<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1999
REGISTRATION NO. 333-87609
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MCAFEE.COM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 77-0503003
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) NUMBER)
</TABLE>
2805 BOWERS AVENUE
SANTA CLARA, CA 95051
(408) 572-1500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SRIVATS SAMPATH
CHIEF EXECUTIVE OFFICER
MCAFEE.COM CORPORATION
2805 BOWERS AVENUE
SANTA CLARA, CA 95051
(408) 572-1500 (PHONE)
(408) 572-1559 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JEFFREY D. SAPER, ESQ. GREGORY M. GALLO, ESQ.
KURT J. BERNEY, ESQ. PAUL A. BLUMENSTEIN, ESQ.
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH LLP
PROFESSIONAL CORPORATION 400 HAMILTON AVENUE
650 PAGE MILL ROAD PALO ALTO, CA 94301
PALO ALTO, CA 94304 (650) 328-6561
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, 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(d)
under the Securities Act of 1933, 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, $.001
par value per share......... 7,187,500 $8.00 $57,500,000 $15,985
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Amount previously paid.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued November 3, 1999
6,250,000 Shares
[MCAFEE.COM LOGO]
CLASS A COMMON STOCK
------------------------
MCAFEE.COM CORPORATION IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS
OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $6
AND $8 PER SHARE.
------------------------
WE HAVE APPLIED TO LIST OUR CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "MCAF."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MCAFEE.COM
-------- ------------- -----------
<S> <C> <C> <C>
Per Share......................................... $ $ $
Total............................................. $ $ $
</TABLE>
McAfee.com has granted the underwriters the right to purchase up to an
additional 937,500 shares of Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 1999.
------------------------
MORGAN STANLEY DEAN WITTER
HAMBRECHT & QUIST
ROBERTSON STEPHENS
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Special Note Regarding
Forward-Looking Statements........ 25
Use of Proceeds..................... 26
Dividend Policy..................... 26
Capitalization...................... 27
Dilution............................ 28
Selected Financial Data............. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 31
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business............................ 43
Management.......................... 60
Related Party Transactions.......... 69
Principal Stockholders.............. 74
Description of Capital Stock........ 76
Shares Eligible for Future Sale..... 79
Underwriters........................ 81
Legal Matters....................... 83
Experts............................. 83
Additional Information.............. 84
Index to Financial Statements....... F-1
</TABLE>
-------------------------
Our principal executive offices are located at 2805 Bowers Avenue, Santa
Clara, California 95051. Our telephone number at that address is (408) 572-1500.
Our worldwide web address is www.McAfee.com. The information on our web site is
not incorporated by reference into this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of Class A common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the Class A common stock.
McAfee, McAfee Clinic, McAfee.com, VirusScan, McAfee Office, Oil Change and
ActiveShield are our trademarks or are licensed to us. This prospectus also
includes trade names, trademarks and service marks of other companies and
organizations.
UNTIL 1999, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL DEALERS
THAT BUY, SELL OR TRADE THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our Class A common stock being sold in
this offering and our financial statements and notes appearing elsewhere in this
prospectus. In this prospectus, unless the context indicates otherwise,
"McAfee.com" refers to both us and our predecessor business.
COMPANY OVERVIEW
We are an online provider of PC security and management products and
services for consumers. Through our McAfee.com web site, consumers can secure,
repair, update and upgrade their PCs online. Our web site provides a suite of
online products and services personalized for consumers based on their PC
configurations, software and attached peripherals, such as scanners, printers
and modems. We began operations in December 1998 as an applications service
provider, or ASP, and we believe that we are among the first consumer ASPs
hosting PC security and management software applications for consumers over the
Internet. Our applications allow consumers to detect and eliminate viruses on
their PCs, repair their PCs from damage caused by viruses, check for year 2000
compliance, optimize their hard drives and update their PCs with current
software patches and upgrades. We generate revenue from the sale of
subscriptions for our hosted software applications, such as McAfee Clinic,
online sales of non-hosted software programs, Internet banner advertisements and
sponsorships. We began charging users subscription fees for the use of our
McAfee Clinic service on September 2, 1999. As of November 2, 1999, we had over
100,000 paid subscribers for the McAfee Clinic service.
OUR MARKET OPPORTUNITY
Increasing use of the Internet has transformed the home PC from merely a
stand-alone processor into the primary Internet access device for consumers
engaged in information retrieval, communication and e-commerce. According to
Jupiter Communications, approximately 63 million U.S. households will be online
by the year 2002, representing 59% of all U.S. households. Consumers are
increasingly dependent on their PCs to reliably access, store and manage a
growing amount of valuable and highly-sensitive data. PCs have become essential
to many consumers, and a PC-related failure could lead to hours of lost time and
significant financial loss. Moreover, the combination of greater access to
public networks such as the Internet and increasingly sophisticated PC
applications has made both PCs and PC management more complex. Consumers, who
generally lack the experience, knowledge and sophistication necessary to
properly secure and manage their PCs without assistance, may be overwhelmed by
the variety and complexity of the products and services that are offered to help
them perform these tasks.
OUR WEB SITE
McAfee.com is a one-stop destination for consumer PC security and
management needs. We have designed our web site and software applications to be
easy to use and helpful for PC users of all skill levels. Our home page provides
access to our free product and service centers, such as the Shopping Center and
subscriber services, such as our McAfee Clinic. Subscribers to our McAfee Clinic
service can access all of our online centers including:
- MCAFEE CLINIC -- the central access point for all of our hosted online
application services;
- ANTI-VIRUS CENTER -- a computer virus protection and information service;
- PC CHECKUP CENTER -- a PC optimization and maintenance service;
- Y2K CENTER -- a "year 2000" compliance resource and analysis service;
- SHOPPING CENTER -- a shopping resource where consumers can research and
purchase computer products, accessories and books;
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<PAGE> 5
- DOWNLOAD CENTER -- a service that allows users to download evaluation
software titles and browser plug-ins; and
- SUPPORT CENTER -- a product registration, technical support and customer
care service.
OUR STRATEGY
Our objective is to become a popular online destination where consumers
secure, repair, update and upgrade their PCs and other Internet access devices.
To achieve this objective, we plan to continue aggressively building brand
awareness among consumer PC users through extensive marketing activities and
alliances. We intend to drive adoption of our ASP model by attracting PC users
to our web site and offering free limited-time trial subscriptions. To become a
popular online destination, we must continue to develop innovative PC security
and management products and services and expand our target market. We plan to do
so both through increased international penetration and by developing new or
enhanced products and services for PCs and non-PC Internet access devices.
OUR OPERATING HISTORY
We were incorporated in Delaware in December 1998 as a wholly-owned
subsidiary of Network Associates, Inc., a supplier of enterprise network
security and management software. Network Associates, a publicly held company,
has been marketing PC security and management software under the McAfee brand
name since 1992. Effective January 1, 1999, Network Associates contributed its
consumer e-commerce business to us. After completion of this offering, Network
Associates will own all of our outstanding Class B common stock representing
approximately 95% of the voting power of our outstanding capital stock.
Accordingly, Network Associates has sufficient power to control the election of
directors and all other matters requiring shareholder approval. In addition, as
of September 30, 1999, officers and employees of Network Associates held options
to purchase 2,046,000 shares of our Class A common stock, representing
approximately 1.9% of the voting power of our outstanding capital stock.
We operate in the highly competitive PC security and management software
market. Our financial statements have been prepared on a carved-out basis from
Network Associates' financial statements. Our business has incurred aggregate
net losses of $27.1 million since January 1, 1996. We expect to incur additional
losses in the foreseeable future. In the future we believe that most of our
revenues will be derived from the sale of user subscriptions for our online
applications. However, for the nine months ended September 30, 1999, we derived
approximately 40% of our revenues from our largest software reseller,
Beyond.com.
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<PAGE> 6
THE OFFERING
Class A common stock offered.............. 6,250,000 shares
Common stock to be outstanding after this
offering:
Class A common stock.................... 6,250,000 shares
Class B common stock.................... 36,000,000 shares
Voting rights:
Class A common stock.................... One vote per share
Class B common stock.................... Three votes per share
Use of proceeds........................... General corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.... MCAF
The number of shares of our common stock to be outstanding immediately
after the offering is based on the number of shares outstanding at September 30,
1999. This number does not take into account 5,108,560 shares of Class A common
stock issuable on exercise of options outstanding as of October 31, 1999 with a
weighted average exercise price of approximately $4.65 per share.
Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' overallotment option.
Each share of our Class B common stock is convertible, at any time at the
option of the holder, into one share of Class A common stock. In addition, any
Class B common stock transferred by Network Associates to a third party would be
automatically converted into Class A common stock upon transfer. Upon any change
of control of Network Associates not approved by the Network Associates
continuing directors, each share of Class B common stock held by Network
Associates will be entitled to one vote per share instead of three. Network
Associates' continuing directors consist of the current Network Associate
directors and any subsequent directors of Network Associates approved or not
objected to by a majority of the then-continuing directors.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is our summary historical financial and operating data for
the periods indicated. The financial and operating data for the three years
ended December 31, 1998 have been derived from our audited financial statements.
The financial and operating data as of September 30, 1999 and for each of the
nine month periods ended September 30, 1998 and 1999 have been derived from the
unaudited financial statements. Prior to 1999, our business was operated by
Network Associates. Our statement of operations data for prior periods was
prepared on a carved-out basis from the financial statements of Network
Associates. The summary historical financial data set forth below should be read
in conjunction with our financial statements and notes thereto included
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The summary historical financial
data set forth below is not necessarily indicative of the results of operations
or financial position which would have resulted if we had been a separate
stand-alone entity during these periods. Through December 31, 1998, our
activities were included in the operations of Network Associates. Our financial
statements for these periods have been prepared on a carve-out basis. From
January 1, 1999, we have operated as a wholly-owned subsidiary of Network
Associates.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................. $ 539 $ 2,530 $ 6,292 $ 4,268 $ 16,095
Gross profit................................ 280 428 2,587 1,563 7,463
Loss from operations........................ (1,790) (1,508) (1,993) (823) (21,798)
------- ------- ------- ------- --------
Net loss.................................... $(1,790) $(1,508) $(1,993) $ (823) $(21,798)
======= ======= ======= ======= ========
Net loss per share, basic and diluted....... -- -- -- -- $ (.61)
========
Shares used in per share calculation........ -- -- -- -- 36,000
Pro forma net loss per share, basic and
diluted................................... -- -- $ (.06) -- --
=======
Shares used in pro forma per share
calculation............................... -- -- 36,000 -- --
</TABLE>
The as adjusted column in the balance sheet data set forth below gives
effect to the sale of 6,250,000 shares of our Class A common stock in this
offering at an assumed initial public offering price of $7.00 per share and the
application of the estimated net proceeds from the offering. See "Use of
Proceeds."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 2,410 $43,098
Working capital............................................. (20,547) 19,041
Total assets................................................ 10,069 49,657
Deferred revenue............................................ 19,869 19,869
Receivable from Network Associates.......................... 1,290 1,290
Stockholder's equity/(deficit).............................. (17,004) 22,584
</TABLE>
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<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before buying shares in this offering. If any of
the following risks actually occurs, our business, results of operations and
financial condition could be materially adversely affected, the trading price of
our Class A common stock could decline, and you could lose all or part of your
investment.
RISKS RELATED TO OUR RELATIONSHIP WITH NETWORK ASSOCIATES
We are currently a wholly-owned subsidiary of Network Associates. We were
incorporated in December 1998 and effective January 1, 1999, Network Associates
contributed the assets of its consumer e-commerce business to us.
WE DO NOT OWN MUCH OF THE CORE TECHNOLOGY AND INTELLECTUAL PROPERTY
UNDERLYING OUR CURRENT PRODUCTS AND OUR CURRENTLY PLANNED PRODUCTS
Much of the core technology and intellectual property underlying our
current products and our currently planned products is licensed to us by Network
Associates under a license agreement. This license agreement has a perpetual
term subject to specific termination provisions contained in the agreement. This
license agreement:
- restricts our use of the licensed technology to 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;
- allows Network Associates to continue to sell "shrink-wrapped" boxed
products incorporating the licensed technology through non-online
distribution channels, such as retail stores;
- prevents us from offering products from companies other than Network
Associates if Network Associates offers a competitive product;
- grants to Network Associates a license to all technology that we create
based on the copyrights that we license from Network Associates;
- does not enable us to independently enforce Network Associates'
intellectual property rights in the licensed technology against third
parties; and
- allows Network Associates to terminate the cross license if we fail to
cure any material breach of the cross license within 30 days after being
notified by Network Associates of the breach, subject to mandatory
dispute resolution prior to the effectiveness of any proposed
termination.
See "Related Party Transactions -- Intercompany Agreements -- License
Agreement."
Despite precautions that we and Network Associates may take, third parties
could copy or otherwise obtain or use the proprietary information without
authorization or develop similar technology independently. If Network Associates
fails to adequately and timely protect the technology it licenses to us, our
business may be adversely affected.
OUR AGREEMENTS WITH NETWORK ASSOCIATES ARE NOT THE RESULT OF ARM'S LENGTH
NEGOTIATIONS AND AS A RESULT THE AGREEMENTS MAY BE LESS FAVORABLE TO US
THAN IF THE AGREEMENTS WERE NEGOTIATED AT ARM'S LENGTH
Our agreements with Network Associates were negotiated when we were a
wholly-owned subsidiary of Network Associates and one of our two directors at
that time was a director and the chief executive officer of Network Associates.
In addition, Srivats Sampath, our president and the other director at the time,
was employed by Network Associates prior to joining McAfee.com in December 1998.
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WE MAY BE UNABLE TO PURSUE BUSINESS OPPORTUNITIES AVAILABLE TO US BECAUSE
OF OUR RELATIONSHIP WITH NETWORK ASSOCIATES
We do not currently have a policy in place with Network Associates to
govern the pursuit or allocation of business opportunities between the two
companies, except to the extent the license agreement restricts each party from
selling licensed products in specified markets or prevents us from offering
products based on technology competitive with that provided to us by Network
Associates under the license agreement. Our ability to take advantage of a
specific business opportunity may be affected by Network Associates'
representation on our board of directors, its voting control over us and our
comparatively limited resources. As a result, we may be unable to successfully
pursue business opportunities available to both Network Associates and us.
OUR HOSTED PRODUCTS AND SERVICES CURRENTLY COMPETE WITH SOME OF NETWORK
ASSOCIATES' EXISTING PRODUCTS AND MAY COMPETE WITH FUTURE NETWORK
ASSOCIATES' PRODUCTS AND SERVICES, WHICH WOULD SIGNIFICANTLY LIMIT OUR
BUSINESS OPPORTUNITIES
Network Associates will continue to offer competing products through
traditional non-online distribution channels, such as retail stores. These
products include "shrink wrapped," boxed versions of McAfee VirusScan and McAfee
Office, a suite of products which incorporates a number of the features included
in our online products and services. Network Associates may also provide hosted
online products and services to business users. Our license agreement with
Network Associates restricts our use of the licensed technology to providing
single-user consumer licenses and grants Network Associates a license to the
proprietary technology which enables us to provide hosted products and services.
As a result, absent Network Associates' consent, we are unable to pursue
business customers for our online products and services and we may experience
customer confusion, each of which would harm our business or limit our business
opportunities.
NETWORK ASSOCIATES' ABILITY TO EXERT CONTROL OVER US FOLLOWING THIS
OFFERING COULD RESULT IN ACTIONS THAT ARE NOT CONSISTENT WITH THE INTERESTS
OF OUR OTHER STOCKHOLDERS, PARTICULARLY WITH RESPECT TO A CHANGE OF CONTROL
Network Associates' substantial voting control over us could conflict with
the interests of our other stockholders. Our capital stock consists of Class A
common stock and Class B common stock. Holders of Class A common stock are
entitled to one vote per share, and Network Associates, as the sole holder of
Class B common stock, is entitled to three votes per share. In the event that
Network Associates transfers Class B common stock to a third party, the
transferred Class B common stock automatically converts to Class A common stock
upon transfer. In this offering, we are offering 6,250,000 shares of our Class A
common stock. Following this offering, Network Associates will own 36,000,000
shares, or 100%, of the outstanding Class B common stock, representing
approximately 95% of the overall voting power of our outstanding stock. As long
as the shares of Class B common stock held by Network Associates represent more
than 25% of our outstanding voting capital stock, Network Associates will have a
majority of the voting power represented by our outstanding stock. This voting
power will enable Network Associates to:
- elect our entire board of directors and, as a result, control matters
requiring board approval, subject to Network Associates' contractual
obligation to vote in favor of at least two independent directors or at
least a majority of independent directors if a change of control of
Network Associates takes place that is not approved by the Network
Associates continuing directors;
- control matters submitted to a stockholder vote, including mergers and
consolidations with third parties and the sale of all or substantially
all of our assets; and
- otherwise control or influence the business direction and policies of
McAfee.com.
