests of the
holders of notes in any material respect; or
- adding or modifying any other provisions with respect to matters or
questions arising under the indenture which we and the trustee may
deem necessary or desirable and which will not adversely affect the
interests of the holders of notes in any material respect.
MEETINGS
The indenture contains provisions for convening meetings of the holders
of notes to consider matters affecting their interests.
QUORUM
The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the notes at
the time outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of such aggregate principal amount.
SATISFACTION AND DISCHARGE
We may satisfy and discharge our obligations under the indenture while
notes remain outstanding, subject to certain conditions, if:
- all outstanding notes will become due and payable at their scheduled
maturity within one year; or
- all outstanding notes are scheduled for redemption within one year,
and, in either case, we have deposited with the trustee an amount sufficient to
pay and discharge all outstanding notes on the date of their scheduled maturity
or the scheduled date of redemption.
REGISTRATION RIGHTS
We have filed a registration statement, of which this prospectus is a
part, pursuant to a resale registration rights agreement we entered into with
the initial purchaser in the initial private placement of the notes. Pursuant to
the agreement, we will use our reasonable efforts to have this shelf
registration statement declared effective by February 13, 2002 and to keep it
effective until the earliest of:
- two years after the last date of original issuance of any of the
notes;
- the date when the holders of the notes and the common stock issuable
upon conversion of the notes are able to sell all such securities
immediately without restriction pursuant to the volume limitation
provisions of Rule 144 under the Securities Act; and
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- the date when all of the notes and the common stock issuable upon
conversion of the notes of those holders that complete and deliver in
a timely manner the selling securityholder election and questionnaire
described below are registered under the shelf registration statement
and disposed of in accordance with the shelf registration statement.
If:
- the shelf registration statement has not been declared effective
prior to or on February 13, 2002; or
- at any time after February 13, 2002, the registration statement
ceases to be effective or fails to be usable and (1) we do not cure
the registration statement within five business days by a
post-effective amendment or a report filed pursuant to the Exchange
Act or (2) if applicable, we do not terminate the suspension period
related to disclosure of material non-public information by the 45th
or 90th day, as the case may be (or any applicable extension thereof)
(each, a "registration default"), then
additional interest will accrue on the notes that are registrable securities
from and including the day following the registration default to but excluding
the day on which the registration default has been cured. Additional interest
will be paid semiannually in arrears, with the first semiannual payment due on
each February 15 and August 15, and will accrue at a rate per year equal to:
- 0.25% of the principal amount of a note to and including the 90th day
following such registration default; and
- 0.50% of the principal amount of a note from and after the 91st day
following such registration default.
In no event will additional interest accrue at a rate per year exceeding
0.50%. If a holder has converted some or all of its notes that are registrable
securities into common stock, the holder will be entitled to receive equivalent
amounts based on the principal amount of the notes converted to the extent such
shares are registrable securities.
GOVERNING LAW
The indenture and the notes will be governed by, and construed in
accordance with, the law of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
State Street Bank and Trust Company of California, N.A., as trustee
under the indenture, has been appointed by us as paying agent, conversion agent,
registrar and custodian with regard to the notes. Equiserve is the transfer
agent and registrar for our common stock. The trustee or its affiliates may from
time to time in the future provide banking and other services to us in the
ordinary course of their business.
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GLOBAL NOTES; BOOK-ENTRY FORM
The notes are represented by one or more global notes deposited with and
registered in the name of DTC or its nominee. Thus, we will not issue
certificated securities to you for the notes, except in the limited
circumstances described below. Each global note will be issued to DTC, which
will keep a computerized record of its participants whose clients have purchased
the notes. Each participant will then keep a record of its clients. Unless it is
exchanged in whole or in part for a certificated note, a global note may not be
transferred. DTC, its nominees and their successors may, however, transfer a
global note as a whole to one another, and these transfers are required to be
recorded on our records or a register to be maintained by the trustee.
Beneficial interests in a global note will be shown on, and transfers of
beneficial interests in the global note will be made only through, records
maintained by DTC and its participants. DTC has provided us with the following
information: DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities that its direct
participants deposit with DTC. DTC also records the settlements among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for direct participants'
accounts. This eliminates the need to exchange certificated securities. Direct
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
direct participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
When you purchase notes through the DTC system, the purchases must be
made by or through a direct participant, which will receive credit for the notes
on DTC's records. When you actually purchase the notes, you will become their
beneficial owner. Your ownership interest will be recorded only on the direct or
indirect participants' records. DTC will have no knowledge of your individual
ownership of the notes. DTC's records will show only the identity of the direct
participants and the amount of the notes held by or through them. You will not
receive a written confirmation of your purchase or sale or any periodic account
statement directly from DTC. You should instead receive these from your direct
or indirect participant. As a result, the direct or indirect participants are
responsible for keeping accurate account of the holdings of their customers. The
trustee will wire payments on the notes to DTC's nominee. We and the trustee
will treat DTC's nominee as the owner of each global note for all purposes.
Accordingly, we, the trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on a global note to you or any
other beneficial owners in that global note. Any redemption notices will be sent
by us directly to DTC, which will, in turn, inform the direct participants (or
the indirect participants), which will then contact you as a beneficial holder.
It is DTC's current practice, upon receipt of any payment of
distributions or liquidation amounts, to proportionately credit direct
participants' accounts on the payment date based on their holdings. In addition,
it is DTC's current practice to pass through any consenting or voting rights to
such participants by using an omnibus proxy. Those participants will, in turn,
make payments to and solicit votes from you, the ultimate
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owner of notes, based on their customary practices. Payments to you will be the
responsibility of the participants and not of DTC, the trustee or our company.
Notes represented by one or more global notes will be exchangeable for
certificated securities with the same terms in authorized denominations only if:
- DTC is unwilling or unable to continue as depositary or ceases to be
a clearing agency registered under applicable law, and a successor is
not appointed by us within 90 days; or
- we decide to discontinue the book-entry system.