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<PAGE> 10
In light of its voting control and board influence, Network Associates will
have significant influence over matters requiring approval of our board of
directors and stockholders. Two of our current board members are affiliated with
Network Associates. William Larson is Network Associates' chief executive
officer and Prabhat Goyal is Network Associates' chief financial officer. Our
business could be adversely affected if these directors act in favor of Network
Associates' interests over ours while on our board of directors.
Network Associates' voting control and board influence may have the effect
of discouraging many types of transactions involving a change of control,
including transactions in which the holders of Class A common stock might
otherwise receive a premium for their shares over the then-current market price.
In addition, we have elected not to be subject to Section 203 of the Delaware
General Corporation Law, which would otherwise provide certain restrictions on
"business combinations" between us and any party acquiring a 15% or greater
interest in our voting stock other than in a transaction approved by our board
of directors and in certain cases by our stockholders. As a result, for example,
as long as Network Associates owns more than 50% of the outstanding common
stock, Network Associates could effect a change in control of McAfee.com through
sales of its shares without our other stockholders having an opportunity to
participate in the transaction.
BECAUSE NETWORK ASSOCIATES CONSOLIDATES OUR OPERATING RESULTS WITH ITS OWN,
IT MAY ATTEMPT TO RESTRICT OUR EXPENDITURES, WHICH COULD ADVERSELY AFFECT
OUR BUSINESS IN THE LONG TERM
As long as Network Associates owns common stock having at least a majority
of our voting power, it will continue to consolidate our operating results with
its own for accounting purposes. Our business strategy will require us to incur
large expenses resulting in significant losses as we attempt to establish our
brand by increasing our marketing efforts and establishing strategic
relationships. Incurring large expenses for these purposes may conflict with
Network Associates' interests in maximizing its net earnings, and Network
Associates may attempt to influence our expenditures in a manner that limits our
losses in the short term but may not be in our best interests in the long term.
WE RELY ON NETWORK ASSOCIATES TO ADEQUATELY PROTECT AND DEFEND OUR LICENSED
TECHNOLOGY AND INTELLECTUAL PROPERTY AND ANY FAILURE BY NETWORK ASSOCIATES
TO DO SO COULD ADVERSELY AFFECT OUR BUSINESS
We rely on Network Associates to protect the technology and intellectual
property that it licenses to us through a combination of patent, trademark,
trade secret and copyright law and contractual restrictions. Despite Network
Associates' precautionary measures, third parties could copy or otherwise obtain
or use the licensed technology and intellectual property without authorization.
Our license agreement with Network Associates does not permit us to take
independent legal action against third parties to enforce Network Associates'
rights in the licensed technology. Network Associates has been, currently is and
in the future may be, subject to litigation related to the technology licensed
to us. Adverse determinations in that litigation could:
- result in the loss of Network Associates', and as a result our,
proprietary rights, which could prevent us from selling our products;
- subject us to significant liabilities; or
- require Network Associates and/or us to seek licenses from third parties.
OUR BUSINESS MAY BE HARMED BY THE LITIGATION TO WHICH NETWORK ASSOCIATES IS
A PARTY WITH RESPECT TO ANTI-VIRUS TECHNOLOGY IT LICENSES TO US
Symantec, Hilgraeve and Trend Micro have each filed suit against Network
Associates with respect to the anti-virus technology that we license from
Network Associates. See "Legal Proceedings" for a
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description of these actions. In addition to naming Network Associates as a
defendant in these litigation matters, these claimants may seek to name us as a
defendant in related actions and seek damages from us. Under the terms of an
indemnification agreement with Network Associates, it has agreed to indemnify
and defend us and hold us harmless from any losses as a result of these or other
intellectual property claims known prior to the consummation of this offering.
The litigation process is subject to inherent uncertainties and we and/or
Network Associates may not prevail in these matters, or we and/or Network
Associates may be unable to obtain licenses with respect to any patents or other
intellectual property rights of third parties that may be held valid or
infringed upon by us through our use of intellectual property licensed to us by
Network Associates. 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 Network
Associates or McAfee.com. In addition, any involvement in legal actions
regarding our intellectual property rights could be expensive and could distract
our management from our day-to-day operations.
BECAUSE WE LICENSE OUR ANTI-VIRUS AND OTHER TECHNOLOGY FROM NETWORK
ASSOCIATES, OUR ABILITY TO COMPETE IN OUR MARKETS DEPENDS IN PART ON THE
SUCCESS OF NETWORK ASSOCIATES' RESEARCH AND DEVELOPMENT
Under our license agreement with Network Associates, Network Associates
licenses to us all future improvements based on the licensed technologies. Our
research and development efforts will initially focus on adapting the licensed
technology for sales of products and services over the Internet. Specifically,
we do not plan to undertake independent research and development efforts
relating to the anti-virus technology licensed from Network Associates but
instead plan to rely on future improvements developed by Network Associates. As
a result, our ability to introduce additional or enhanced anti-virus products is
directly impacted by the success of Network Associates' related research and
development efforts. If Network Associates does not commit sufficient resources
to these efforts, or if its efforts are unsuccessful or untimely, the quality of
our anti-virus products would suffer and we would be required to commit
significant resources to our own research and development efforts. If we are
required to do so, our ability to maintain any technological leadership
currently provided by Network Associates would be severely constrained by our
relatively limited capital resources, engineering capabilities and other
resources necessary to timely develop and introduce additional or enhanced
anti-virus products. This would significantly harm our competitive position and
business.
We do not plan to engage in significant research and development activities
relating to our anti-virus technology. We expect to rely on Network Associates'
ongoing research and development efforts to keep our anti-virus products
up-to-date. Accordingly, we will not control whether these products will:
- continue to recognize and eliminate new computer viruses;
- incorrectly report the presence or absence of computer viruses;
- incorporate leading-edge technology; or
- be adequately protected from infringement by third parties or infringe
upon the intellectual property rights of third parties.
BECAUSE WE SHARE THE MCAFEE BRAND WITH NETWORK ASSOCIATES, ITS ACTIVITIES
RELATED TO ITS MCAFEE-BRANDED PRODUCTS COULD HARM OUR BRAND AND OUR
COMPETITIVE POSITION
The value of our McAfee.com brand is closely linked to the reputation of
Network Associates' McAfee-branded software, such as VirusScan. Network
Associates owns the McAfee trademark and will continue to maintain the right to
control the sale of McAfee and other Network Associates-branded
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"shrink-wrapped" boxed software into non-online channels. Our McAfee.com brand
and competitive position could be harmed by:
- publicity surrounding inadequate levels of consumer support for, or poor
performance of, Network Associates' McAfee-branded products, particularly
McAfee VirusScan; and
- customer confusion related to Network Associates' continued sale of
McAfee-branded shrink-wrapped boxed products in non-online channels.
The McAfee.com web site address, or domain name, and the McAfee trademark
are important to our business and are licensed to us by Network Associates. If
we were to lose the McAfee.com domain name or the use of this trademark, our
business would be harmed, and we would need to devote substantial resources
towards developing an independent brand identity.
WE RELY ON NETWORK ASSOCIATES TO PROVIDE CRITICAL SERVICES TO US, AND ANY
FAILURE ON ITS PART TO EFFECTIVELY DO SO COULD ADVERSELY AFFECT OUR
BUSINESS
We currently rely on Network Associates for cash management, tax and
payroll administration, insurance, employee benefits administration and other
services. We have entered into a services agreement with Network Associates for
the continued provision of these services. Until otherwise terminated, this
agreement will continue in effect through the end of December 1999 with
automatic one-year renewal periods following this date. This agreement was not
the result of arm's length negotiation since we were a wholly-owned subsidiary
of Network Associates at the time we negotiated and entered into the agreement.
As a result, the agreement may be less favorable to us than if it was negotiated
at arm's length. If this agreement is terminated or if Network Associates fails
to satisfactorily provide these services, we would be required to provide these
services internally or find a third-party provider of these services. Any
services we choose to provide internally may not be as cost-effective as those
that Network Associates is currently providing, particularly in light of our
lack of experience as an independent organization. If we are required to obtain
these services from a third party, we may be unable to do so in a timely,
efficient and cost-effective manner, or the services we receive may be inferior
to those that Network Associates is currently providing.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND EXPECT FURTHER LOSSES
Our business has incurred aggregate net losses since the inception of our
business in January 1996. As of September 30, 1999, we had aggregate net losses
of approximately $27.1 million which we have accumulated since inception. Our
net losses as a percentage of net revenue were 332% in 1996, 60% in 1997, 32% in
1998, and 135% for the nine months ended September 30, 1999. We expect to
continue to incur significant net operating losses for the foreseeable future.
We may never become profitable, or if we do earn a profit in any period, we may
be unable to sustain or increase our profitability on a quarterly or annual
basis. It is critical to our success that we continue to devote financial, sales
and management resources to developing brand awareness for our web site and our
online PC security and management products and services. As a result, we expect
that our operating expenses will increase significantly during the next several
years, as we incur additional expenses related to:
- development, marketing and promotion of products and services;
- development of our web site and related infrastructure;
- development and maintenance of strategic relationships; and
- increased employee headcount.
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With the addition of these operating expenses, we will need to generate
significant additional revenues to achieve profitability.
OUR APPLICATIONS SERVICE PROVIDER BUSINESS MODEL IS UNPROVEN, AND OUR
SUCCESS DEPENDS ON MARKET ACCEPTANCE OF OUR HOSTED APPLICATIONS
Historically, substantially all of our revenue has come from software sales
through our web site and other online resellers, such as Beyond.com. Our current
strategy is to expand upon this base and broaden our role as an applications
service provider, or ASP, providing consumers with online access to PC security
and management software applications hosted on our servers. Under this ASP
model, consumers "rent versus buy" our software, which means PC users purchase a
license to use the software hosted on our servers for a limited duration of time
with all version updates included, as opposed to purchasing a single version of
traditional software with perpetual access to only one version. We believe we
are among the first consumer-focused ASPs, and this concept may not achieve
acceptance in the market. We began providing our application services online in
October 1998 when we updated Oil Change and introduced it as our initial online
subscription service following the acquisition of CyberMedia, Inc. by Network
Associates. In April 1999, we significantly redesigned our web site and
introduced our McAfee Clinic hosted services. To build awareness and demand for
our hosted products and services, we offered our McAfee Clinic and other
products and services for free prior to September 2, 1999, when we began
charging a subscription fee for McAfee Clinic. Consumer acceptance of our hosted
products and services is highly uncertain and subject to a number of potential
factors, including:
- consumers' reluctance to pay a subscription fee for our hosted services
which were offered for free prior to September 2, 1999;
- consumers' reluctance to change their software purchasing behavior in
favor of services hosted on our servers;
- consumer concerns regarding the effectiveness of hosted PC products and
services compared with software that is entirely on a user's PC;
- unwillingness by consumers to incur ongoing subscription fees for hosted
products and services previously offered for free;
- consumer concerns about whether the Internet is fast and reliable enough
to deliver critical PC security and management functions effectively; and
- our ability to properly price our products and services to generate the
greatest revenue potential.
Our online services are designed to protect consumer privacy by ensuring
that all PC scans are done locally at the PC, all information about the user's
PC is transmitted to us anonymously and no scanned data is stored by us.
However, consumers' misconceptions about this process could prevent our ASP
model from achieving market acceptance.
ANY FAILURE TO SUCCESSFULLY EXPAND OUR CONTEXTUAL E-COMMERCE SERVICES COULD
LIMIT OUR POTENTIAL GROWTH
We plan to expand our contextual e-commerce services, in which we provide
product recommendations based on a customer's particular PC, attached hardware,
such as printers and monitors, internal peripheral devices, such as hard drives
and graphics cards, and software, such as Windows 95 and Quicken. The success of
our contextual e-commerce services requires that we continue to properly scan
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the user's PC system and identify the PC configuration. In addition, we will be
unable to successfully complete the rollout of our contextual e-commerce
services unless we take the following actions:
Obtain Relevant Content. For our recommendations to be accurate, we must
successfully obtain and maintain:
- relationships with vendors, such as hardware and software distributors,
who agree to have their products included in our database of products we
recommend to consumers for purchase;
- interoperability information to ensure that our recommended products are
compatible with the consumer's PC system configuration; and
- relationships with third party providers of information, such as product
reviews and ratings, about the products included in our contextual
product database.
To date we have secured only a limited amount of the content needed to
successfully provide our contextual e-commerce services. To obtain this content,
particularly online product information, product reviews and interoperability
information, we may have to pay fees or enter into revenue-sharing agreements.
We may not be successful in our efforts to enter into mutually satisfactory
revenue-sharing arrangements with content providers.
Establish Revenue-Generating Arrangements with Vendors. We must
successfully negotiate revenue-generating arrangements with our vendors.
Potential revenue-generating arrangements with our vendors may include:
- a referral fee or a share in the product revenue based on the type and
value of products purchased as a result of our product recommendation;
- guaranteed minimum payments paid by participating vendors in exchange for
their inclusion in our contextual product database, perhaps on an
exclusive basis depending on the product;
- slotting fees paid by vendors to ensure that their products receive
preferential listing in our list of recommended products; and
- licenses of our technology to third parties with whom we have strategic
relationships in exchange for license fees or revenue sharing.
We may be unable to establish and maintain mutually satisfactory revenue
generating arrangements. E-commerce is a relatively new concept and our ability
to enter into these arrangements and their success is dependent on the degree to
which e-commerce is broadly adopted by consumers.
Establish Consumer Trust and Generate Related Revenue. We must establish
consumer trust and generate related revenue through our contextual e-commerce
services. To do so, we must successfully and consistently recommend a broad
selection of high-quality and reliable products at competitive prices. In
addition, for us to generate revenue through our contextual e-commerce services,
consumers must purchase the products recommended by our service. We believe that
a significant number of consumers will use our service to gather product
recommendations and information and purchase products from sources with whom we
do not have revenue sharing relationships, such as traditional retail channels
or third-party online sources. If our vendors offer low-quality or unreliable
products or do not properly distribute and support their products, consumers
could lose trust in us. Consumers could also lose trust in us as a result of our
only recommending the products of vendors who have separately agreed to be
included in our database or giving priority to those vendors who have paid us a
slotting fee for preferential treatment.
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WE PLAN TO INTRODUCE CONTEXTUAL ADVERTISING, AND THE FAILURE OF THIS
SERVICE COULD ADVERSELY AFFECT OUR BUSINESS
Contextual advertising is based on selling advertising targeted to
consumers based on their PC configuration, attached peripherals and software. We
will be unable to successfully introduce and maintain our contextual advertising
product unless we take the following actions:
Provide Proper System Scanning. Our scanning software must accurately scan
the user's PC system in order to provide relevant targeted advertisements.
Obtain Advertisers Willing to Pay a Premium for Targeted
Advertisements. The market for contextual advertising is still developing and
advertisers may be unwilling to utilize contextual advertising or pay a premium
for this product. Our ability to charge higher rates for contextual advertising
is subject to a number of factors including the number and demographics of the
users of our web site, the amount of time users spend on our web site and the
degree to which users of our web site purchase the advertised products.
ANY FAILURE ON OUR PART TO DEVELOP, MAINTAIN AND ENHANCE STRATEGIC
RELATIONSHIPS WILL LIMIT OUR ABILITY TO EXPAND OUR DISTRIBUTION AND GROW
OUR BUSINESS
Our distribution strategy will require us to develop and maintain strategic
relationships with third parties including Internet portals, Internet shopping
sites, and Internet access providers. We believe that the maintenance and
enhancement of our relationship with Beyond.com and the establishment of
additional strategic relationships in other areas of our business will be
critical if we are to expand our business. Our current agreement with
Beyond.com, which is the largest reseller of our software and the exclusive
reseller of third-party software sold on our web site, expires on June 30, 2000.
Through the Beyond.com reseller arrangement, Beyond.com purchases licenses to
our software from us for resale at the time a customer decides to purchase it,
paying us for these licenses on a monthly basis. In the nine months ended
September 30, 1999, approximately 40% of our net revenue was derived from the
sale of software licenses through Beyond.com. Although we intend to pursue
additional strategic relationships in the future, these efforts may not be
successful. To secure and maintain key strategic relationships, we may be
required to pay significant fees and/or grant exclusive rights. Even if we do
succeed in establishing these relationships, they may not result in our
generating additional subscriber or customer relationships or increased
revenues.
OUR MANAGEMENT TEAM WAS ONLY RECENTLY FORMED, AND OUR SUCCESS DEPENDS UPON
THEIR ABILITY TO WORK EFFECTIVELY TOGETHER AND OUR ABILITY TO RETAIN THEM
Because our senior management currently consists of individuals who have
worked together for a relatively short period of time, our management may be
unable to work together effectively. We are substantially dependent on the
continued services of our senior management, including Srivats Sampath, our
chief executive officer, and Evan Collins, our chief financial officer, as well
as key technical and engineering personnel. We do not have employment agreements
with any of our senior management or key personnel and we do not maintain any
"key person" life insurance policies. If our management team fails to work
together effectively, or if we lose the services of any member of senior
management or key personnel, our business could be harmed.
OUR FAILURE TO HIRE AND RETAIN KEY MANAGEMENT PERSONNEL AND OTHER QUALIFIED
INDIVIDUALS COULD HARM OUR BUSINESS
In addition to retaining and motivating our current management and
technical employees, we must attract and train new employees in key areas of our
company, including marketing and sales, research and development and web
information technologies functions. We may be unable to successfully attract,
train, retain and motivate key management personnel and other highly skilled
technical, sales and
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marketing and customer support personnel. Competition for these individuals is
intense, especially in the San Francisco Bay Area. If we fail to either retain
our current employees, or fail to attract and train new employees, our business
could be harmed.
OUR INABILITY TO EFFECTIVELY MANAGE OUR WEB SITE TRAFFIC AND INFORMATION
TECHNOLOGY INFRASTRUCTURE COULD HARM OUR BUSINESS
Since the launch of our web site in December 1998, we have experienced
significant growth and fluctuations in traffic to our web site. To meet
increased traffic demands and potential future traffic increases, we recently
expanded our information technology, or IT, infrastructure and continue to add
additional infrastructure based on our anticipated requirements for the
following six months.
We have experienced significant temporary increases in traffic to our web
site in response to particular events, such as the Melissa and Chernobyl
computer virus outbreaks in the first half of 1999, each of which approximately
tripled our then average daily web site traffic. To respond to sudden traffic
increases, we must expand and maintain the capacity of our IT infrastructure. In
addition, we need to anticipate and prepare for increased traffic to our web
site as the year 2000 approaches and consumers increasingly visit our free Y2K
Center. If we are unable to effectively expand our IT infrastructure to
accommodate traffic increases, consumers may experience difficulties in
accessing our web site or in downloading products and information from our web
site. This could materially harm our business.
We have agreed to provide IT infrastructure to Network Associates and to
manage its web site. Increases in traffic on the Network Associates web site
could adversely impact access to and responsiveness of our web site. The impact
of traffic increases would likely be most severe during unanticipated events
such as virus outbreaks. Currently, our web site infrastructure supporting both
our and Network Associates' web sites operates at approximately 40% capacity
based on average daily traffic levels. These capacity estimates are based on
measuring existing web site traffic against the bandwidth specifications of our
installed hardware.
Currently, Beyond.com provides electronic distribution for software
products sold on our web site. If we were to elect to provide our own electronic
distribution of these products and the related updates and upgrades, we would
need to increase our IT infrastructure.
WE RELY ON BEYOND.COM FOR SOFTWARE LICENSE SALES AND PRODUCT FULFILLMENT,
AND ANY FAILURE BY BEYOND.COM TO PERFORM THIS SERVICE EFFECTIVELY COULD
ADVERSELY AFFECT OUR BUSINESS
During the nine months ended September 30, 1999, approximately 40% of our
net revenue was derived from the sale of our software licenses through
Beyond.com. Included in these revenues are software licenses sold on our web
site for which Beyond.com acts as a reseller and provides product fulfillment.
Beyond.com provides fulfillment for these products whether they are distributed
electronically by Beyond.com or in "shrink-wrapped" box format shipped to
customers. We have agreed that Beyond.com has the exclusive right to resell
traditional software licenses for our products on our web site until June 30,
2000. If Beyond.com does not provide these services in a timely and satisfactory
manner, we would be required to replace Beyond.com and our business could be
harmed.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A
NUMBER OF REASONS THAT COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
We expect that our quarterly and long-term revenues and operating results
will fluctuate significantly in the future based upon a number of factors, many
of which are not within our control.
We plan to significantly increase our operating expenses to expand our
marketing and sales activities and expand our operating infrastructure. We base
our operating expenses on anticipated market growth and our operating expenses
are relatively fixed in the short term. As a result, if our revenues are lower
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than we expect, our quarterly and long-term operating results may not meet the
expectations of public market analysts or investors, which could cause the
market price of our common stock to decline.
In prior periods, our net revenue and operating results have fluctuated on
a quarterly basis. For example, during the nine months ended September 30, 1999,
we recorded approximately 22% of our total net revenue in the three months ended
March 30, 1999, approximately 36% in the three months ended June 30, 1999, and
approximately 42% in the three months ended September 30, 1999. During the year
ended December 31, 1998, we recorded approximately 17% of our total net revenue
in the three months ended March 30, 1998, approximately 24% in the three months
ended June 30, 1998, approximately 27% in the three months ended September 30,
1998, and approximately 32% in the three months ended December 31, 1998.
Accordingly, you should not rely on the results of any past periods as an
indication of future performance. It is likely that in some future period, our
operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop. The primary factors that
may affect our quarterly and long-term revenues and operating results include
the following:
- the number of visitors to our web site, the proportion of visitors that
become registered users, the proportion of registered users that convert
to paying online subscribers and the rate at which they renew their
subscriptions;
- seasonality, such as during summer months, when Internet usage is
typically lower;
- the number of visitors to our web site who purchase products offered
through our web site and the mix of products purchased;
- the amount and timing of our operating expenses and capital expenditures;
- the percentage of revenue which is deferred, which may fluctuate based on
the change in product mix and/or pricing; and
- costs related to potential acquisitions of businesses or technologies.
BECAUSE OUR HISTORICAL FINANCIAL STATEMENTS ARE DERIVED FROM NETWORK
ASSOCIATES' HISTORIC FINANCIAL RESULTS PRIOR TO THE TIME WE ADOPTED OUR
CURRENT BUSINESS MODEL, THEY MAY NOT BE INDICATIVE OF OUR FUTURE
PERFORMANCE
Our financial statements are derived from the historic books and records of
Network Associates. Furthermore, although historically substantially all of our
revenues have come from traditional software sales, our current strategy is to
expand our role as an ASP, providing consumers with online access to software
applications hosted on our servers. For these reasons, we do not believe that
our historical operating results are representative of our business model going
forward. As a result, you should not rely on comparisons of our historical
operating results as an indicator of our future performance.
THE GROWTH OF OUR NET REVENUE DEPENDS TO A SIGNIFICANT EXTENT UPON THE
CONTINUED DEMAND FOR OUR ANTI-VIRUS PRODUCTS AND SERVICES
We believe that to date a significant portion of the traffic to our web
site has been generated by consumer demand for our anti-virus products and
services. A decline in the demand for, or the price that consumers are willing
to pay for, our anti-virus products and services as a result of competition, an
erosion of brand loyalty, perceived degradation in product quality,
technological changes, the bundling by third parties of anti-virus functionality
into their products or services or other factors would harm our business and
operating results. We license the technology underlying our anti-virus products
and services from Network Associates and we are therefore dependent on the
continued quality and availability of Network Associates' anti-virus technology.
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COMPETITION FROM OTHER VENDORS MAY RENDER OUR PRODUCTS OBSOLETE OR LEAD TO
REDUCED SALES OF OUR PRODUCTS OR REDUCED MARKET SHARE
Vendors of hardware and of operating system software or other software,
such as e-mail software, may enhance their products or bundle separate products
to include PC security and management software similar to our products. This
competition from vendors and their widespread inclusion of products that perform
some of the same or similar functions as our products within computer hardware
or other software, such as those offered by our current competitors Dell and
Microsoft, could render our products duplicative or obsolete and result in
reduced sales and market share. Even if these incorporated products are inferior
or more limited than our products, consumers may nevertheless believe that the
incorporated products eliminate the need to purchase our products separately. If
we are unable, either directly or indirectly through Network Associates, to
develop new PC security and management products to further enhance operating
systems or other software and to successfully replace any obsolete products, our
business would suffer.
IF OUR PRODUCTS AND SERVICES ARE NOT EFFECTIVE, OUR REPUTATION AND BUSINESS
MAY BE HARMED AND CONSUMERS MAY MAKE PRODUCT LIABILITY CLAIMS AGAINST US
Our PC security and management software products and services are used to
protect and manage PCs. If these products and services are not effective, our
reputation will be harmed and demand for our products and services could
decrease, which would materially adversely affect our business. As a result, we
could face potential product liability and related claims. Our anti-virus
products and services may fail to effectively detect and respond to existing or
newly developed computer viruses. In addition, our anti-virus technology may
cause a "false alarm" by detecting viruses that do not actually exist. Our PC
management services may not perform effectively, causing a consumer to
accidentally lose or delete a file and other data. Any of the foregoing events
could harm our reputation and our business and could lead to claims against us.
This risk is especially acute for anti-virus software because of the rate at
which new viruses are introduced, the challenges involved in widely distributing
software updates before customers have been infected by new viruses, and the
severity of the harm that consumers may suffer as a result of viruses. Because
we license the technology underlying our anti-virus products and services from
Network Associates, the quality of these products and services depends on
Network Associates' research and development efforts. We seek to limit our
exposure to potential product liability claims through limitation of liability
provisions in our electronic and shrink wrap licenses and through disclaimers.
However, these measures, particularly those involving unsigned licenses, may not
be effective under the laws of some jurisdictions.
IF MICROSOFT TECHNOLOGY FAILS TO MAINTAIN ITS MARKET SHARE OUR BUSINESS
WILL BE ADVERSELY AFFECTED
Currently, our online services are designed exclusively for PCs running
Microsoft's Windows 95, Windows 98 and Windows NT operating systems. For our web
browser interface, we utilize Microsoft's Internet Explorer technology, which
has achieved a market share of approximately 60% among home PC users according
to Gartner Group, an industry research firm. We do not support Netscape browser
technology except through use of specialized software, commonly referred to as
"plug-ins," that must be downloaded over the Internet, a potentially
time-consuming and complicated process. For such plug-ins to work, Microsoft's
Internet Explorer must reside on the user's PC. If Microsoft's technology fails
to continue to be broadly accepted by consumers, or if consumers migrate to
other technologies that we do not support, our business would be harmed.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE WE MUST
CONTINUALLY ADAPT TO THESE CHANGES AND INTRODUCE NEW PRODUCTS AND SERVICES
THAT ACHIEVE BROAD MARKET ACCEPTANCE
The market for Internet products and services is subject to rapid
technological developments, evolving industry standards and consumer demands,
and frequent new product introductions and
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enhancements. To remain competitive, we must continue to enhance and improve the
ease of use, responsiveness, functionality and features of our web site. These
efforts may require us to internally develop increasingly complex technologies
or license them from either Network Associates or other parties. Developing and
integrating new products, services or technologies into our web site could be
expensive and time-consuming. Any new features, functions or services may not
achieve market acceptance or enhance our brand loyalty. If we fail to develop
and introduce or acquire new features, functions or services effectively on a
timely basis, we may be unable to continue to attract new users or to retain our
existing users. Furthermore, we may not succeed in incorporating new Internet
technologies, or to do so, we may incur substantial expenses. We must also work
with strategic relationships to expand and enhance the content on our web site.
COMPETITION FROM OTHER COMPANIES THAT OFFER PC SECURITY AND MANAGEMENT
SERVICES COULD REDUCE OUR NET REVENUE AND MARKET SHARE
A large number of Internet companies compete for users, advertisers,
e-commerce transactions and other sources of online revenue. The market for PC
security and management products is intensely competitive and we expect
competition to increase in the near-term. Competitive factors affecting our
market include:
- relatively low barriers to entry, allowing current and new competitors to
launch new Internet sites at a relatively low cost using commercially
available software;
- the ability of some of our present and future competitors to offer their
products and services for free;
- new technologies that may increase competitive pressures by enabling our
competitors to offer lower-cost services; and
- web-based applications that direct Internet traffic to web sites and
users to computer management services that compete with ours.
Increased competition could result in price reductions, diminished market
share and loss of subscribers, which could materially harm our business. We
believe that competition for consumers of PC security and management services
will continue to increase as the Internet grows as a commercial medium and as
consumer ownership of PCs and other Internet access devices becomes more
widespread. To respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could harm our business.
In the market for anti-virus software products, we compete primarily
against Symantec and Trend Micro Systems, which offer software licenses to
anti-virus software products, including boxed products sold through retail store
channels. In the market for hosted PC security and management solutions, we also
compete primarily against Symantec and Trend Micro Systems, as well as other PC
utility vendors. In particular, Symantec and Trend Micro Systems both offer
online anti-virus services. In the future, we may also compete against PC and
system vendors such as Dell, Compaq, IBM, Gateway and Intel that may seek to
provide a higher level of support and service to their customers. In particular,
Dell has announced an online customer support initiative that includes online PC
management services. Operating system and application vendors such as Microsoft
provide or plan to provide hosted services to better manage Windows-based PCs.
Online PC content sites such as CNET and ZDNet provide or have announced their
intention to provide hosted services to enhance their web sites. We are also
aware of smaller entrepreneurial companies that are focusing significant
resources on developing and marketing these services to consumers.
In the market for e-commerce and advertising, we compete primarily with
established online retailers such as Beyond.com, Gigabuys.com, Outpost.com and
PC-related content sites such as CNET
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and ZDNet. We also compete with online comparative shopping services provided by
Internet sites such as Yahoo!, Amazon.com and Excite.
Some current and many potential competitors have longer operating
histories, larger customer bases and greater brand recognition in other business
and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources. Other
online computer management services may be acquired by, receive investments from
or enter into commercial relationships with larger, more established and better
financed companies. As a result, some of our competitors may be able to devote
more resources to marketing and promotional campaigns, adopt more aggressive
pricing policies and devote substantially more resources to web site and systems
development than we are able to provide. Increased competition may result in
reduced operating margins, loss of market share and diminished value of our
brand.
OUR INTENDED EXPANSION INTO INTERNATIONAL MARKETS COULD EXPOSE US TO
RELATED RISKS THAT COULD HARM OUR BUSINESS
We currently have no operations outside the United States. To expand our
business, we intend to continue to develop subscriber relationships with users
outside of the United States. Expansion of our business to international
consumers poses significant challenges, including the creation of non-English
language versions of our web site. Conducting business outside of the United
States is subject to additional risks, including:
- difficulties related to online payment processing, including foreign
currency issues and transacting with consumers who do not have credit
cards;
- currency fluctuations;
- the burden of complying with foreign laws, including evolving privacy
laws of Europe, which may include restrictions on e-mail marketing;
- difficulties in securing an international provider of fulfillment
services for shrink-wrapped software; and
- political or economic instability or constraints on international trade.
Any of the foregoing factors could adversely affect our future
international operations, and as a result, harm our business and financial
results.
WE MAY FACE LIABILITY RELATING TO CONTENT ON, OR PRODUCTS AND SERVICES SOLD
FROM, OUR WEB SITE
Our web site provides third-party content and links to other web sites. We
could be exposed to claims related to copyright or trademark infringement,
errors or omissions or other wrongful acts by the third parties whose content we
provide or whose web sites are linked with ours. We enter into agreements with
other companies under which we share revenues resulting from advertising or the
purchase of products or services through direct or indirect links to or from our
web site. These arrangements may expose us to additional legal risks and
uncertainties, including government regulation and potential liabilities to
consumers of these products and services, even if we do not provide the products
and services ourselves.
IF WE ARE UNSUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS, WE MAY BE UNABLE TO PREVENT THIRD PARTIES FROM USING
THESE RIGHTS AND WE MAY LOSE THESE RIGHTS OR BE REQUIRED TO PAY DAMAGES OR
ROYALTIES
We regard substantial elements of our web site and the underlying
technology as proprietary. Despite our precautionary measures and those of
Network Associates, it is possible that third parties could copy or otherwise
obtain and use our proprietary information without authorization or develop
19
<PAGE> 21
similar technology independently, and the intellectual property laws on which we
rely may be ineffective in preventing such unauthorized copying or use.