If the global note is exchanged for certificated securities, the trustee
will keep the registration books for the notes at its corporate office and
follow customary practices and procedures regarding those certificated
securities.
RESTRICTIONS ON TRANSFER; LEGENDS
The notes are subject to certain restrictions on transfer set forth on
the notes and in the indenture, and certificates evidencing the notes bear a
legend regarding such transfer restrictions.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This section summarizes the material U.S. federal income tax
considerations relating to the purchase, ownership, and disposition of the notes
and of common stock into which the notes may be converted. This summary does not
provide a complete analysis of all potential tax considerations. The information
provided below is based on existing authorities. These authorities may change,
or the Internal Revenue Service, or "IRS," might interpret the existing
authorities differently. In either case, the tax consequences of purchasing,
owning or disposing of notes or common stock could differ from those described
below. The summary generally applies only to "U.S. holders" that purchase notes
in the initial offering at their issue price and hold the notes or common stock
as "capital assets" (generally, for investment). For this purpose, U.S. holders
include citizens or residents of the United States and corporations organized
under the laws of the United States or any state. Trusts are U.S. holders if
they are subject to the primary supervision of a U.S. court and the control of
one of more U.S. persons. Special rules apply to nonresident alien individuals
and foreign corporations or trusts or "non-U.S. holders." This summary describes
some, but not all, of these special rules. For U.S. federal income tax purposes,
income earned through a foreign or domestic partnership or similar entity is
attributed to its owners. Consequently, the tax treatment of income earned
through a partnership depends on the status of the partner. The summary
generally does not address tax considerations that may be relevant to particular
investors because of their specific circumstances, or because they are subject
to special rules. Finally, the summary does not describe the effect of the
federal estate and gift tax laws on U.S. holders or the effects of any
applicable foreign, state, or local laws.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FEDERAL ESTATE OR GIFT TAX LAWS,
FOREIGN, STATE, OR LOCAL LAWS, AND TAX TREATIES.
U.S. HOLDERS
TAXATION OF INTEREST
U.S. holders will be required to recognize as ordinary income any
interest paid or accrued on the notes, in accordance with their regular method
of accounting. In general, if the terms of a debt instrument entitle a holder to
receive payments other than fixed periodic interest that exceed the issue price
of the instrument, the holder may be required to recognize additional interest
as "original issue discount" over the term of the instrument. We believe that
the notes were not issued with original issue discount. In certain
circumstances, investors in our notes could receive payments in excess of
principal or stated interest. First, we may be required to make additional
payments to holders of the notes as liquidated damages if we do not file or
cause to be declared effective a registration statement, as described under
"Description of the Notes--Registration Rights." Second, if, upon a change of
control, a holder requires us to repurchase some or all of the holder's notes
and we elect to pay the repurchase price in shares of our common stock, the
value of the stock could exceed the principal amount of the notes and accrued
and unpaid interest. The original issue discount rules allow contingent payments
such as these to be disregarded in computing a holder's interest income if the
contingency is "remote." We believe that the possibility is remote that a change
of control would occur or that we would be required to pay additional interest
because of a failure to provide registration rights. Our determination in this
regard is binding on U.S. holders unless they disclose their contrary position.
If, contrary to expectations, we pay additional interest, U.S. holders would be
required to recognize additional interest income.
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SALE, EXCHANGE OR REDEMPTION OF THE NOTES
A U.S. holder will generally recognize capital gain or loss if the
holder disposes of a note in a sale, redemption or exchange other than a
conversion of the note into common stock. The holder's gain or loss will equal
the difference between the proceeds received by the holder and the holder's
adjusted tax basis in the note. The proceeds received by the holder will include
the amount of any cash and the fair market value of any other property received
for the note. The holder's tax basis in the note will generally equal the amount
the holder paid for the note. The portion of any proceeds that is attributable
to accrued interest will not be taken into account in computing the holder's
capital gain or loss. Instead, that portion will be recognized as ordinary
interest income to the extent that the holder has not previously included the
accrued interest in income. The gain or loss recognized by a holder on a
disposition of the note will be long-term capital gain or loss if the holder
held the note for more than one year. Long-term capital gains of non-corporate
taxpayers are taxed at lower rates than those applicable to ordinary income. The
deductibility of capital losses is subject to limitation.
If, upon a change of control, a holder requires us to repurchase some or
all of the holder's notes and we elect to pay the repurchase price in whole or
in part with shares of our common stock, and if the notes are "securities" for
U.S. federal income tax purposes, the holder would generally not recognize any
loss on the exchange and would recognize any gain realized only to the extent of
any cash received. If the holder receives cash in lieu of a fractional share of
common stock, however, the holder would be treated as if he received the
fractional share and then had the fractional share redeemed for cash. The holder
would recognize gain or loss equal to the difference between the cash received
and that portion of his basis in the stock attributable to the fractional share.
In addition, the value of any portion of the common stock received that is
attributable to accrued interest on the notes will be taxed as ordinary income.
The holder's aggregate basis in the common stock received in exchange for the
notes (including any fractional share for which cash is paid but excluding any
shares attributable to accrued interest) would equal his adjusted basis in the
note, increased by any gain recognized on the exchange and decreased by the
amount of any cash received. The holder's holding period for the common stock so
received would include the period during which he held the note. The holder's
basis in any shares of common stock attributable to accrued interest would equal
the fair market value of those shares when received, and the holding period of
those shares would begin on the day after the holder's receipt of those shares.
If the notes are not securities for U.S. federal income tax purposes, the
holder's exchange of notes upon a change of control would be subject to the
general rules for exchanges of notes described in the preceding paragraph,
regardless of whether the holder receives shares of our common stock in payment
of all or part of the redemption price. The classification of debt instruments
as securities for U.S. federal income tax purposes depends on the extent to
which the instruments represent an investment in the issuer's business. Because
the decided cases turn on the specific facts in each case, we cannot predict
whether our notes will be treated as securities for U.S. federal income tax
purposes.