Other companies may own, obtain or claim trademarks that could prevent,
limit or interfere with our use of the trademark that we use. The McAfee.com web
site address, or domain name, and the McAfee trademark are important to our
business and are licensed to us by Network Associates. If we were to lose the
McAfee.com domain name or the use of this trademark, our business would be
harmed and we would need to devote substantial resources towards developing an
independent brand identity.
From time to time, third parties may claim that our products and services
infringe upon their rights. These claims might require us to pay damages or
royalties. Any infringement claims, with or without merit, could lead to costly
litigation that could absorb significant management time and require substantial
expenses.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and evolving, and we can give no assurance regarding the future viability or
value of any of our proprietary rights.
WE COULD FACE CLAIMS BY OUR CUSTOMERS FOR INVASION OF PRIVACY.
We collect and use data from our customers to process their orders for our
services as well as in the operation of our services. This creates the potential
for claims to be made against us based on invasion of privacy or other legal
theories. Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
IF WE, OR THIRD PARTIES ON WHICH WE RELY, FAIL TO ACHIEVE YEAR 2000
COMPLIANCE, OUR BUSINESS COULD BE HARMED
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries may produce erroneous results or fail unless they
have been modified or upgraded to process date information correctly. We could
be impacted by year 2000 issues occurring in our own infrastructure or the
infrastructure of our suppliers, vendors and financial service organizations.
These year 2000 issues could include information errors and significant
information system failures. Any disruption in our operations as a result of
year 2000 issues could materially harm our business. In addition, year 2000
compliance efforts may involve significant time and expense. We are dependent on
Network Associates' year 2000 compliance efforts for the technology that we
license from them. There can be no assurance that Network Associates will be
able to complete all phases of the compliance effort in a timely manner, if at
all, or that the process will adequately address year 2000 issues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
OUR NET REVENUE WOULD BE HARMED IF WE EXPERIENCE SIGNIFICANT CREDIT CARD
FRAUD
A failure to adequately control fraudulent credit card transactions could
harm our net revenue and operating results because we do not carry insurance
against this risk. Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a cardholder's
signature.
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<PAGE> 22
INTERNET INDUSTRY RISKS
IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW AND RELIABLY SUPPORT THE
DEMANDS PLACED ON IT BY ELECTRONIC COMMERCE, OUR MARKET AND ABILITY TO
ATTRACT NEW SUBSCRIBERS TO OUR SERVICES WILL BE HARMED AND WE MAY
EXPERIENCE LOSS OF SALES
Our success depends upon continued growth in the use of the Internet as a
medium of commerce. If the Internet develops more slowly than we expect as a
medium of commerce, our business may be seriously harmed. Broad acceptance and
adoption of the Internet by consumers and businesses for our online PC products
and services will only occur if the Internet provides them with more efficient
and cost effective methods of obtaining the products and services offered by
McAfee.com.
GOVERNMENT LEGISLATION AND REGULATION OF THE INTERNET MAY LIMIT THE GROWTH
OF OUR BUSINESS AND OUR ABILITY TO MARKET OUR PRODUCTS AND SERVICES
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including online
content, user privacy, direct mail marketing, access charges, liability for
third-party activities and jurisdiction. Additionally, it is uncertain how
existing laws will be applied to the Internet. The adoption of new laws or the
application of existing laws may decrease the growth in the use of the Internet,
which could in turn decrease the usage and demand for our services or materially
increase our cost of doing business.
Some local telephone carriers have asserted that the increasing popularity
and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If access fees are imposed, the costs of
communicating on the Internet could increase substantially, potentially slowing
the increasing use of the Internet. This could in turn decrease demand for our
services or materially increase our cost of doing business.
A number of European countries have enacted laws restricting the marketing
of products and services using e-mail. These restrictions could hinder or
restrict the sales and marketing of our products and services in Europe. If
similar restrictions were also adopted in the United States or other countries,
our business would be materially harmed.
CURRENT AND FUTURE LEGISLATION COULD LIMIT OUR ABILITY TO EXPAND OUR
CONTEXTUAL E-COMMERCE SERVICES
Legislation has recently been enacted in several states restricting the
sending of unsolicited commercial e-mail. The federal government and several
other states are considering, or have considered, similar legislation. Although
the provisions of these current and contemplated laws vary, they generally limit
or prohibit both the transmission of unsolicited commercial e-mails and the use
of forged or fraudulent routing and header information. Some states, including
California, require that unsolicited e-mails include "opt-out" instructions and
that senders of such e-mails honor any "opt-out" requests.
In addition, the European Union's Directive on Data Protection, adopted in
1998, requires that the electronic transfer of personal data take place only to
non-EU countries that provide an adequate level of privacy protection.
Uncertainty over whether the U.S. will be deemed to provide an adequate level of
privacy protection means that we cannot be certain that this EU Directive will
have no impact on our expansion of our contextual e-commerce services,
particularly if we choose to target new market opportunities in Europe. Future
legislation or the application of existing legislation may harm our business.
There is a growing body of laws and regulations applicable to access to or
commerce on the Internet. Due to the increasing popularity and use of the
Internet, it is likely that a growing number of laws and
21
<PAGE> 23
regulations will be adopted at the international, federal, state and local level
relating to the Internet or e-commerce services covering issues such as user
privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of services. Further, the growth and development of
the market for e-commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The adoption of any additional laws or regulations may impair
the growth of the Internet or e-commerce. In turn, the adoption of these laws
and regulations could increase our cost of doing business because we currently
rely on direct targeted e-mail campaigns as an element of our marketing and
sales strategy. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our business
or the application of existing laws and regulations to the Internet could harm
our business.
TAXATION OF INTERNET TRANSACTIONS COULD SLOW THE GROWTH OF E-COMMERCE AND
HARM OUR BUSINESS
The tax treatment of electronic commerce is currently unsettled. A number
of proposals have been made at the federal, state and local levels and by
various foreign governments to impose taxes on the sale of goods and services
and other e-commerce activities. Recently, the Internet Tax Information Act was
signed into law, placing a three-year moratorium on new state and local taxes on
Internet commerce. However, future laws may impose taxes or other regulations on
e-commerce, which could substantially impair the growth of e-commerce and
materially and adversely affect our business.
IF THE MARKET FOR WEB ADVERTISING DEVELOPS MORE SLOWLY THAN EXPECTED, OUR
BUSINESS MAY BE ADVERSELY AFFECTED
Our ability to generate advertising revenues from selling banner
advertisements, contextual advertisements and sponsorships on our web site will
depend on, among other factors, the continued development of the Internet as an
advertising medium, the amount of traffic to our web site and our ability to
achieve and demonstrate user demographic characteristics that are attractive to
advertisers. Most potential advertisers and their advertising agencies have only
limited experience with the Internet as an advertising medium and have not
devoted a significant portion of their advertising expenditures to
Internet-based advertising. No standards have been widely accepted to measure
the effectiveness of web advertising. If these standards do not develop,
existing advertisers might reduce their current levels of Internet advertising
or eliminate their spending entirely. The widespread adoption of technologies
that permit Internet users to selectively block out unwanted graphics, including
advertisements attached to web pages, could also adversely affect the growth of
the Internet as an advertising medium. Furthermore, advertisers have
traditionally relied upon advertising media other than the Internet, such as
newsprint and magazines, and have invested substantial resources in these other
advertising methods. Therefore, advertisers may be reluctant to adopt a new
strategy and advertise on the Internet.
IF THE INTERNET INFRASTRUCTURE DOES NOT CONTINUE TO DEVELOP, THE GROWTH OF
OUR BUSINESS MAY BE ADVERSELY AFFECTED
The recent growth in Internet traffic has caused episodes of diminished
performance, requiring Internet service providers and users of the Internet to
upgrade their infrastructures. Our ability to maintain and increase the speed
with which we provide services to consumers and to increase the scope of these
services is limited by and dependent upon the speed and reliability of the
Internet. Consequently, the emergence and growth of the market for our services
is dependent on the performance of and future improvements to the Internet.
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<PAGE> 24
IF OUR INTERNAL NETWORK INFRASTRUCTURE IS DISRUPTED BY COMPUTER HACKERS OR
BY OTHER OCCURRENCES, OUR BUSINESS MAY BE ADVERSELY AFFECTED
Our operations depend upon our ability to maintain and protect our computer
systems, most of which are located in Santa Clara, California. We also contract
with a third party to maintain a fully redundant computer system to prevent
disruption of our operations in the event of a system failure in our Santa Clara
facility. Given our high profile in the security software market, we are an
attractive target for skilled computer users commonly referred to as "hackers"
who attempt to gain unauthorized access to computers or computer networks. In
the past, we have been a target of hackers who have, among other things,
attempted to penetrate our network security or created viruses to sabotage or
otherwise attack our web site. While to date these efforts have been discovered
quickly and their adverse impact has been limited, similar efforts or viruses
may be created or replicated in the future. In this event, our web site or
users' computer systems could be damaged and, as a result, demand for our
software products may suffer. Our relationships with our subscribers and
customers may be adversely affected if the security measures that we use to
protect their personal information, such as credit card numbers, are not
effective, causing our revenues to decrease and our business to suffer. We might
be required to expend significant capital and resources to protect against, or
to alleviate, problems caused by hackers. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could expose us to
litigation or harm our reputation.
We have not experienced any material outages to date. However, our systems
are vulnerable to damage from break-ins, unauthorized access, vandalism, fire,
floods, earthquakes, power loss, telecommunications failures and similar events.
Although we maintain insurance against fires, floods and general business
interruptions, the amount of coverage may not be adequate in any particular
case.
RISKS RELATED TO THIS OFFERING
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW
AND OUR RELATIONSHIP WITH NETWORK ASSOCIATES MAY DISCOURAGE TAKEOVER
ATTEMPTS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could have the effect of delaying or preventing a third party from
acquiring us, even if a change in control would be beneficial to our
stockholders. For example, we will have a classified board of directors whose
members serve staggered three-year terms and are removable only for cause. These
provisions could make it more difficult for a third party to acquire us, even if
doing so would benefit our stockholders. Furthermore, following this offering,
Network Associates will own 36,000,000 shares, or 100%, of our outstanding Class
B common stock, with each Class B share entitled to three votes. As a result,
Network Associates will have sufficient voting power to control the direction
and policies of McAfee.com.
AN AGGREGATE OF 41,108,560 SHARES, OR 86.8%, OF OUR OUTSTANDING STOCK WILL
BECOME ELIGIBLE FOR RESALE IN THE PUBLIC MARKET BETWEEN 180 DAYS AND ONE
YEAR AFTER THIS OFFERING, AND FUTURE SALES OF SUCH STOCK MAY CAUSE OUR
STOCK PRICE TO DECLINE
Sales of substantial amounts of our common stock in the public market after
this offering could reduce the prevailing market price for our common stock. Of
the 47,358,560 shares of common stock to be outstanding, which includes all
options outstanding as of October 31, 1999, upon the closing of this offering,
the 6,250,000 shares in this offering will be freely tradeable without
restriction, other than shares purchased by our officers, directors or other
affiliates within the meaning of Rule 144 under the Securities Act of 1933,
which will be restricted from sale until 180 days after the date of this
prospectus
23
<PAGE> 25
under lock-up agreements with the underwriters. Of these shares, Network
Associates owns an aggregate of 36,000,000 shares. The remaining 41,108,560
shares of our common stock will become eligible for resale in the public market
as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES/PERCENT
OUTSTANDING AFTER
THE OFFERING DATE WHEN SHARES BECOME AVAILABLE FOR RESALE IN THE PUBLIC MARKET
- ------------------ -----------------------------------------------------------------
<C> <S>
38,351,000/81.0% 180 days after the date of this prospectus under agreements
between the stockholders and the underwriters or McAfee.com,
provided that the underwriters can waive this restriction at any
time, and including 2,351,000 shares subject to options which
will be vested. 37,560,000 of these shares will also be subject
to sales volume restrictions under Rule 144 under the Securities
Act.
1,044,071/2.2% Upon one year following the offering, shares subject to options
which will have vested.
951,890/2.0% Upon two years following the offering, shares subject to options
which will have vested.
</TABLE>
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 90 days after the date of this offering to register an
aggregate of 9,038,000 shares of common stock issued or reserved for issuance
under our various stock plans.
WE MAY NEED ADDITIONAL FINANCING TO ACHIEVE OUR BUSINESS OBJECTIVES, AND IF
SUCH FINANCING IS UNAVAILABLE, OUR BUSINESS COULD BE HARMED AND OUR PLANNED
EXPANSION COULD BE LIMITED
We may need to obtain additional financing to fund more rapid expansion, to
expand our marketing activities, to develop new or enhance existing services or
products, to respond to competitive pressures or to acquire complementary
services, businesses or technologies. We may also need to raise funds in the
future to meet our working capital needs. Additional financing may not be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, we may be required to lower
our operating expenses by scaling back our operations, such as reducing our
marketing and research and development expenditures.
INTERNET STOCKS HAVE BEEN VOLATILE AND OUR STOCK PRICE MAY FLUCTUATE
SIGNIFICANTLY, AND MAY CAUSE A DECLINE IN THE PRICE OF OUR SHARES FOLLOWING
THIS OFFERING
The trading prices of many Internet stocks have experienced extreme price
and volume fluctuations. These fluctuations have often been unrelated or
disproportionate to the operating performance of these companies. The trading
price of our stock is likely to be highly volatile and may be significantly
affected by factors including actual or anticipated fluctuations in our
operating results, new products introduced by us or our competitors, conditions
and trends in the software or e-commerce industries, changes in financial
estimates by securities analysts, general market conditions and other factors.
Any negative change in the public perception of the prospects of Internet or
e-commerce companies in general could also depress our stock price regardless of
our business, prospects or operating results.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE DILUTION AND WILL
EXPERIENCE FURTHER DILUTION WITH THE FUTURE EXERCISE OF STOCK OPTIONS
Investors in this offering will experience an immediate dilution in the net
tangible book value of the common stock of $6.46 per share, based on the number
of outstanding shares as of September 30, 1999 and an assumed initial public
offering price of $7.00 per share. Additionally, purchasers in this offering
will experience further dilution as holders of our stock options exercise those
options. As of October 31, 1999, we have outstanding options to purchase
5,108,560 shares of our common stock, none of which
24
<PAGE> 26
have yet been exercised. On the date that is 180 days after this offering,
2,351,000 options will have vested and could be exercised and sold. This
potential sale would have the effect of diluting purchasers of shares in this
offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "intend," "anticipate," "believe," "estimate,"
"predict," "potential," or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the Risk
Factors section above. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements.
25
<PAGE> 27
USE OF PROCEEDS
Our net proceeds from the sale of the 6,250,000 shares of Class A common
stock we are offering will be approximately $39.6 million, assuming an initial
public offering price of $7.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $45.7 million.
The principal purpose of this offering is to increase our working capital
for general corporate purposes. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing, investment
grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
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<PAGE> 28
CAPITALIZATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth (1) our actual capitalization as of
September 30, 1999 and (2) our capitalization as adjusted to give effect to our
application of the estimated net proceeds of this offering at an assumed initial
public offering price of $7.00 per share, after deducting the estimated offering
expenses and underwriting discount. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------
AS
ACTUAL ADJUSTED
---------- ----------
(UNAUDITED)
<S> <C> <C>
Stockholder's equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding........... $ -- $ --
Common stock:
Class A, $.001 par value; 100,000,000 shares
authorized, no shares issued and outstanding, actual;
6,250,000 shares issued and outstanding, as
adjusted.............................................. -- 6
Class B, $.001 par value; 65,000,000 shares authorized,
36,000,000 shares issued and outstanding, actual;
36,000,000 shares issued and outstanding, as
adjusted.............................................. 36 36
Additional paid-in capital................................ 10,049 49,631
Accumulated deficit....................................... (27,089) (27,089)
-------- --------
Total stockholder's equity (deficit)................. (17,004) 22,584
-------- --------
Total capitalization.............................. $(17,004) $ 22,584
======== ========
</TABLE>
The data in the table above excludes 5,108,560 shares of Class A common stock
issuable on exercise of options outstanding as of October 31, 1999 with a
weighted average exercise price of $4.65 per share.
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<PAGE> 29
DILUTION
Our net tangible book value as of September 30, 1999 was $(17.0 million) or
$(.47) per share. Net tangible book value per share is determined by dividing
the number of outstanding shares of common stock into our net tangible book
value, which is our total tangible assets less total liabilities. After giving
effect to the receipt of the estimated net proceeds from this offering, based
upon an assumed initial public offering price of $7.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses, our net tangible book value as of September 30, 1999 would
have been approximately $22.6 million, or $.54 per share. This represents an
immediate increase in net tangible book value of $1.01 per share to existing
stockholders and an immediate dilution of $6.46 per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $7.00
Net tangible book value per share as of September 30,
1999........................................................ $(.47)
Increase per share attributable to new investors....... 1.01
-----
Net tangible book value per share after the offering... 0.54
-----
Dilution per share to new investors......................... $6.46
=====
</TABLE>
The following table summarizes as of September 30, 1999, on the basis
described above, the number of shares of common stock acquired from us by
Network Associates, our only existing stockholder, and purchased from us by
investors, the total consideration contributed by Network Associates or paid by
investors and the average amount per share contributed by Network Associates and
paid by investors purchasing shares of common stock in this offering at an
assumed initial public offering price of $7.00 per share and before deducting
the estimated underwriting discounts and commissions and estimated offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Network Associates -- sole existing
stockholder......................... 36,000,000 85.2% $ 2,833,342 6.1% $ .08
New investors......................... 6,250,000 14.8 43,750,000 93.9 $7.00
----------- ------ ----------- -----
Total............................ 42,250,000 100.0% $46,583,342 100.0%
=========== ====== =========== =====
</TABLE>
As of October 31, 1999, there were options outstanding to purchase a total
of 5,108,560 shares of Class A common stock at a weighted average exercise price
of $4.65 per share.
To the extent that any of these options are exercised or shares are issued,
there will be further dilution to new public investors. Furthermore, if the
underwriters exercise their over-allotment option in full, the number of shares
held by the existing stockholders will be reduced to 83.4% of the total number
of shares outstanding, and will increase the number of shares held by new
investors to 7,187,500 shares, or 16.6% of the total number of shares
outstanding after this offering. See "Capitalization," "Management -- Stock
Plans," "Description of Capital Stock," Note 6 of notes to financial statements.
28
<PAGE> 30
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for each of the three years
ended December 31, 1998 and the balance sheet data as of December 31, 1997 and
1998 are derived from our financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. The balance sheet data as of December 31, 1996 is derived
from our financial data that has been audited by PricewaterhouseCoopers LLP, not
included elsewhere in this prospectus. The statement of operations data for the
nine-month periods ended September 30, 1998 and 1999 and the balance sheet data
as of September 30, 1999 are derived from our unaudited financial statements.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which we consider necessary for a fair presentation of the
results of operations for this period. The data for the interim periods is not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
The consumer e-commerce business of Network Associates, that was
contributed to us, commenced in January 1996. Therefore, there is no financial
data as of and for the years ended December 31, 1994 and 1995. The financial
statements from 1996 through 1998 contained herein and discussed below have been
carved out from the financial statements of Network Associates using the
historical results of operations and the historical bases of the assets and
liabilities of the consumer e-commerce business of Network Associates. We
believe that the assumptions underlying the preparation of our financial
statements are reasonable. However, the financial information included herein,
may not be indicative of our future results of operations, financial position
and cash flows or the financial results we would have achieved if we had been a
separate stand-alone entity during these periods. In particular, periods prior
to fiscal 1999 do not include the expenses incurred under our license agreement
with Network Associates. See Note 4 to the financial statements.
From January 1, 1999, various services have been and will continue to be
provided by Network Associates based upon a services agreement entered into
between us and Network Associates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................................... $ 539 $ 2,530 $ 6,292 $ 4,268 $ 16,095
Cost of net revenue:
Product costs........................................... 53 142 730 272 2,065
Technology costs........................................ 206 1,960 2,975 2,433 4,860
License fees............................................ -- -- -- -- 1,707
------- ------- ------- ------- --------
Total cost of net revenue............................. 259 2,102 3,705 2,705 8,632
Operating expenses:
Research and development................................ 287 326 2,661 1,417 4,458
Marketing and sales..................................... 1,438 1,469 1,152 396 14,061
General and administrative.............................. 345 141 767 573 3,491
Stock-based compensation................................ -- -- -- -- 7,251
------- ------- ------- ------- --------
Total operating expenses.............................. 2,070 1,936 4,580 2,386 29,261
------- ------- ------- ------- --------
Loss from operations...................................... (1,790) (1,508) (1,993) (823) (21,798)
------- ------- ------- ------- --------
Net loss.................................................. $(1,790) $(1,508) $(1,993) $ (823) $(21,798)
======= ======= ======= ======= ========
Net loss per share, basic and diluted..................... $ (.61)
------- ------- ------- ------- ========
Shares used in per share calculation...................... 36,000
------- ------- ------- -------
Pro forma net loss per share, basic and diluted........... -- -- $ (.06) -- --
=======
Shares used in pro forma per share calculation............ -- -- 36,000 -- --
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------- AS OF
1996 1997 1998 SEPTEMBER 30, 1999
------- ------- ------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash........................................................ $ -- $ -- $ -- $ 2,410
Working capital............................................. (1,777) (3,268) (5,196) (20,547)
Total assets................................................ 38 21 2,438 10,069
Deferred revenue............................................ 1,003 2,976 6,388 19,869
Receivable from (payable to) Network Associates............. (674) (275) 1,286 1,290
Total stockholder's/divisional deficit...................... (1,739) (3,247) (5,131) (17,004)
</TABLE>
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial
statements and related notes of McAfee.com appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve risks and uncertainties, including, among other things, statements
regarding anticipated costs and expenses, mix of revenues, plans for introducing
new products and services to expand our revenue base. Our actual results could
differ materially from the results contemplated by these forward-looking
statements as a result of a number of factors, including those discussed below,
elsewhere in this prospectus and under "Risk Factors."
OVERVIEW
We are currently a wholly-owned subsidiary of Network Associates. We were
incorporated in December 1998 and, effective January 1, 1999, Network Associates
contributed to us its consumer e-commerce business, which began operations in
January 1996. We have never operated as an independent company. Network
Associates has provided a number of services to us and we will continue to rely
on Network Associates to provide these services after completion of this
offering. In addition, our financial statements are derived from the historical
books and records of Network Associates. The balance sheet includes all assets
and liabilities directly attributable to us which are derived from historical
cost information of Network Associates. The statement of operations includes all
revenues and expenses directly attributable to us including charges for shared
facilities, functions and services used by us and provided by Network
Associates. A number of expenses, such as research and development expenses,
sales and marketing expenses and general and administrative expenses, have been
allocated based on Network Associates' management's estimate of the cost of
services provided by them. These allocations were generally based on either a
direct cost pass-through or percentage of total expenses for the services
provided, based on headcount. See Note 4 of notes to financial statements. In
light of the above, you should not consider our historical financial statements
to be representative of future results.
We are a provider of hosted, version-less PC security and management
products and services over the Internet. We derive our revenue from:
- products, software and subscription licenses sold through the McAfee
Store as well as through e-retail distributors, such as Beyond.com and
America Online, and computer original equipment manufacturers, or OEMs,
such as Gateway and Dell. The McAfee Store is the location on our web
site where consumers can purchase McAfee-branded products through secure,
credit-card based transactions;
- software subscriptions for our hosted PC security and management
applications provided on our web site, including McAfee Clinic and Oil
Change, our initial hosted subscription service;
- sponsorship arrangements in which we provide access to other vendors' web
sites;
- co-hosting arrangements where products and services are branded under
both our brand and that of our partners; and
- banner advertising and other advertising space on our web site sold by us
or our partners to third parties.
Historically, substantially all of our net revenue has come from software
licenses sold through the McAfee Store, OEMs and other e-retail distributors. In
particular, sales of our anti-virus products accounted for approximately 47%,
95%, 91% and 61% of our revenue in 1996, 1997, 1998 and the nine months ended
September 30, 1999.
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In September 1998, Network Associates acquired CyberMedia, Inc., a provider
of desktop utility software. Our net revenue from that date includes e-commerce
revenue for these additional product offerings relating to CyberMedia products.
Our current strategy is to further expand on our historical revenue base
and significantly broaden our role as an applications service provider, or ASP,
providing consumers with access to PC security and management software
applications hosted on our services. Under this ASP model, consumers "rent
versus buy" our software applications. In October 1998, we updated Oil Change
and introduced it as our initial hosted subscription service, based on
technology acquired through Network Associates' purchase of CyberMedia. In April
1999, we introduced McAfee Clinic. McAfee Clinic incorporates the functionality
of Oil Change and provides a significantly broader suite of hosted PC security
and management applications. To date, we have recognized limited revenues from
our hosted applications and services and only began charging for McAfee Clinic
on September 2, 1999. We are seeking to convert our current and any future Oil
Change subscribers to McAfee Clinic subscribers. Our strategy of transitioning
users of our web site to paid subscriber status could make us vulnerable to the
risk that those users may be reluctant to pay a subscription fee for our
services which we offered for free prior to September 2, 1999. Also, to further
expand our revenue base, we have recently introduced contextual e-commerce
services on our web site and plan to introduce contextual advertising services.
Contextual e-commerce consists of providing purchase recommendations based on a
user's PC configuration, attached peripherals and software. Depending on the
purchased product, if the user purchases recommended products from parties with
whom we have a contractual relationship, we receive a referral fee or share in
related product revenue. Contextual advertising will consist of sales of
targeted advertising directed at consumers based on their individual PC
configurations, attached peripherals and software.
REVENUE RECOGNITION
Revenue recognition varies depending on the product or service sold.
Revenue derived from the sale of software products is recognized in accordance
with Statement of Position 97-2, or SOP 97-2, "Software Revenue Recognition," as
amended by Statements of Position 98-4 and 98-9, collectively, SOP 97-2, and
Statement of Financial Accounting Standards 48, or SFAS 48, "Revenue Recognition
When Right of Return Exists." Based on these accounting pronouncements, our
revenue recognition practices relating to various products and customers are as
follows:
- Recognition of net revenue at the time of delivery from the sale of
software products sold through both the McAfee Store and our e-retail
distributors, such as Beyond.com and America Online, and sales to OEMs,
varies depending on the product being sold. For products that include
future upgrades, updates or services, such as VirusScan licenses, a
percentage of the revenue is deferred and recognized ratably over the
period for which these upgrades, updates or services are provided,
usually one year. The amount deferred is based on the price of these
upgrades, updates and future services when sold separately. For the
majority of our products, however, we do not sell these upgrades, updates
and services separately and therefore we typically defer a substantial
portion of total revenue and recognize it ratably over one year. Products
sold through our e-retail distributors are sold by us to them at a
discount from list price and additionally, some of our e-retail
distributors may purchase product for inventory. We recognize revenue for
these products when they are sold to the end user.
- Revenue from the fees received for providing sponsorships, co-hosting
arrangements and software subscriptions for our hosted applications is
deferred at the time of the transaction and is recognized ratably over
the term of the arrangement or the subscription term.
- Revenue from banner advertising and other advertising space on our web
site is typically recognized as advertisement impressions are delivered.
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<PAGE> 34
COSTS AND EXPENSES
Cost of Net Revenue. Cost of net revenue consists of product costs,
technology costs and license fees.
Product costs consist mainly of the cost of media, manuals and packaging as
well as shipping costs for boxed products sold both through our McAfee Store and
through e-retail partners. From September 1998 through May 16, 1999, product
costs also included charges from Beyond.com for processing and fulfilling sales
transactions, including credit card processing fees and fulfillment costs.
Technology costs are included in cost of net revenue because these costs
represent the cost of selling our products and services over the Internet.
Technology costs consist of Internet connection charges, co-location costs for
maintaining server sites, salary and benefit expenses for personnel maintaining
our web site and that of Network Associates, depreciation of equipment such as
routers and access servers, and other related costs associated with the
maintenance of the web sites. We have agreed to maintain Network Associates' web
site. For this service, we charge Network Associates a fee equal to 10% of our
total technologies cost plus a 10% mark-up. Amounts owed to us by Network
Associates are offset against amounts that we owe to Network Associates under
our other agreements with it.
License fees are incurred under the technology cross license agreement with
Network Associates, which gives us the right to sell single-user consumer
licenses for the licensed Network Associates products over the web and through
computer OEMs and e-retailers. The license fee is payable commencing January 1,
1999 and is based on a percentage of net revenue derived from product sales that
include the licensed technology. The license fee was 20% commencing on January
1, 1999, declining 1.625% per quarter until the rate is 7% in the quarter
beginning January 1, 2001 and will remain at 7% thereafter. The rate for the
quarter ended September 30, 1999 is 16.75%. See "Related Party
Transaction -- Intercompany Agreements" for a more detailed description of the
Network Associates cross license. For a quarterly royalty of $250,000, Network
Associates has, among other things, a limited right to sell licenses to any
software products that we create based on the Network Associates technology that
we license from it. This royalty received from Network Associates is offset
against our royalty payments to Network Associates, which are presented on a net
basis in our results of operations.
We expect that cost of net revenue will continue to increase in absolute
dollars but may fluctuate as a percentage of net revenue over time as we expand
our operations.
Research and Development. Research and development expenses consist
primarily of salary and benefits for our development and technical staff,
computer and equipment depreciation, as well as allocated overhead expenses.
Prior to 1999, we did not engage in research and development activities or incur
related expenses independent from Network Associates. Research and development
expenses during that time represent an allocation of expenses incurred by
Network Associates in developing the McAfee.com web site.
We are focusing our research and development resources on providing
next-generation software services for Internet access devices initially focused
on PC security and management delivered via the Internet, contextual e-commerce
and contextual advertising. We expect that our research and development expenses
will grow in absolute dollars as we continue to invest in development and
enhancement of our products and services, but may fluctuate as a percentage of
net revenue. We also expect an increase in research and development expenses
related to the anticipated future international expansion of our business. The
timing and amount of our research and development expenses may vary
significantly based upon the number of new products and significant upgrades
under development and products acquired, if any, during a given period.
Marketing and Sales. Marketing and sales expenses consist primarily of
salary, commissions and benefits for marketing and sales employees as well as
expenses associated with advertising and
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<PAGE> 35
promotions. Also included in marketing and sales expenses is a charge from
Network Associates for providing retail support and customer care. We expect
marketing and sales expenses to increase in absolute dollars over time as we:
- continue to aggressively market our products and services to attract new
paid subscribers;
- attempt to establish strategic relationships with third parties; and
- expand internationally.
However, we expect that our marketing and sales expenses may fluctuate as a
percentage of net revenue. See "Related Party Transactions -- Intercompany
Agreements" for a more detailed description of the Network Associates corporate
services agreement.
General and Administrative. General and administrative expenses consist
principally of charges under the corporate services agreement with Network
Associates and of salary and benefit expenses for administrative personnel.
Under the corporate services agreement, Network Associates is providing services
relating to tax, accounting, insurance, employee benefits administration,
corporate record-keeping, payroll, information technology infrastructure, and
facilities management. The expenses are allocated based on relative headcount
and include a 10% mark-up from Network Associates' allocated expenses. In turn,
we allocate a portion of these charges related to facilities and information
technology infrastructure to marketing and sales and research and development.
This allocation is based on the headcount of these departments. Although we
believe that we benefit from the services provided by Network Associates, the
corporate services agreement gives us the right to obtain these services from a
third party, and we may do so to the extent that we are able to obtain these
services on more economical terms. We expect that general and administrative
expenses will increase in absolute dollars in the future, but may fluctuate as a
percentage of net revenue, as we expand our operations.
Stock-Based Compensation. In January 1999, five officers of Network
Associates were granted options to purchase 3,420,000 shares of our Class A
common stock. These options originally vested over four years. Since these
officers are not our employees, those options are accounted for at fair market
value. The determination of the total compensation to be recognized in
connection with these grants requires the remeasurement of the fair value of the
options each reporting period until the options are fully vested. Compensation
expense is reflected in our results of operations over the vesting period. We
recorded compensation expense of approximately $1.2 million and $1.6 million for
the three and six months ended June 30, 1999. On September 22, 1999, with the
agreement of the optionholders, we cancelled options for 1,710,000 shares and
amended the remaining options to make them fully vested. As a result of this
change we recorded a charge of approximately $5.6 million, including a charge
for option granted to Network Associates employees in September 1999, during the
three months ended September 30, 1999.
Taxes. Our operations are included in Network Associates' consolidated U.S.
tax returns. No income tax provision has been included in our financial
statements because net losses were incurred throughout the reporting period. We
have entered into a tax sharing agreement with Network Associates effective upon
the consummation of this offering. See "Related Party
Transactions -- Intercompany Agreements" for a more detailed description of the
Network Associates tax sharing agreement.