CONVERSION OF THE NOTES
A U.S. holder generally will not recognize any income, gain or loss on
converting a note into common stock. If the holder receives cash in lieu of a
fractional share of stock, however, the holder would be treated as if he
received the fractional share and then had the fractional share redeemed for the
cash. The holder would recognize gain or loss equal to the difference between
the cash received and that portion of his basis in the stock attributable to the
fractional share. The holder's aggregate basis in the common stock (including
any fractional share for which cash is paid) will equal his adjusted basis in
the note. The holder's holding period for the stock will include the period
during which he held the note.
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DIVIDENDS
If, after a U.S. holder converts a note into common stock, we make a
distribution in respect of that stock, the distribution will be treated as a
dividend, taxable to the U.S. holder as ordinary income, to the extent it is
paid from our current or accumulated earnings and profits. If the distribution
exceeds our current and accumulated earnings and profits, the excess will be
treated first as a tax-free return of the holder's investment, up to the
holder's basis in its common stock. Any remaining excess will be treated as
capital gain. If the U.S. holder is a U.S. corporation, it would generally be
able to claim a deduction equal to a portion of any dividends received.
The terms of the notes allow for changes in the conversion price of the
notes in certain circumstances. A change in conversion price that allows
noteholders to receive more shares of common stock on conversion may increase
the noteholders' proportionate interests in our earnings and profits or assets.
In that case, the noteholders would be treated as though they received a
distribution in the form of our stock. Such a constructive stock distribution
could be taxable to the noteholders, although they would not actually receive
any cash or other property. A taxable constructive stock distribution would
result, for example, if the conversion price is adjusted to compensate
noteholders for distributions of cash or property to our shareholders. Not all
changes in conversion price that allow noteholders to receive more stock on
conversion, however, increase the noteholders' proportionate interests in the
company. For instance, a change in conversion price could simply prevent the
dilution of the noteholders' interests upon a stock split or other change in
capital structure. Changes of this type, if made by a bona fide, reasonable
adjustment formula, are not treated as constructive stock distributions.
Conversely, if an event occurs that dilutes the noteholders' interests and the
conversion price is not adjusted, the resulting increase in the proportionate
interests of our shareholders could be treated as a taxable stock distribution
to them. Any taxable constructive stock distributions resulting from a change
to, or failure to change, the conversion price would be treated like dividends
paid in cash or other property. They would result in ordinary income to the
recipient, to the extent of our current or accumulated earnings and profits,
with any excess treated as a tax-free return of capital or as capital gain.
SALE OF COMMON STOCK
A U.S. holder will generally recognize capital gain or loss on a sale or
exchange of common stock. The holder's gain or loss will equal the difference
between the proceeds received by the holder and the holder's adjusted tax basis
in the stock. The proceeds received by the holder will include the amount of any
cash and the fair market value of any other property received for the stock. The
gain or loss recognized by a holder on a sale or exchange of stock will be
long-term capital gain or loss if the holder held the stock for more than one
year.
SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS
TAXATION OF INTEREST
Payments of interest to nonresident persons or entities are generally
subject to U.S. federal income tax at a rate of 30 percent, collected by means
of withholding by the payor. Payments of interest on the notes to most non-U.S.
holders, however, will qualify as "portfolio interest." and thus will be exempt
from the withholding tax, if the holders certify their nonresident status as
described below. The portfolio interest exception will not apply to payments of
interest to a non-U.S. holder that
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- owns at least 10 percent of our voting stock (taking into account
stock owned directly and also stock owned indirectly under specific
attribution rules), or
- is a "controlled foreign corporation" that is related to us.
In general, a foreign corporation is a controlled foreign corporation if
at least 50 percent of its stock is owned, directly or indirectly, by one or
more U.S. persons that each owns, directly or indirectly, at least 10 percent of
the corporation's voting stock.
The portfolio interest exception and several of the special rules for
non-U.S. holders described below apply only if the holder certifies its
nonresident status. A non-U.S. holder can meet this certification requirement by
providing a Form W-8BEN or appropriate substitute form to us, or our paying
agent. If the holder holds the note through a financial institution or other
agent acting on the holder's behalf, the holder will be required to provide
appropriate documentation to the agent. The holder's agent will then be required
to provide certification to us or our paying agent, either directly or through
other intermediaries.
For payments made to a foreign partnership, the certification
requirements generally apply to the partners rather than the partnership.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Non-U.S. holders generally will not be subject to U.S. federal income
tax on any gain realized on the sale, exchange, or other disposition of notes.
This general rule, however, is subject to several exceptions. For example, the
gain would be subject to U.S. federal income tax if
- the gain is effectively connected with the conduct by the non-U.S.
holder of a U.S. trade or business,
- the non-U.S. holder was a citizen or resident of the United States
and thus is subject to special rules that apply to expatriates, or
- the rules of the Foreign Investment in Real Property Tax Act, or
"FIRPTA" (described below), treat the gain as effectively connected
with a U.S. trade or business.
The FIRPTA rules may apply to a sale, exchange or other disposition of
notes if we are, or were within five years before the transaction, a "U.S. real
property holding corporation, or "USRPHC." In general, we would be a USRPHC if
interests in U.S. real estate comprised most of our assets. We do not believe
that we are a USRPHC or that we will become one in the future. So long as our
common stock continues to be regularly traded, the FIRPTA rules would apply to a
disposition of notes by a non-U.S. holder only if the holder owned, directly or
indirectly, more than 5 percent of our common stock (or, if the notes were
considered to be "regularly traded," more than 5 percent of our notes) within
five years before the holder's disposition of the notes. For this purpose, the
non-U.S. holder would be treated as owning the stock that the holder could
acquire on conversion of the holder's notes. If all of these conditions were
met, and the FIRPTA rules applied to the sale, exchange, or other disposition of
notes by a non-U.S. holder, then any gain recognized by the holder would be
treated as effectively connected with a U.S. trade or business, and would thus
be subject to U.S. federal income tax.