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<PAGE> 36
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net revenue represented by certain items in our Statement of Operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ----- ----- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
------ ----- ----- ----- ------
Cost of net revenue:
Product.................................... 9.9 5.6 11.6 6.4 12.8
Technology costs........................... 38.2 77.5 47.3 57.0 30.2
License fees............................... -- -- -- -- 10.6
------ ----- ----- ----- ------
Total cost of net revenue............... 48.1 83.1 58.9 63.4 53.6
------ ----- ----- ----- ------
Operating expenses:
Research and development................... 53.2 12.9 42.3 33.2 27.7
Marketing and sales........................ 266.8 58.1 18.3 9.3 87.3
General and administrative................. 64.0 5.6 12.2 13.4 21.7
Stock-based compensation................... -- -- -- -- 45.1
------ ----- ----- ----- ------
Total operating expenses................ 384.0 76.5 72.8 55.9 181.8
------ ----- ----- ----- ------
Loss from operations......................... (332.1) (59.6) (31.7) (19.3) (135.4)
------ ----- ----- ----- ------
Net Loss..................................... (332.1)% (59.6)% (31.7)% (19.3)% (135.4)%
====== ===== ===== ===== ======
</TABLE>
COMPARISON OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER
30, 1999
Net Revenue. Net revenue increased from $4.3 million in the nine months
ended September 30, 1998 to $16.1 million in the nine months ended September 30,
1999. Net revenue increased primarily as a result of increased traffic to our
McAfee Store in connection with the emergence of a number of new harmful
computer viruses in the first half of 1999 and the official launch of our web
site in the second quarter of 1999. The increase in net revenue also reflects
sales of software product licenses and subscriptions related to increased
product offerings as a result of Network Associates' acquisition of CyberMedia
in September 1998.
Cost of Net Revenue. Cost of net revenue increased from $2.7 million in the
nine months ended September 30, 1998 to $8.6 million in the nine months ended
September 30, 1999. The increase was primarily related to the increase in the
cost of products sold through the McAfee Store as sales volumes increased, an
increase in technology costs relating to the substantial investment in our
infrastructure, as well as license fees payable to Network Associates beginning
January 1, 1999. The increase in the total cost of net revenue as a percentage
of net revenue reflects costs incurred for fulfillment services provided by
Beyond.com and license fees payable to Network Associates. Effective May 17,
1999, the arrangement with Beyond.com was restructured, such that Beyond.com
became a reseller rather than a fulfillment agency.
Research and Development. Research and development expenses increased from
$1.4 million in the nine months ended September 30, 1998 to $4.5 million in the
nine months ended September 30, 1999. This increase was primarily due to a
significant increase in investment in research and development headcount and
infrastructure in 1999 as we continued to expand and enhance our product and
service offerings. As a percentage of net revenue, research and development
expenses were 33% in the nine months ended September 30, 1998 and 28% in the
nine months ended September 30, 1999.
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Marketing and Sales. Marketing and sales expenses increased from $396,000
in the nine months ended September 30, 1998 to $14.1 million in the nine months
ended September 30, 1999. This increase was primarily due to a significant
investment in the marketing of our products and services, including advertising
and promotions, as well as development of strategic relationships with a variety
of Internet companies. In June 1999, we began a significant advertising campaign
to build brand awareness, and also increased the number of sales and marketing
personnel. Also, beginning January 1, 1999, we incurred charges from Network
Associates for retail support and customer care of approximately $1.1 million
per quarter. These amounts were not material in prior years. As a percentage of
net revenue, marketing and sales expenses were 9% in the nine months ended
September 30, 1998 and 87% in the six months ended September 30, 1999.
General and Administrative. General and administrative expenses increased
from $573,000 in the nine months ended September 30, 1998 to $3.5 million in the
nine months ended September 30, 1999. This increase was primarily due to the
increase in charges from Network Associates, resulting from our additional
headcount due to the expansion of our operations.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Net Revenue. Net revenue increased from $539,000 in the year ended December
31, 1996 to $2.5 million in the year ended December 31, 1997 and to $6.3 million
in the year ended December 31, 1998. These increases in net revenue were
primarily due to increases in the licensing of anti-virus software products to
new customers.
Cost of Net Revenue. Cost of net revenue increased from $259,000 in the
year ended December 31, 1996 to $2.1 million in the year ended December 31, 1997
and to $3.7 million in the year ended December 31, 1998. The increases in cost
of net revenue were primarily due to increased product sales from year to year,
as well as an increase in technology costs resulting from an increase in
spending on infrastructure, particularly in the second half of 1998 as we
prepared to launch our pilot web site in December 1998.
Research and Development. Research and development expenses increased from
$287,000 in the year ended December 31, 1996 to $326,000 in the year ended
December 31, 1997 and increased to $2.7 million in the year ended December 31,
1998. These increases were primarily due to a significant investment in research
and development headcount and infrastructure in 1998 as we expanded our
operations. As a percentage of net revenue, research and development expenses
were 53% in 1996, 13% in 1997 and 42% in 1998.
Marketing and Sales. Marketing and sales expenses increased from $1.4
million in the year ended December 31, 1996 to $1.5 million in the year ended
December 31, 1997 and decreased to $1.2 million in the year ended December 31,
1998. The decrease from 1997 to 1998 was primarily due to a decrease in
marketing and the significant reduction in marketing and sales headcount. As a
percentage of net revenue, marketing and sales expenses were 267% in 1996, 58%
in 1997 and 18% in 1998.
General and Administrative. General and administrative expenses decreased
from $345,000 in 1996 to $141,000 in 1997 and increased to $767,000 in 1998. The
decrease from 1996 to 1997 was primarily due to a decrease in our headcount
resulting in a lower charge from Network Associates. The increase from 1997 to
1998 was primarily due to an increase in the charge from Network Associates as a
result of a significant increase in headcount resulting from our increased
investment in infrastructure and expansion of operations. As a percentage of net
revenue, general and administrative expenses were 64% in 1996, 6% in 1997 and
12% in 1998.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the seven most recent quarters. In our opinion, this
information has been prepared on the same basis as the audited financial
statements contained in this prospectus and includes all adjustments, consisting
only of normal recurring adjustments, we consider necessary for fair
presentation in accordance with generally accepted accounting principles. This
information should be read in conjunction with our financial statements and the
related notes appearing at the end of this prospectus. Our operating results for
any three-month period are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue.............................. $ 1,096 $ 1,490 $ 1,682 $ 2,024 $ 3,469 $ 5,863 $ 6,763
------- ------- ------- ------- ------- ------- --------
Cost of net revenue:
Product costs.......................... 5 50 217 458 952 829 284
Technology costs....................... 572 710 1,151 542 1,226 2,126 1,508
License fees........................... -- -- -- -- 434 667 606
------- ------- ------- ------- ------- ------- --------
Total cost of net revenue............ 577 760 1,368 1,000 2,612 3,622 2,398
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Research and development............... 292 361 764 1,244 1,558 1,145 1,755
Marketing and sales.................... 17 21 358 756 2,398 5,055 6,608
General and administrative............. 191 150 232 194 350 1,628 1,513
Stock-based compensation............... -- -- -- -- 456 1,170 5,625
------- ------- ------- ------- ------- ------- --------
Total operating expenses............. 500 532 1,354 2,194 4,762 8,998 15,501
------- ------- ------- ------- ------- ------- --------
Income (loss) from operations............ 19 198 (1,040) (1,170) (3,905) (6,757) (11,136)
------- ------- ------- ------- ------- ------- --------
Net income (loss)........................ $ 19 $ 198 $(1,040) $(1,170) $(3,905) $(6,757) $(11,136)
======= ======= ======= ======= ======= ======= ========
Net income (loss) per share, basic and
diluted................................ $ -- $ -- $ -- $ -- $ (.11) $ (.19) $ (.31)
======= ======= ======= ======= ======= ======= ========
Shares used in per share calculation..... -- -- -- -- 36,000 36,000 36,000
</TABLE>
We have experienced growth in net revenue in each quarter since January 1,
1996. Net revenue increased significantly in the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999 largely due to an increase in the licensing
of anti-virus software through the McAfee Store and through e-retail
distributors as well as an increase in our product offerings due to Network
Associates' acquisition of CyberMedia in the quarter ended September 30, 1998.
Cost of net revenue has increased in each quarter except the quarter ended
December 31, 1998 and September 30, 1999 with substantial increases in the
quarters ended March 31, 1999 and June 30, 1999. The increases were primarily
due to an increase in product costs resulting from an increase in net revenue,
and increased costs due to the significant technology infrastructure investment,
as well as license fees paid to Network Associates under our cross license
agreement commencing January 1, 1999. The decrease from the quarter ended
September 30, 1998 to December 31, 1998 was due to the consolidation of
duplicate technology infrastructure and the renegotiation of vendor contracts.
The decrease in the quarter ended September 30, 1999 was primarily due to a
reduction in product costs as a result of Beyond.com becoming a reseller, as
well as a reduction in technology costs.
Operating expenses have also increased in each quarter with substantial
increases in the quarters ended March 31, 1999, June 30, 1999 and September 30,
1999. These increases were primarily due to increased investment in our research
and development efforts and a significant increase in marketing and sales due to
significant spending on advertising and promotions, as well as development of
strategic relationships with several Internet companies.
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Our net revenue and results of operations could fluctuate significantly
quarter-to-quarter and year-to-year. Causes of such fluctuations may include the
conversion of our web site users into paying subscribers and the rate at which
they renew their subscriptions, seasonal purchasing patterns on the Internet,
the number of users of our web site purchasing products offered through our web
site and the mix of products purchased, the amount and timing of our operating
expenses and capital expenditures, the percentage of revenue which is deferred,
and costs related to potential acquisitions.
Significant quarterly fluctuations in products and services sold will cause
significant fluctuations in our cash flows and the cash and cash equivalents,
accounts receivable and deferred net revenue accounts on our balance sheet.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We do not currently hold any derivative instruments and do not engage in
hedging activities. Also, we do not currently hold any variable interest rate
debt or lines of credit, and currently do not enter into any transaction
denominated in a foreign currency. Although our revolving loan agreement with
Network Associates provides for interest based on the one-month LIBOR rate,
there are currently no outstanding borrowings under that agreement. Thus, our
current exposure to interest rate and foreign exchange fluctuations is minimal.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had $2.4 million in cash, with $1.3 million due
from Network Associates related to net cash generated by our operations during
the period from January 1, 1996 through September 30, 1999. In October 1999,
under an asset contribution and receivables settlement agreement, Network
Associates settled the outstanding amount, without interest, in cash. Any
subsequent receivable or payable will be settled in cash on a quarterly basis.
At September 30, 1999, we also had in place an intercompany revolving loan
agreement under which Network Associates has agreed to make up to $30 million
available to us. The interest rate under this revolving loan is equal to the
one-month LIBOR rate which fluctuates daily and was 5.4% on September 30, 1999.
As of September 30, 1999, no loans were outstanding under this line of credit.
Beginning 30 days after the completion of this offering, Network Associates may
elect to require us to repay all outstanding principal and interest under the
agreement. If Network Associates does not require repayment prior to that time,
the revolving loan will be repayable in full on January 1, 2001, the termination
date of the agreement. As of September 30, 1999, there were no amounts
outstanding under the revolving loan agreement.
Net cash used in operating activities was $674,000 in the year ended
December 31, 1996, consisting primarily of net loss before depreciation,
partially offset by an increase in deferred net revenue.
Net cash provided by operating activities was $399,000 in the year ended
December 31, 1997 and $1.5 million in the year ended December 31, 1998,
consisting primarily of increases in deferred net revenue partially offset by
net loss before depreciation.
Net cash provided by operating activities was $268,000 in the nine months
ended September 30, 1998, consisting primarily of an increase in deferred net
revenue. Net cash provided by operating activities was $3.8 million in the nine
months ended September 30, 1999, consisting primarily of increases in deferred
net revenue and accounts payable and accrued liabilities partially offset by net
loss before depreciation and stock-based compensation.
Net cash used in investing activities was $1.3 million in the nine months
ended September 30, 1999, relating to purchases of fixed assets.
Net cash (used in) provided by financing activities consists principally of
the change in the amount receivable (from) to Network Associates.
We believe that cash due from Network Associates, the net proceeds from
this offering and anticipated cash flow from operations will be sufficient to
fund our working capital and capital expenditure requirements for at least the
next 12 months, although this may not be sufficient to fund our
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<PAGE> 40
working capital beyond the next 24 months. However, we may seek to raise
additional capital during that period. We cannot assure you that we will not
require additional funds during the next 12 months. Even if these additional
funds are not required, we may decide to seek additional equity or debt
financing. There can be no assurance that such financing will be available on
acceptable terms, if at all, or that such financing will not be dilutive to our
stockholders. Without the proceeds from this offering, we will rely on our
revolving loan agreement with Network Associates that would likely be sufficient
to meet our working capital requirements for the next 12 months.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded
to accept, store, or report only two digit entries in date code fields.
Beginning in the year 2000, these date code fields will need to be enabled to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies, including us and our vendors,
will need to be upgraded to comply with these year 2000 requirements. We could
be impacted by year 2000 issues occurring in our own infrastructure or the
infrastructure of our suppliers, vendors and financial service organizations.
These year 2000 issues could include information errors and significant
information system failures. Any disruption in our operations as a result of
year 2000 issues could have a material adverse effect on our business, results
of operations and financial conditions.
OUR STATE OF READINESS
Overview. To address year 2000 readiness, we have, as part of the services
agreement, contracted with Network Associates to provide a corporate program to
coordinate efforts across all business functions and geographic areas, including
addressing risks associated with business partners and other third-party
relationships. The agreed upon year 2000 readiness program is divided into four
program areas:
- Commercial Product Compliance;
- Internal Systems and Technology Compliance;
- Supplier and Business Partner Compliance; and
- Facilities and Safety Compliance.
For each of these areas, the program specifies a four-step approach that
includes:
- Awareness -- ownership and task assignment;
- Inventory -- listing of all items to be assessed;
- Assessment -- prioritizing inventoried items, assessing compliance,
planning corrective actions, making initial contingency plans; and
- Corrective Action -- implementing corrective actions, verifying
implementation, and finalizing contingency plans.
Network Associates has substantially completed the assessment phase for all four
areas and is targeting completion of corrective actions by the end of the third
quarter of 1999. However, there can be no assurance that Network Associates will
be able to complete all four phases in a timely manner, if at all, or that the
process will adequately address year 2000 issues.
Commercial Product Compliance. Our currently licensed products, are
designed to be "year 2000 compliant," meaning that our licensed products are
expected to continue to operate substantially in accordance with published
documentation on and after January 1, 2000. Network Associates uses the British
Standards Institute's DISC PD-2000 as the standard for assessing year 2000
compliance. The
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<PAGE> 41
British Standards Institute Definition DISC, which means Delivering Information
Systems to Customers, PD-2000 is the British Standards Institute document, which
addresses year 2000 compliance, providing an objective definition of year 2000
compliance and the requirements that must be satisfied in equipment and
products, which use dates and times. Network Associates has evaluated and tested
all our licensed products for year 2000 compliance and believes that all
products released since November 1998 or currently under development are year
2000 compliant.
Internal Systems and Technology Compliance. As part of our services
agreement with Network Associates, we rely on Network Associates for our core IT
systems, with the exception of our web IT infrastructure. Network Associates has
implemented the R/3 system from SAP. The R/3 system from SAP is a version of the
industry standard SAP enterprise resource planning system that we have
implemented to more fully automate our business processes and is certified by
SAP as year 2000 compliant. The implementation was completed in late 1997 and
early 1998 and included most of the major functional areas of our business. A
major upgrade of the R/3 installation was completed in 1999. Our core web IT
infrastructure is substantially Microsoft-based and we have received
certificates of year 2000 compliance from Microsoft. We have also obtained
compliance certificates from all other significant third party software vendors.
Our hardware infrastructure is based on Compaq, Cisco and HP systems that are
less than two years old and which have also been certified to be year 2000
compliant.
Our other information technology systems include telephone switches and
equipment and software, network, desktop and server hardware and related
operating systems and application software and electronic data interchange
systems. Network Associates has substantially completed an assessment of our
systems and we have replaced, upgraded, or planned to replace or upgrade, those
systems that were not year 2000 compliant. All business critical systems are
currently year 2000 compliant using the same DISC PD-2000 standard applied to
the Network Associates product line. All other system compliance projects have
been substantially completed as of September 30, 1999. Testing and minor
compliance projects will continue into the fourth quarter of 1999.
Supplier and Business Partner Compliance. Our suppliers and business
partners include the sources of the equipment and supplies we use in the conduct
of our business, as well as our financial institutions, and other service
providers. The following steps were taken to determine their year 2000
compliance:
- Network Associates began its vendor, facilities and business partners'
year 2000 validation program in 1998.