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CONVERSION OF THE NOTES
A non-U.S. holder generally will not recognize any income, gain or loss
on converting a note into common stock. Any recognized as a result of the
holder's receipt of cash in lieu of a fractional share gain recognize of stock
would also generally not be subject to U.S. federal income tax. See "Special Tax
Rules Applicable to non-U.S. holders -- Sale of Common Stock" below.
DIVIDENDS
Dividends paid to a non-U.S. holder on common stock received on
conversion of a note will generally be subject to U.S. withholding tax at a 30
percent rate. The withholding tax might not apply, however, or might apply at a
reduced rate, under the terms of a tax treaty between the United States and the
non-U.S. holder's country of residence. A non-U.S. holder must demonstrate its
entitlement to treaty benefits by certifying its nonresident status. Some of the
common means of meeting this requirement are described above under "Special Tax
Rules Applicable to Non-U.S. Holders -- Taxation of Interest."
SALE OF COMMON STOCK
Non-U.S. holders will generally not be subject to U.S. federal income
tax on any gains realized on the sale, exchange, or other disposition of common
stock. This general rule, however, is subject to exceptions, some of which are
described under "Special Tax Rules Applicable to Non-U.S. Holders -- Sale,
Exchange or Redemption of Notes."
INCOME OR GAINS EFFECTIVELY CONNECTED WITH A U.S. TRADE OR BUSINESS
The preceding discussion of the tax consequences of the purchase,
ownership or disposition of notes or common stock by a non-U.S. holder assumes
that the holder is not engaged in a U.S. trade or business. If any interest on
the notes, dividends on common stock, or gain from the sale, exchange or other
disposition of the notes or stock is effectively connected with a U.S. trade or
business conducted by the non-U.S. holder, then the income or gain will be
subject to U.S. federal income tax at the regular graduated rates. If a
partnership is engaged in a U.S. trade or business, the partners of the
partnership are also treated as being engaged in that trade or business. If a
non-U.S. holder is eligible for the benefits of a tax treaty between the United
States and the holder's country of residence, any "effectively connected" income
or gain will be subject to U.S. federal income tax only if it is also
attributable to a permanent establishment maintained by the holder in the United
States. Payments of dividends that are effectively connected with a U.S. trade
or business, and therefore included in the gross income of a non-U.S. holder,
will not be subject to the 30 percent withholding tax. To claim exemption from
withholding, the holder must certify its qualification, which can be done by
filing a Form W-8ECL If the non-U.S. holder is a corporation, that portion of
its earnings and profits that is effectively connected with its U.S. trade or
business would generally be subject to a "branch profits tax." The branch
profits tax rate is generally 30 percent, although an applicable tax treaty
might provide for a lower rate.
U.S. FEDERAL ESTATE TAX
The estates of nonresident alien individuals are subject to U.S. federal
estate tax on property with a U.S. situs. The notes will not be U.S. situs
property as long as interest on the notes paid immediately before the death of
the holder would have qualified as portfolio interest, exempt from withholding
tax as described above under "Special Tax Rules Applicable to Non-U.S. Holders
-- Taxation of Interest." Because we are a U.S. corporation, our common stock
will be U.S. situs property, and therefore will be included in the taxable
-57-
estate of a nonresident alien decedent. The U.S. federal estate tax liability of
the estate of a nonresident alien may be affected by a tax treaty between the
United States and the decedent's country of residence.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Internal Revenue Code and the Treasury regulations require those who
make specified payments to report the payments to the IRS. Among the specified
payments are interest, dividends, and proceeds paid by brokers to their
customers. The required information returns enable the IRS to determine whether
the recipient properly included the payments in income. This reporting regime is
reinforced by "backup withholding" rules. These rules require the payors to
withhold tax from payments subject to information reporting if the recipient
fails to cooperate with the reporting regime by failing to provide his taxpayer
identification number to the payor, furnishing an incorrect identification
number, or repeatedly failing to report interest or dividends on his returns.
The withholding tax rate is currently 30.5 percent, but will be reduced in
stages to 28 percent beginning in 2006. The information reporting and backup
withholding rules do not apply to payments to corporations, whether domestic or
foreign.
Payments of interest or dividends to individual U.S. holders of notes or
common stock will generally be subject to information reporting, and will be
subject to backup withholding unless the holder provides us or our paying agent
with a correct taxpayer identification number.
Payments to non-U.S. holders will generally be subject to information
reporting but not backup withholding. To avoid backup withholding, however, a
non-U.S. holder will have to certify its nonresident status. Some of the common
means of doing so are described under "Special Rules Applicable to Non-U.S.
Holders -- Taxation of Interest."
Payments made to U.S. holders by a broker upon a sale of notes or common
stock will generally be subject to information reporting and backup withholding.
If, however, the sale is made through a foreign office of a U.S. broker, the
sale will be subject to information reporting but not backup withholding. If the
sale is made through a foreign office of a foreign broker, the sale will
generally not be subject to either information reporting or backup withholding.
This exception may not apply, however, if the foreign broker is owned or
controlled by U.S. persons, or is engaged in a U.S. trade or business.
Payments made to non-U.S. holders by a broker upon a sale of notes or
common stock will not be subject to information reporting or backup withholding
as long as the non-U.S. holder certifies its foreign status.
Any amounts withheld from a payment to a holder of notes or common stock
under the backup withholding rules can be credited against any U.S. federal
income tax liability of the holder.
THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE,
LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING. AND DISPOSING OF OUR
NOTES OR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN
APPLICABLE LAWS.
-58-
SELLING SECURITYHOLDERS
We originally issued the notes in a private placement in August 2001.
Selling securityholders may offer and sell the notes and the underlying common
stock pursuant to this prospectus.
The following table contains information as of November 6, 2001, with
respect to the selling securityholders and the principal amount of notes and the
underlying common stock beneficially owned by each selling security holder that
may be offered using this prospectus.