- All were assessed to determine their criticality level relating to
Network Associates' ongoing business. Each vendor was classed as
critical, medium or low importance.
- All of these organizations received and were asked to complete a Y2K
readiness questionnaire. Approximately 60% responded in writing,
including over 90% of critical vendors.
- All of our critical vendors, or medium importance vendors of highest
priority, regardless of their answers to the questionnaire, were the
subjects of in-depth audits to determine in detail their ability to
support Network Associates' and our business needs without date-related
interruptions. Every vendor that showed significant flaws or shortcomings
in year 2000 preparedness became the subject of an intensive set of
meetings and tests to ensure each of these organizations brought their
programs up to satisfactory standards. The few organizations that would
or could not do so were replaced with compliant alternate vendors. Our
critical vendors are now rated as year 2000 compliant by Network
Associates' Y2K organization.
- All compliance information from these organizations is in writing and on
file at the Network Associates Year 2000 office.
- Contingency plans have been developed to ensure business operations can
continue and customer support will be available throughout the year 2000
rollover period.
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Facilities and Safety Compliance. Our facilities and safety technology
systems include building systems such as heating, cooling, and air purification,
fire and sprinkler systems, security systems and elevators. Our commitment is to
minimize the business risks attributable to year 2000 problems in these systems.
Network Associates has actively worked with each facilities and safety systems
vendor to identify and resolve any year 2000 compliance issues and contingency
plans have been formulated for all critical sites, regardless of whether they
have been shown to be compliant or not. Included in these contingency plans are
backup web sites as well as backup organizations, such as call centers. We have
substantially completed the repair or replacement of non-compliant items that
affect our product development, distribution and support operations. All
landlords and facility and safety system providers were included in the year
2000 compliance assessment.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES
Historic or period expenses incurred in connection with the resolution of
year 2000 issues to date have consisted principally of internal labor expenses
of compliance planning and assessment. To date, these expenses have not been
significant due to the relative newness of our systems and equipment. During the
remainder of 1999, we expect to incur an immaterial amount of compliance-related
expenditures. We do not expect expenditures in future years related to year 2000
compliance to be significant. Network Associates incurred a total of
approximately $600,000 for the year ended December 31, 1998 and expects to incur
an estimated $4.5 million for the year ended December 31, 1999, a portion of
which will be allocated to us under the services agreement based on the
percentage of employee headcount that McAfee.com represents for the Network
Associates' overall company-wide employee headcount. In the year ended December
31, 1998, we incurred approximately $567,000 for overall information technology
charges, which includes this Y2K compliance cost. In the nine months ended
September 30, 1999, we incurred approximately $857,000 for overall information
technology charges, which includes this Y2K compliance cost.
THE RISKS OF OUR YEAR 2000 ISSUES
Our expectations as to our efforts to ensure and achieve year 2000
compliance are forward-looking statements. Actual results may vary materially as
a result of a number of risks and uncertainties, including the following:
- Network Associates may not successfully complete our year 2000
contingency program.
- We may be unable to successfully and timely modify non-year 2000
compliant products, services and systems.
- Our contingency plans may not address all year 2000 risks that may
actually arise.
- Our contingency plans will only be effective if timely and properly
implemented.
- We do not have, and do not anticipate obtaining, any insurance policy
providing material coverage for potential injuries or damages related to
or caused by year 2000 issues.
- Actual expenses of our year 2000 compliance efforts may exceed our
estimates.
Network Associates has initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by us to identify and, to the extent possible, to resolve issues
involving the year 2000 problem. Neither Network Associates nor we control the
actions of these third party suppliers. These suppliers may fail to resolve any
or all year 2000 problems with their respective systems before the occurrence of
a material disruption to our business or any of their other customers' business.
Also, the computer systems necessary to maintain the viability of the Internet
or any of the web sites that direct customers to our online store may not be
year 2000 compliant. Computers used by customers to access our online store may
not be year 2000 compliant, delaying customers'
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product purchases. Any of the above risks could have a material adverse effect
on our business, results of operations and financial condition.
If the purchasing patterns of our current or potential customers are
significantly affected by year 2000 concerns, we could experience a significant
reduction in our net revenue and related growth.
Lastly, it has been widely predicted that there will be a significant
amount of litigation surrounding year 2000 issues. It is uncertain whether, or
to what extent, we may be affected by such litigation. Because our products are
able to operate in the year 2000 and beyond, we do not anticipate exposure to
material product defect or similar litigation. Any such litigation, however,
could have a material adverse effect on our business, results of operations and
financial condition. We also may not receive any assistance, damages or other
relief as a result of our initiation of any litigation related to the year 2000
issue. Our inability to implement our year 2000 plans or to otherwise address
year 2000 issues in a timely manner could have directly or indirectly a material
adverse effect on our business, results of operations and financial condition.
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BUSINESS
OVERVIEW
We provide online PC management products and services for consumers.
Through our web site at www.McAfee.com, we allow consumers to secure, repair,
update and upgrade their PCs. We believe we are among the first consumer
applications service providers, or ASPs. As an ASP, we generate revenue by
encouraging PC users to subscribe to our service which gives them online access
to version-less PC security and management software applications that we host on
our servers. Under this ASP model, consumers "rent versus buy" our software
applications. Our applications allow our subscribers to manage their PCs by
checking for and eliminating viruses, optimizing PC system performance,
repairing problems, updating outdated software and determining Y2K compliance.
We also offer relevant content and contextual e-commerce services that enable
users to maximize their PC investment. We recently began charging subscription
fees for our McAfee Clinic service in September 1999. To date, over six million
PC users have registered on our web site from over 230 countries and
territories, and we have over 100,000 paid subscribers as of November 2, 1999.
In September 1999, the McAfee.com sites, including the Network Associates web
site, were recognized by Media Metrix as having one of the top 50 U.S. web
audience ratings. This Media Metrix top 50 list is based on the number of
unduplicated audience reach, also known as unique visitors.
INDUSTRY BACKGROUND
GROWTH OF ONLINE COMPUTING OUTSIDE OF THE OFFICE
Historically, consumers used personal computers, or PCs, at home for
stand-alone functions such as word processing, game playing and home financial
management. Today, however, consumers are increasingly motivated to purchase PCs
to access the Internet and use e-mail from home. According to Jupiter
Communications, approximately 63 million U.S. households will be online by the
year 2002, representing 59% of all U.S. households. The growth in households
online represents one of the fastest-growing segments of Internet use.
International Data Corporation, or IDC, estimates that the number of overall
Internet users worldwide will grow from approximately 69 million in 1997 to
approximately 502 million in 2003. Tremendous consumer demand for Internet
access, combined with faster Internet connectivity and the emergence of PCs
priced below $1,000, has fueled growth in consumer PC ownership. IDC estimates
that there are currently approximately 71 million PCs in use by U.S. households.
In addition to PCs, a number of other consumer focused Internet access devices
such as pagers, handheld devices and wireless Internet-enabled phones are
quickly emerging. IDC estimates that there were 5.8 million smart handheld
devices in use in 1999. IDC projects that by the year 2003, there will be nearly
19 million smart handheld devices shipped, and by this time, these devices will
be outselling PCs.
Increasing use of the Internet has transformed the home PC from merely a
stand-alone processor into the primary Internet access device for consumers
engaged in information retrieval, communication and e-commerce. Consumers are
increasingly using Internet applications such as world wide web access, e-mail,
online bill payment, personal financial management, online shopping and trading,
calendar scheduling, and contact management. The proliferation of these
applications has motivated consumers to increasingly depend on their PCs to
reliably access, store and manage a growing amount of valuable and highly
sensitive data. We believe many of these applications have become essential to
PC users, and any PC-related failure could lead to hours of lost time and
significant financial loss. The combination of greater access to networks such
as the Internet and increasingly sophisticated applications has made both PCs
and PC management more complex. Moreover, as the number of PCs in use increases
and price points decline, we believe the number of first-time buyers, who are
often less technologically sophisticated than prior generations of PC users, is
increasing.
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CURRENT MANAGEMENT OF PCS AND NETWORKS
As the commercial value of activities conducted on the Internet and other
computer networks grows exponentially, it becomes increasingly important to
manage and protect these networks, the PCs in the networks and the data residing
on them. Fully-staffed corporate IT departments are charged with numerous
mission-critical tasks that keep their systems fully operational and secure.
Consumers, in contrast, are left on their own to manage and protect their
PCs. They generally lack the knowledge and sophistication necessary to properly
secure and manage their PCs and may be overwhelmed by the variety and complexity
of the products and services that are marketed to help them perform these tasks.
PC users are responsible for numerous decisions and tasks regarding the
maintenance and health of their PCs, which include:
Virus Protection. Computer viruses are typically spread via e-mail and file
downloads over Internet-connected PCs. To date, there are over 45,000 known
computer viruses worldwide, with numerous new and altered viruses discovered
daily. Recent computer virus outbreaks such as Melissa, Chernobyl and
Explorer.zip represent a new class of virus that uses the Internet to infect
hundreds of thousands of computers in a matter of hours. We believe that new and
modified strains of computer viruses will continue to be developed, requiring
rapid responses and continual updates of existing anti-virus protections. As a
growing proportion of PCs are connected to the Internet and other networks,
vulnerability to virus infection increases dramatically because users are better
able to exchange information and files, including those infected with viruses,
through use of the Internet. Consumers are especially susceptible to computer
viruses because they have little protection other than what they purchase
themselves.
Internet Security. The rapid growth and high dollar volume of e-commerce,
forecasted by IDC to reach $1.3 trillion worldwide for 2003, and corresponding
valuable data traffic makes network break-ins potentially more lucrative for
hackers and more damaging for consumers. The storage of vital information on
PCs, such as confidential files, credit card information and financial data,
increases the magnitude of possible damage from network intruders. New methods
of intrusion, such as penetrating security loopholes in popular Internet
browsers, allow remote hackers to take control of a consumer's PC and steal,
alter or delete files, confidential documents, and applications without their
knowledge. The "always on" availability of Internet access services such as
cable modem and digital subscriber line, or DSL, services increases the time
during which home PCs are vulnerable to attacks. In general, consumers do not
have the adequate tools to protect their PCs against intrusion.
PC Management. Business PC users generally receive support from corporate
IT departments in diagnosing and configuring computers to their optimal
settings. This high level of technical support within the organization helps
business users focus on being productive instead of trying to make their PCs
work. Consumers, on the other hand, must resort to reading complex technical
documentation, visiting online newsgroups or calling the PC or operating system
vendor for technical support. The consumer's burden is further complicated by
increasingly frequent releases of software upgrades, updates, fixes and patches.
Software Management. Corporate IT departments and consumers both face a
variety of software management issues. In the corporate environment, the
distribution of software version updates occurs regularly as large corporate
customers are notified of major version changes and releases by software
vendors. In this corporate environment, software programs exist to remove
unnecessary programs and files to optimize the efficiency of file and data
management on a company-wide basis. A number of companies have focused on the
problem of ready access to version updates of software for corporate customers.
Home PC users, however, often are left to determine on their own, often with
incomplete information, their need for and the availability of version upgrades
of their software programs. Compounding the problem, new software releases
frequently contain "bugs" that may limit the
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functionality or security of the software. In general, software patches and
corrections are effectively disseminated to large corporate customers, but often
are not communicated directly to home PC users.
Year 2000 Compliance. Date-sensitive computer systems and programs may fail
to recognize or correctly process the year 2000 as the century date change
approaches or occurs. While corporations are highly focused on the impact of the
year 2000, or Y2K, problem, and have spent significant resources to address this
problem, consumers generally do not know whether the Y2K problem will affect
their home PC, or whom to trust for help in diagnosing and fixing potential Y2K
problems on their home PC.
Computer-Related Purchases. Corporate hardware and software purchasing
decisions are made by trained IT staffs with expertise in their company's
technology needs and knowledge of the full array of available computing
solutions. Resellers offer corporate buyers assistance in technical education
and documentation, system interoperability, price-to-performance tradeoffs, and
system roadmaps for upgrades and purchases of both hardware and software.
Consumers, on the other hand, are solely responsible for decision making
regarding their home computing needs.
While corporate IT departments monitor and guard against these PC security
and management problems, home PC users often do not realize that they have a
computer problem until it is too late. Trouble may, for example, come
unexpectedly in the form of a virus-infected e-mail or download from the
Internet. Once affected, consumers may not know or understand the nature or
severity of the problem or know how to find a solution. Consumers have typically
sought assistance through retail stores, customer support lines provided by PC
and software vendors or their own research in computing magazines.
Problems with support through retail computer stores include the following:
- Stores are often distant, crowded, and understaffed, and their staff may
be insufficiently knowledgeable about the consumer's problem or possible
solutions.
- If retail assistance is found, consumers must choose from a wide variety
of available products, may not be able to appropriately articulate their
exact PC problem or may not be presented the best solution because the
retailer has failed to stock the most appropriate item.
- Potential retail product solutions may take the form of several products
that must be used together to have the greatest impact, and the ordinary
consumer or store employee may not fully understand how best to combine
these products.
- Software in the retail channel, such as virus protection, is often
out-of-date by the time it reaches the shelves; for example, new viruses
may have already emerged in the time it takes the anti-virus software to
be developed, burned onto CDs, placed in shrink-wrapped packaging and
shipped to the store, making the virus protection obsolete.
Consumers relying on the limited customer support by software vendors or PC
manufacturers also face problems. First, they must determine the appropriate
party to call. Once they locate the appropriate call center, they often find it
to be inadequate and are frustrated by long hold times on the phone,
understaffed customer support personnel and unhelpful help desks.
As PCs and related software applications have become more complex, we
believe vendors have been providing less customer support to compensate for
product price declines, and as the Internet has increased the vulnerability of
PCs, consumers have found themselves without an adequate PC security and
management solution.
THE MCAFEE.COM SOLUTION
McAfee.com is the place for your PC on the Internet. McAfee.com allows
consumers to secure, manage, update and upgrade their PCs online. We believe
that consumers first come to our web site
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either to protect their PC as a precautionary matter or for emergency assistance
fixing their PC when faced with a serious problem. Our web site offers the
following critical PC security and management products and services:
Virus Protection. Our online anti-virus service is designed to scan and
clean PCs as quickly and efficiently as comparable traditional software
installed on the PC, and can recover and repair damaged computer files that have
become infected with a virus. This service provides consumers with the latest
virus protection and can be accessed from any PC at any time. PC users can
detect and clean viruses on their computers by using their browsers to access
our web site.
Internet Security. We provide consumer PC users with tools to protect their
privacy and security while on the Internet. For example, our GuardDog software
monitors programs and applets for suspicious behavior, protects sensitive
information, such as e-mails, passwords and personal files, and performs a
complete security audit on the PC user's system.
Software Management. We assist consumers in locating and downloading new
version releases, upgrades, plug-ins, patches and fixes for software
applications and the Windows operating system that they use on their home PCs.
PC Management. We provide consumers an online service that allows them to
optimize their PCs online. This online service provides consumers with the
ability to:
- remove and clean unnecessary files from their hard drives;
- defragment their hard drives, which means to reorganize the data on their
hard drives to make data more rapidly accessible; and
- display a visual read-out of their system configuration.
Year 2000 Compliance. We provide a comprehensive online year 2000 scan
service for consumers to check their home PCs for Y2K compliance. This online
service checks the PC hardware, software applications and application data files
for Y2K compliance. If Y2K problems are identified, our solutions are designed
to guide consumers to services to remedy the situation. This service also
provides a comprehensive list of Y2K web sites for major software, hardware and
peripheral manufacturers.
Computer-Related Purchases. We provide educational and informational
services to assist the consumer in making purchases of computer hardware,
software, peripherals and other accessories. We provide a highly contextual
service that recommends books and related software based on the user's PC
configuration, attached peripherals and software. We also provide an online
comparative shopping service that allows consumers to find the best deals on
equipment, peripherals and accessories based on user-selected configuration and
price points.
Consumers who visit our web site for these security and management
solutions can learn about other PC problems and related products and services
that we offer. Our web site contains a number of centers which provide
diagnostic services, PC-related products and other services for home PC users.
For example, a PC user who comes to our site with a particular anti-virus
problem may then decide to check for Y2K issues or clean up the PC's hard drive.