PRINCIPAL
AMOUNT AT NUMBER OF
MATURITY OF SHARES OF PERCENTAGE
NOTES PERCENTAGE COMMON OF COMMON
BENEFICIALLY OF STOCK THAT STOCK
OWNED THAT NOTES MAY OUTSTANDING
NAME MAY BE SOLD OUTSTANDING BE SOLD(1) (2)
---- ----------- ----------- ---------- -----------
1976 Distribution Trust FBO Jene A. Lauder ........ $ 14,000 * 775 *
1976 Distribution Trust FBO A. R.
Lauder/Zinterhofer ............................. 7,000 * 387 *
2000 Revocable Trust FBO A.R.
Lauder/Zinterhofer ............................. 7,000 * 387 *
Advent Convertible Master (Cayman) L.P. ........... 3,220,000 * 178,196 *
AFTRA Health Fund ................................. 190,000 * 10,515 *
AIG/National Union Fire Insurance ................. 725,000 * 40,122 *
Aloha Airlines Non-Pilots Pension Trust ........... 55,000 * 3,044 *
Aloha Pilots Retirement Trust ..................... 35,000 * 1,937 *
American Investors Life Insurance Company ......... 500,000 * 27,670 *
American Motorist Insurance Company ............... 542,000 * 29,994 *
American Samoa Government ......................... 50,000 * 2,767 *
Amerus Life Insurance Co.
(Amerus Multi-Fund Convertible Account) ........ 750,000 * 41,505 *
Arapahoe County Colorado .......................... 53,000 * 2,933 *
ARB Minnesota Power and Light ..................... 180,000 * 9,961 *
Argent Classic Convertible Arbitrage Fund
(Bermuda) Ltd. ................................. 1,000,000 * 55,340 *
Argent Convertible Arbitrage Fund Ltd. ............ 1,000,000 * 55,340 *
Arkansas PERS ..................................... 1,010,000 * 55,894 *
Associated Electric & Gas Insurance Services
Limited ........................................ 400,000 * 22,136 *
B.C. McCabe Foundation ............................ 300,000 * 16,602 *
Bank Austria Cayman Islands LTD ................... 6,375,000 1.85% 352,795 *
BBT Fund, L.P. .................................... 16,500,000 4.78% 913,116 *
Boilermakers Blacksmith Pension Trust ............. 1,285,000 * 71,112 *
British Virgin Islands Social Security Board ...... 41,000 * 2,269 *
C & H Sugar, Inc. ................................. 85,000 * 4,704 *
CALAMOS(R) Convertible Growth and Income Fund
- CALAMOS(R) Investment Trust .................. 2,900,000 * 160,487 *
CALAMOS(R) Convertible Technology Fund
- CALAMOS(R) Investment Trust .................. 70,000 * 3,874 *
Chrysler Corporation Master Retirement Trust ...... 2,960,000 * 163,807 *
CIBC World Markets ................................ 2,500,000 * 138,351 *
City of New Orleans ............................... 217,000 * 12,009 *
City University of New York ....................... 130,000 * 7,194 *
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PRINCIPAL
AMOUNT AT NUMBER OF
MATURITY OF SHARES OF PERCENTAGE
NOTES PERCENTAGE COMMON OF COMMON
BENEFICIALLY OF STOCK THAT STOCK
OWNED THAT NOTES MAY OUTSTANDING
NAME MAY BE SOLD OUTSTANDING BE SOLD(1) (2)
---- ----------- ----------- ---------- -----------
Conseco Fund Group - Conseco Convertible
Securities Fund ................................. 500,000 * 27,670 *
Convertible Securities Fund ....................... 90,000 * 4,981 *
Delaware PERS ..................................... 1,425,000 * 78,860 *
Delta Air Lines Master Trust ...................... 770,000 * 42,612 *
Delta Pilots D & S Trust .......................... 390,000 * 21,583 *
DLB High Yield Fund ............................... 50,000 * 2,767 *
Drury University .................................. 25,000 * 1,384 *
Duke Endowment .................................... 375,000 * 20,753 *
Durango Investments L.P. .......................... 1,500,000 * 83,011 *
Estate of James Campbell .......................... 153,000 * 8,467 *
Ferox Fund Limited ................................ 1,636,000 * 90,537 *
Ferox Fund LP. .................................... 364,000 * 20,144 *
Fidelity Advisor Series I: Fidelity Advisor
Dividend Growth Fund ........................... 334,000 * 18,484 *
Fidelity Advisor Series I: Fidelity Advisor
Equity Value Fund .............................. 2,000 * 111 *
Fidelity Charles Street Trust: Fidelity
Asset Manager .................................. 1,780,000 * 98,506 *
Fidelity Charles Street Trust: Fidelity
Asset Manager: Growth ......................... 890,000 * 49,253 *
Fidelity Charles Street Trust: Fidelity
Asset Manager: Income .......................... 60,000 * 3,320 *
Fidelity Commonwealth Trust: Fidelity
Mid-Cap Stock Fund ............................. 1,075,000 * 59,491 *
Fidelity Devonshire Trust: Fidelity Equity -
Income Fund .................................... 4,290,000 1.24% 237,410 *
Fidelity Financial Trust: Fidelity
Convertible Securities Fund .................... 10,000,000 2.89% 553,403 *
Fidelity Financial Trust: Fidelity Equity -
Income II Fund ................................. 2,430,000 * 134,477 *
Fidelity Puritan Trust: Fidelity Puritan Fund ..... 2,460,000 * 136,137 *
Fidelity Securities Fund: Fidelity Dividend
Growth Fund .................................... 2,300,000 * 127,283 *
Fidelity Trend Fund: Fidelity Trend Fund ......... 170,000 * 9,408 *
First Union National Bank ......................... 5,000,000 1.44% 276,702 *
First Union Risk Management Inc. .................. 10,000,000 2.89% 553,403 *
First Union Securities Inc. ....................... 11,250,000 3.26% 622,579 *
Froley Revy Investment Convertible Security
Fund ........................................... 145,000 * 8,024 *
Grady Hospital Foundation ......................... 114,000 * 6,309 *
Granville Capital Corporation ..................... 1,000,000 * 55,340 *
Hawaiian Airlines Employees Pension Plan --
IAM ............................................ 30,000 * 1,660 *
Hawaiian Airlines Pension Plan for Salaried
Employees ...................................... 5,000 * 277 *
Hawaiian Airlines Pilots Retirement Plan .......... 50,000 * 2,767 *
HFR Convertible Arbitrage Account ................. 180,000 * 9,961 *
Highbridge International LLC ...................... 500,000 * 27,670 *
ICI American Holdings Trust ....................... 510,000 * 28,224 *
-60-
PRINCIPAL
AMOUNT AT NUMBER OF
MATURITY OF SHARES OF PERCENTAGE
NOTES PERCENTAGE COMMON OF COMMON
BENEFICIALLY OF STOCK THAT STOCK
OWNED THAT NOTES MAY OUTSTANDING
NAME MAY BE SOLD OUTSTANDING BE SOLD(1) (2)
---- ----------- ----------- ---------- -----------
IL Annuity and Insurance Company (IL Annuity
VMIII Convertible) ............................. 750,000 * 41,505 *
Independence Blue Cross ........................... 197,000 * 10,902 *
James Campbell Corporation ........................ 197,000 * 10,902 *
JMG Capital Partners, LP .......................... 4,500,000 1.30% 249,032 *
JMG Triton Offshore Fund, Ltd. .................... 1,000,000 * 55,340 *
Local Initiatives Support Corporation ............. 43,000 * 2,380 *
Mainstay Convertible Fund ......................... 2,690,000 * 148,866 *
Mainstay VP Convertible Portfolio ................. 750,000 * 41,505 *
Massachusetts Mutual Life Insurance Company ....... 525,000 * 29,054 *
MassMutual Asia, Limited .......................... 15,000 * 830 *
MassMutual Corporate Investors .................... 150,000 * 8,301 *
MassMutual High Yield Partners II LLC ............. 260,000 * 14,388 *
McMahan Securities Co. L.P. ....................... 100,000 * 5,534 *
Merrill Lynch Insurance Group ..................... 239,000 * 13,226 *
Merrill Lynch, Pierce, Fenner & Smith, Inc. ....... 250,000 * 13,835 *
Microsoft Corporation ............................. 505,000 * 27,947 *
Morgan Stanley Dean Witter Convertible
Securities Trust ............................... 1,500,000 * 83,011 *
Motion Picture Industry Health Plan - Active
Member Fund .................................... 270,000 * 14,942 *
Motion Picture Industry Health Plan - Retiree
Member Fund .................................... 115,000 * 6,364 *
Municipal Employees ............................... 130,000 * 7,194 *
Nabisco Holdings .................................. 25,000 * 1,384 *
National Fuel Gas Company Retirement Plan ......... 125,000 * 6,918 *
Nations Convertible Securities Fund ............... 2,910,000 * 161,040 *
New Orleans Firefighters Pension/Relief Fund ...... 118,000 * 6,530 *
New York Life Insurance and Annuity
Corporation .................................... 750,000 * 41,505 *
New York Life Insurance Company ................... 4,000,000 1.16% 221,361 *
New York Life Separate Account #7 ................. 370,000 * 20,476 *
Occidental Petroleum Corporation .................. 219,000 * 12,120 *
OCM Convertible Trust ............................. 1,820,000 * 100,719 *
Ohio Bureau of Workers Compensation ............... 127,000 * 7,028 *
Ondeo Nalco ....................................... 180,000 * 9,961 *
Oxford, Lord Abbett & Co. ......................... 1,450,000 * 80,243 *
Partner Reinsurance Company Ltd. .................. 455,000 * 25,180 *
Policemen and Firemen Retirement System of
the City of Detroit ............................ 571,000 * 31,599 *
Pro Mutual ........................................ 644,000 * 35,639 *
Queen's Health Plan ............................... 20,000 * 1,107 *
Ramius Capital Group .............................. 425,000 * 23,520 *
Raytheon Master Pension Trust ..................... 346,000 * 19,148 *
RCG Latitude Master Fund LTP ...................... 1,530,000 * 84,671 *
RCG Multi Strategy LP ............................. 170,000 * 9,408 *
RJR Reynolds ...................................... 74,000 * 4,095 *
Shell Pension Trust ............................... 498,000 * 27,559 *
-61-
PRINCIPAL
AMOUNT AT NUMBER OF
MATURITY OF SHARES OF PERCENTAGE
NOTES PERCENTAGE COMMON OF COMMON
BENEFICIALLY OF STOCK THAT STOCK
OWNED THAT NOTES MAY OUTSTANDING
NAME MAY BE SOLD OUTSTANDING BE SOLD(1) (2)
---- ----------- ----------- ---------- -----------
Southern Farm Bureau Life Insurance ............... 725,000 * 40,122 *
Starvest Combined Portfolio ....................... 755,000 * 41,782 *
State Employees' Retirement Fund of the State
of Delaware .................................... 1,170,000 * 64,748 *
State of Connecticut Combined Investment Funds .... 2,485,000 * 137,521 *
State of Maryland Retirement Agency ............... 2,752,000 * 152,297 *
State of Oregon/Equity ............................ 4,475,000 1.30% 247,648 *
State of Oregon/SAIF Corporation .................. 1,850,000 * 102,380 *
Sterling Investment Co. ........................... 700,000 * 38,738 *
Syngenta AG ....................................... 240,000 * 13,282 *
TCW Group, Inc. ................................... 18,325,000 5.31% 1,014,112 *
The Grable Foundation ............................. 102,000 * 5,645 *
Total Fina Elf Finance USA, Inc. .................. 175,000 * 9,685 *
UBS O'Connor LLC f/b/o
UBS Global Convertible Portfolio ............... 750,000 * 41,505 *
Vanguard Convertible Securities Fund, Inc. ........ 3,560,000 1.03% 197,012 *
Variable Insurance Products Fund: Equity -
Income Portfolio ............................... 2,000,000 * 110,681 *
Zeneca Holdings Trust ............................. 360,000 * 19,923 *
Zurich Institutional Benchmarks ................... 100,000 * 5,534 *
Any other holder of Notes or future
transferee, pledgee, donee or successor of
any holder (3) (4) .............................. 170,289,000 49.36% 9,423,822 6.81%
----------
* Less than 1%.
(1) Assumes conversion of all of the holder's notes at a conversion price of
$18.07 per share of common stock. However, this conversion price will be
subject to adjustment as described under "Description of Notes--Conversion
of Notes." As a result, the amount of common stock issuable upon conversion
of the notes may increase or decrease in the future.
(2) Calculated based on Rule 13d-3(d)(i) of the Exchange Act using 138,455,083
shares of common stock outstanding as of September 30, 2001. In calculating
this amount, we treated as outstanding the number of shares of common stock
issuable upon conversion of all of that particular holder's notes. However,
we did not assume the conversion of any other holder's notes.
(3) Information about other selling security holders will be set forth in
prospectus supplements, if required.
(4) Assumes that any other holders of notes, or any future transferees,
pledgees, donees or successors of or from any such other holders of notes,
do not beneficially own any common stock other than the common stock
issuable upon conversion of the notes at the initial conversion rate.
We prepared this table based on the information supplied to us by the
selling securityholders named in the table.
The selling securityholders listed in the above table may have sold or
transferred, in transactions exempt from the registration requirements of the
Securities Act, some or all of their notes since the date on which the
information in the above table is presented. Information about the selling
securityholders may change from over time. Any changed information will be set
forth in prospectus supplements.
Because the selling securityholders may offer all or some of their notes
or the underlying common stock from time to time, we cannot estimate the amount
of the notes or underlying common stock that will be held by the selling
securityholders upon the termination of any particular offering. See "Plan of
Distribution."
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PLAN OF DISTRIBUTION
We will not receive any of the proceeds of the sale of the notes and the
underlying common stock offered by this prospectus. The notes and the underlying
common stock may be sold from time to time to purchasers:
- directly by the selling securityholders; or
- through underwriters, broker-dealers or agents who may receive
compensation in the form of discounts, concessions or commissions
from the selling securityholders or the purchasers of the notes and
the underlying common stock.
The selling securityholders and any such broker-dealers or agents who
participate in the distribution of the notes and the underlying common stock may
be deemed to be "underwriters." As a result, any profits on the sale of the
notes and underlying common stock by selling securityholders and any discounts,
commissions or concessions received by any such broker-dealers or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
If the selling securityholders were to deemed underwriters, the selling
securityholders may be subject to certain statutory liabilities of, including,
but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
If the notes and underlying common stock are sold through underwriters
or broker-dealers, the selling securityholders will be responsible for
underwriting discounts or commissions or agent's commissions.
The notes and underlying common stock may be sold in one or more
transactions at:
- fixed prices;
- prevailing market prices at the time of sale;
- varying prices determined at the time of sale; or
- negotiated prices.
These sales may be effected in transactions:
- on any national securities exchange or quotation service on which the
underlying common stock may be listed or quoted at the time of the
sale, including the Nasdaq National Market, in the case of the common
stock;
- in the over-the-counter market;
- in transactions otherwise than on such exchanges or services or in
the over-the-counter market; or
- through the writing of options.
-63-
These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of the
trade.
In connection with sales of the notes and underlying common stock or
otherwise, the selling securityholders may enter into hedging transactions with
broker-dealers. These broker-dealers may in turn engage in short sales of the
notes and underlying common stock in the course of hedging their positions. The
selling securityholders may also sell the notes and underlying common stock
short and deliver notes and underlying common stock to close out short
positions, or loan or pledge notes and underlying common stock to broker-dealers
that in turn may sell the notes and underlying common stock.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes and the underlying common
stock by the selling securityholders. Selling securityholders may not sell any
or all of the notes and the underlying common stock offered by them pursuant to
this prospectus. In addition, we cannot assure you that any such selling
securityholder will not transfer, devise or gift the notes and the underlying
common stock by other means not described in this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol
"NETA." We do not intend to apply for listing of the notes on any securities
exchange or for quotation through Nasdaq. Accordingly, no assurance can be given
as to the development of liquidity or any trading market for the notes. See
"Risk Factors--We cannot assure you that an active trading market will develop
for these notes which may reduce their market price."
There can be no assurance that any selling securityholder will sell any
or all of the notes or underlying common stock pursuant to this prospectus. In
addition, any notes or underlying common stock covered by this prospectus that
qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be
sold under Rule 144 or Rule 144A rather than pursuant to this prospectus.
The selling securityholders and any other person participating in such
distribution will be subject to the Exchange Act. The Exchange Act rules
include, without limitation, Regulation M, which may limit the timing of
purchases and sales of any of the notes and the underlying common stock by the
selling securityholders and any other such person. In addition, Regulation M of
the Exchange Act may restrict the ability of any person engaged in the
distribution of the notes and the underlying common stock to engage in
market-making activities with respect to the particular notes and the underlying
common stock being distributed for a period of up to five business days prior to
the commencement of such distribution. This may affect the marketability of the
notes and the underlying common stock and the ability of any person or entity to
engage in market-making activities with respect to the notes and the underlying
common stock.
Pursuant to the registration rights agreement filed as an exhibit to
this registration statement, we and the selling securityholders will be
indemnified by the other against certain liabilities, including certain
liabilities under the Securities Act or will be entitled to contribution in
connection with these liabilities.
We have agreed to pay substantially all of the expenses incidental to
the registration, offering and sale of the notes and underlying common stock to
the public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Second Restated Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except for liability
(i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
Our Restated Bylaws provide that we shall indemnify our directors and
officers and may indemnify our employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. Our Restated Bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether we would have the power
to indemnify him or her against such liability under the General Corporation Law
of Delaware. We currently have secured such insurance on behalf of our officers
and directors.
We have entered into agreements to indemnify our directors and officers,
in addition to indemnification provided for in our Bylaws. Subject to certain
conditions, these agreements, among other things, indemnify our directors and
officers for certain expenses (including attorney's fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in the right of us, arising out of such person's
services as a director or officer of ours, any subsidiary of ours or any other
company or enterprise to which the person provides services at our request.
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation's Board of Directors to grant indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities and Exchange Act of 1933, as amended. Our
Second Restated Certificate of Incorporation, as amended, and Bylaws provide for
indemnification of our officers, directors, employees and other agents to the
maximum extent permitted by the Delaware Law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Network Associates pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
The validity of the issuance of Networks Associates' securities offered
by this prospectus will be passed upon for Networks Associates, Inc. by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K for the year ended December 31,
2000, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
-65-
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with this offering. All amounts are estimates except
for the registration fee:
Securities and Exchange Commission registration fee... $86,250
Trustee's fees and expenses........................... $11,500
Accounting fees and expenses.......................... $15,500
Legal fees and expenses............................... $50,000
Miscellaneous......................................... $36,750
--------
Total......................................... $200,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF NETWORKS ASSOCIATES
The Registrant's Second Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Registrant's Restated Bylaws provide that the Registrant shall
indemnify its directors and officers and may indemnify its employees and other
agents to the fullest extent permitted by law. The Registrant believes that
indemnification under its Restated Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. The Registrant's Restated Bylaws
also permit the Registrant to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the Registrant would have the
power to indemnify him or her against such liability under the General
Corporation Law of Delaware. The Registrant currently has secured such insurance
on behalf of its officers and directors.
The Registrant has entered into agreements to indemnify its directors
and officers, in addition to indemnification provided for in the Registrant's
Bylaws. Subject to certain conditions, these agreements, among other things,
indemnify the Registrant's directors and officers for certain expenses
(including attorney's fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director or
officer of the Registrant, any subsidiary of the Registrant or any other company
or enterprise to which the person provides services at the request of the
Registrant.
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation's Board of Directors to grant indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities and Exchange Act of 1933, as amended. The
Registrant's Second Restated Certificate of Incorporation, as amended, and
Bylaws provide for indemnification of its officers, directors, employees and
other agents to the maximum extent permitted by Delaware Law.
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ITEM 16. EXHIBITS
The following exhibits are filed herewith or incorporated by reference
herein:
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
4.1 Second Restated Certificate of Incorporation of Networks
Associates, Inc., as amended on December 1, 1997. (1)
4.2 Restated Bylaws of Networks Associates, Inc. (2)
4.3 Indenture by and between Networks Associates, Inc. and State
Street Bank and Trust Company of California, N.A., as Trustee,
dated as of August 17, 2001.
4.4 Resale Registration Rights Agreement between Networks Associates,
Inc. and Lehman Brothers Inc., dated as of August 17, 2001.
4.5 Form of Note (included in Exhibit 4.3).
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney of certain directors and officers of Networks
Associates, Inc. (see page II-4 of this Form S-3).
25.1 Form T-1 Statement of Eligibility of Trustee for Indenture under
the Trust Indenture Act of 1939.
------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 filed with the Commission on March 25, 1998.
(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q as filed with the Commission on August 6, 2001.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act,
(b) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement,
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
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provided, however, that clauses (a) and (b) do not apply if the information
required to be included in a post-effective amendment by such clauses is
contained in periodic reports filed with or furnished to the Securities and
Exchange Commission by the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") that are incorporated
by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities, other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Santa Clara, the State of California, on
November 9, 2001.
NETWORKS ASSOCIATES, INC.
By: /s/ Stephen C. Richards
-------------------------------------
Name: Stephen C. Richards
Title: Executive Vice President and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Stephen C. Richards and Kent H.
Roberts, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Registration Statement on Form S-3, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or any substitute, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ George Samenuk President, Chief Executive Officer November 5,
------------------------------------------ and Chairman of the Board of 2001
George Samenuk Directors (Principal Executive
Officer)
/s/ Stephen C. Richards Executive Vice President and Chief November 9,
------------------------------------------ Financial Officer (Principal 2001
Stephen C. Richards Financial and Accounting Officer)
and Attorney-in-Fact
/s/ Edwin L. Harper Director November 9,
------------------------------------------ 2001
Edwin L. Harper
/s/ Leslie G. Denend Director November 9,
------------------------------------------ 2001
Leslie G. Denend
/s/ Virginia Gemmell Director November 9,
------------------------------------------ 2001
Virginia Gemmell
/s/ Robert M. Dutkowsky Director October 29,
------------------------------------------ 2001
Robert M. Dutkowsky
/s/ Robert Pangia Director November 9,
------------------------------------------ 2001
Robert Pangia
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
4.1 Second Restated Certificate of Incorporation of Networks
Associates, Inc., as amended on December 1, 1997. (1)
4.2 Restated Bylaws of Networks Associates, Inc. (2)
4.3 Indenture by and between Networks Associates, Inc. and State
Street Bank and Trust Company of California, N.A., as Trustee,
dated as of August 17, 2001.
4.4 Resale Registration Rights Agreement between Networks Associates,
Inc. and Lehman Brothers Inc., dated as of August 17, 2001.
4.5 Form of Note (included in Exhibit 4.3).
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney of certain directors and officers of Networks
Associates, Inc. (see page II-4 of this Form S-3).
25.1 Form T-1 Statement of Eligibility of Trustee for Indenture under
the Trust Indenture Act of 1939.
----------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 filed with the Commission on March 25, 1998.
(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q as filed with the Commission on August 6, 2001.