We believe that our broad product and service offerings provide consumers
the following benefits:
One-Stop, Integrated Solution. McAfee.com is a one-stop destination for
consumer PC security and management needs. Our web site provides a suite of
online products and services personalized for the PC user based on the user's PC
configuration, attached peripherals and software. Our applications services
allow consumers to secure, repair, update and upgrade their PCs by visiting our
McAfee Clinic, Anti-Virus Center, PC Checkup Center, Y2K Center, Shopping
Center, Download Center and Support Center.
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Ease of Use. Our web site is designed to be easy to use and helpful for PC
users of all skill levels, from novice to expert. With limited user involvement,
we can diagnose a PC over the Internet for potential security and management
problems and provide an online, personalized solution to a PC user's problem
with the ease of a mouse click. We offer a user-friendly Internet browser
interface and constantly seek to improve this interface to make it easier for
consumers to navigate and use our web site.
Information and Education. We provide a wealth of PC-related information
and educational materials for access and use by consumers on our web site. We
offer, among other services:
- a comprehensive, searchable library of viruses with information about
their characteristics, symptoms and severity;
- McAfee Dispatch, an electronic newsletter that provides information on
new services, products and viruses; and
- user-specific upgrade recommendations and educational books on computer
hardware, software, peripherals and accessories.
We also offer a virus "early warning" e-mail service. This service rapidly
alerts consumers to new viruses and provides appropriate directions to consumers
to safeguard their PCs. Once a virus is identified, we work with AVERT Labs, a
research division of Network Associates, to rapidly deliver updated virus
detection and cleaning services to our customers.
Applications Hosted on Our Servers Rather than the Consumer's PC. In
addition to selling downloadable versions of software that reside locally on a
customer's PC, we host software applications on our own servers. Our hosted
software applications are designed to run over the Internet at speeds comparable
to those obtained if the application were entirely on the user's PC. As an
applications service provider, or ASP, we allow users to "rent versus buy"
software. This allows consumers to realize several unique benefits:
- Our hosted software applications are "version-less" or self-updating, so
consumers running our hosted software service can be assured that they
are using the most recent version.
- Our services do not involve large downloads of large application files
over the Internet, which can take an inordinate amount of
time -- reducing PC storage space requirements and avoiding wait time
from large downloads.
- The overall cost to subscribe to our software service is expected to be
significantly less than if the consumer were to buy software applications
and subsequent new version releases.
THE MCAFEE.COM STRATEGY
Our objective is to become the leading and trusted online destination where
consumers secure, repair, update and upgrade their PCs and other Internet access
devices. The key elements of our strategy include:
Strengthen the McAfee.com Brand. We plan to continue aggressively building
awareness among consumer PC users for the McAfee.com brand name. Our aim is to
enhance McAfee.com's position as an Internet destination for all consumer
PC-related products, services and information. To achieve this objective, we
intend to expand our marketing efforts with advertising campaigns and other
promotional activities and to offer a full suite of trusted products, services
and information to consumers.
Drive Adoption of Applications Service Provider Model. As an ASP, we offer
customers the ability to run applications online and "rent versus buy" those
applications. Prior to September 2, 1999, we offered our online hosted products
and services for free. While we will continue to offer a significant amount of
free services on our web site, some of the more powerful products and services
are now only available to our paid subscribers. To drive adoption of our ASP
model, in addition to offering other free
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services, we offer 14-day free trial subscriptions to McAfee Clinic. We are
targeting the following groups of McAfee users for transition to paid online
subscriber status:
- our existing base of over 1.1 million trial subscribers to McAfee Clinic,
who until recently have used our online services for free;
- our existing base of over 6 million registered McAfee.com users, who have
visited our web site but have yet to subscribe to our online services;
and
- the large number of existing McAfee software users, which we estimate at
over 30 million.
Attract New Users to Our Web Site. Initially our user base grew by word of
mouth and positive press articles. In July 1999, we launched our first
advertising campaign, using a combination of television, radio and Internet
advertising. We plan to continue these marketing efforts to attract new users to
our web site and increase the adoption of our products and services. We also
will continue to pursue strategic relationships with content providers, other
web sites, PC manufacturers and other Internet access providers.
Continue Technology Development. We are currently a provider of hosted,
version-less PC security and management software delivered over the Internet.
Our products and services and delivery network are designed to apply our leading
edge technology to solve complex PC security and management problems
conveniently. We intend to leverage our technology as a consumer ASP to create
loyal and satisfied customers who will both subscribe to our products and
services and return frequently for repeat purchases. To attract new subscribers,
we intend to continuously focus on the ease of use of our products and services,
expand our products and services and upgrade our network.
Expand Our International Presence. We have a global customer base with
registered users from over 230 countries and territories around the world. With
international PC sales and Internet connectivity growing more rapidly than in
the U.S., we plan to focus resources on expanding our current international
presence in Europe, Japan and other countries.
Expand Products and Services Beyond the PC. We plan to develop security and
management products and services for newly emerging Internet access devices,
such as handheld devices, wireless Internet-enabled phones and digital music
devices. As "thin client" devices are increasingly used by consumers to access
the Internet, we will concentrate on developing value-added products and
services tailored to the unique needs of these platforms.
PRODUCTS AND SERVICES
CONSUMER PRODUCTS AND SERVICES
Consumers who visit our McAfee.com web site find a comprehensive one-stop
destination for their PC security and management needs. We have organized our
web site around seven centers to make it easy for consumers to access our
products and services and to enhance their online experience. Consumers who come
to McAfee.com see a home page that highlights our seven product and service
centers which provide an integrated solution that enables them to secure,
repair, update and upgrade their PCs. We encourage consumers to become paid
subscribers to our main product, McAfee Clinic, which gives them access to all
the centers on our web site. These centers consist of the McAfee Clinic,
Anti-Virus Center, Y2K Center, PC Checkup Center, Shopping Center, Download
Center and Support Center. Our web site also provides consumers with information
regarding PC security and management issues.
Our goal is to provide the consumer with a comprehensive set of service
offerings through our various centers, including:
- applications that perform PC security and management services, such as
the VirusScan Online and ActiveShield programs found in our McAfee Clinic
and Anti-Virus Center, all of which can be run using our easy-to-use web
browser interface;
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- content that provides consumers with information regarding PC security
and management issues, such as the Virus Information Library found in our
Anti-Virus Center and the Y2K Resource Center found in our Y2K Center;
and
- contextual e-commerce services, such as the PC Book Finder and Software
Finder, that consumers can currently access through our Shopping Center.
These contextual services provide users with personalized purchasing
recommendations tailored to their computing needs. We are planning future
deployments that will be designed to allow this technology to operate
without any prompting by the user across our web site. For example, a
consumer using our PC Performance Optimizer may receive recommendations
for compatible product upgrades and accessories based on the user's PC
configuration, without any prompting by the user.
McAfee Clinic. McAfee Clinic is the main center where consumers can access
all of our hosted online application services in one location. We believe this
approach is beneficial for consumers because we host requested applications on
our servers, thus eliminating the need for consumers to take the time and disk
space required to download large applications on to their PC. To build consumer
awareness we initially offered our McAfee Clinic products and services for free.
In September 1999, we began charging a subscription-based fee for the McAfee
Clinic. For an annual subscription fee, a consumer gains unlimited access to all
of the McAfee Clinic services at any time, including each center on our web
site, which currently is seven centers. The current list price for an annual
subscription to McAfee Clinic is $49.95. We initially introduced McAfee Clinic
on a paid subscriber basis using promotional subscription fees of $19.95 and
$29.95 and from time to time we may offer similar promotional fees. Our McAfee
Clinic services are continuously updated, providing consumers with the most
recent software versions over the Internet. The McAfee Clinic hosted application
services provide the consumer with critical PC security and management services
at a total cost designed to be lower than if the consumer purchased each of the
applications and their subsequent new version releases in a traditional format.
Though our McAfee Clinic services utilize complex proprietary technology, they
are easy for the consumer to use. Our McAfee Clinic services consist of:
- VirusScan Online. Allows the user to scan hardware and software systems
and identify and eliminate viruses online. This service provides
consumers with a convenient, up-to-date and simple method for protecting
their PCs from viruses.
- Rescue Disk. Allows the user to create a rescue or emergency diskette
online. The user can then use this diskette in the future to start-up and
clean a PC that has been disabled by viruses.
- ActiveShield. Provides PC users with real-time, continuous, offline and
online virus protection. ActiveShield subscribers are also provided with
notices from our virus "early warning" system, which alert them to new
and rapidly breaking virus threats. These subscribers also receive our
Internet-based updating service, which automatically accesses the
McAfee.com web site when the subscriber is online, allowing subscribers
to secure the latest version of ActiveShield.
- Software Update Finder. Automatically identifies and recommends critical
software updates, fixes and patches based on the configuration of the
user's PC. The service supports more than 4,000 different titles and
updates and covers a large number of applications, games and utilities
found on a user's PC, including the most commonly used applications. In
an effort to provide user satisfaction and peace-of-mind, we pre-test
updates and applications for errors, viruses and other potential problems
before including them in our Update Finder service.
- QuickClean. Eliminates clutter from the PC's hard drive and creates
additional disk space for the user. This service scans the user's hard
drive to identify and delete unnecessary files created while the user was
browsing the web, temporary files created by applications and unnecessary
registry entries.
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- Performance Optimizer. Helps the user optimize PC performance by
automatically adjusting critical configuration settings for the PC's file
system, hard drive, CD-ROM drives and graphics devices.
Anti-Virus Center. Our Anti-Virus Center integrates information regarding
viruses and their characteristics and provides consumers with a link to the
services found in our McAfee Clinic. In addition to VirusScan Online, Rescue
Disk and ActiveShield, which are found in our McAfee Clinic, our Anti-Virus
Center includes:
- Virus Information Library. Provides consumers with an easily searchable
database that contains information on over 45,000 known computer viruses,
including their characteristics and detailed remedial steps, as well as
information regarding known virus hoaxes.
- Updates of VirusScan. Provides consumers with the latest version of
VirusScan.
Other services in the Anti-Virus Center include a virus calendar that
provides information on expected trigger dates for various viruses, a virus
"early warning" e-mail service, and a visual virus risk indicator that provides
users with details regarding the severity of particular viruses.
Y2K Center. Our Y2K Center provides a critical set of scan services that
allows consumers to check their home PCs for year 2000 compliance and locate
information on any necessary remedial actions. The Y2K Center includes:
- Hardware Analyzer. Checks to see if the PC's BIOS is year 2000 compliant.
This service runs a series of date tests on the BIOS and proceeds to fix
the BIOS if a problem is detected.
- Software Analyzer. Checks to see if the applications installed on the
user's PC are year 2000 compliant. Non-compliant applications are
highlighted and the user is provided with appropriate remedial
information, such as links to affected vendors' Y2K web sites.
- Database & Spreadsheet Analyzer. Checks to see if all the user's
application data files are year 2000 compliant. Non-compliant data files
are detected and the user is provided with appropriate remedial
information.
- Y2K Resource Center. A comprehensive database of the Y2K sites of the
leading computer hardware, software and content companies on the web.
This service provides a single destination for PC users to find, access
and understand year 2000 compliance information for all the components on
their PC.
Other services in the Y2K Center include information on potential Y2K
viruses and a Y2K Survival Kit, which provides users with a Windows version of
all the services available on the site.
PC CheckUp Center. Our PC CheckUp Center provides consumers with services
and information to help them configure and optimize their PCs online and a link
to the services offered through our McAfee Clinic. The PC CheckUp Center
consists of:
- System Information Reporter. Provides a detailed report regarding the
configuration of the user's PC. The report can then be used to
troubleshoot the PC or alter its configuration.
- Windows Advisor. An online help desk providing answers to frequently
asked questions and problems experienced by Windows users. Windows
Advisor uses a simple question and answer format to provide the user with
a detailed step-by-step approach to solving a Windows problem.
Shopping Center. The Shopping Center is a destination for consumers looking
for a source to purchase hardware, software, peripherals and accessories on the
Internet. At the Shopping Center, a
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customer can shop for the best prices on PC peripherals and accessories and find
and purchase related software and books. The Shopping Center consists of:
- The McAfee Store. Provides consumers with a source for all McAfee branded
products, including VirusScan, McAfee Office and other McAfee utilities.
- The McAfee Comparative Shopping System. Provides users with a service to
help them to learn about and shop for PC peripherals. Developed in
partnership with Cadabra, the comparative shopping service allows the
user to enter the features, price range and qualities of the product the
user is shopping for, generates a list of items tailored to these
characteristics and then assists the user in locating online vendors that
offer the most attractive prices for the product.
- The McAfee Book Store. A source for technical and "how-to" books about PC
hardware, software applications and operating systems, developed in
partnership with fatbrain.com.
- The Software Store. Provides consumers with a wide variety of business,
game and personal software in partnership with Beyond.com. The store
provides users with an extensive one-stop shopping destination for PC
software products.
- The McAfee Software Finder. A service that provides users with
recommended software purchases based on the user's PC configuration,
attached peripherals and software.
- The McAfee Book Finder. A service based on our contextual e-commerce
technologies. This service identifies the user's PC configuration,
attached peripherals and software and then provides the user with
information regarding relevant technical books and training for the user
to purchase.
Download Center. The Download Center provides users with an array of free
evaluation software. At the Download Center, users can, for a limited trial
period, download fully-functional versions of a number of McAfee products. To
access these evaluation software titles, users are required only to register
their names and e-mail addresses with us. The Download Center offers the latest
virus signature files to all users, while subscribers can use the Download
Center to upgrade their applications to the latest versions. The Download Center
is also a destination where users can obtain popular browser plug-ins, such as
RealPlayer and Adobe Acrobat Reader.
Support Center. The Support Center provides our customers with all the
necessary services to register McAfee.com products, receive online product
support, communicate with us and provide feedback on our web site and services.
Services in the Support Center include:
- Online Technical Support Services. Includes a database of answers to
frequently asked questions, contact information for online and phone
support and other support related services.
- Customer Care Services. Allows us to address questions regarding
customers' billing and other transactional issues. Customers can use this
service to request refunds, rebates and product returns.
- Software Registration Services. Allows customers to register their
McAfee.com software, enabling us to track and manage update and upgrade
commitments in connection with our license agreements.
- Feedback Services. Provides customers with an online mechanism to give us
feedback regarding our products and services. Information from customers
is directly routed to the appropriate departments for quick analysis and
corrective action.
- Manual Downloads. Allows our customers to download free electronic
documentation for all our products.
Oil Change. In October 1998 we updated Oil Change which was acquired by
Network Associates in its purchase of CyberMedia, and introduced it as our
initial hosted application. Oil Change allows
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consumers to update and upgrade their computer software on their computer online
without having to use an Internet browser. As part of our recent redesign of the
McAfee.com web site, we separated the various elements of Oil Change to make it
easier and more intuitive for subscribers to use and find them. Oil Change
subscribers can now utilize:
- the Software Update Finder in our PC Checkup Center to list their
installed software and find the latest software updates to download;
- the Software Finder in our Shopping Center to find a wide range of
software, upgrades and related products; and
- PC Book Finder in our Shopping Center to find and purchase
computer-related books.
Network Associates sells subscriptions to Oil Change through its sale of "shrink
wrapped" versions in non-online channels. The renewal process for Oil Change
sold by both Network Associates and McAfee.com is hosted by McAfee.com. We are
attempting to convert current Oil Change subscribers, including those who
purchased from Network Associates, into McAfee Clinic subscribers largely
through use of targeted promotional efforts including e-mails.
ADVERTISING SERVICES
Our advertising services include banner advertising and sponsorships and
our planned contextual advertising. We use DoubleClick to sell banner
advertisements on our web site. Sponsorships allow a company to sponsor a
service on our web site. For example, fatbrain.com sponsors our book store. To
date we have originated our own sponsorship arrangements, which may provide
slotting fees payable to us by the sponsor and ongoing fees or revenue sharing
arrangements. We are currently developing our contextual advertising service,
which will allow advertisers to target their advertisements to users based on
their PC configuration, attached peripherals and software.
ONLINE PRIVACY POLICY
We have established an online privacy policy that governs how we do and do
not use customer information. The important elements of our privacy policy
include:
- We will not sell, rent or market our customer e-mail address list to any
outside parties.
- We are a licensee of the TRUSTe Privacy Program.
- Our internal policies exceed Internet industry standards.
- Our web site is designed so that no personal information is displayed
online or is accessible to the general public.
- We send customers confirmation e-mails and order status updates but no
further e-mails are sent unless the customer responds.
- Third parties who collect customer information on our behalf must abide
by our privacy policies and share information gathered on our customers
only with us.
Our business is dependent on the continued trust of consumers who use our
products and services. If we do not abide by the terms of our online privacy
policy, then consumer trust in us could be eroded and our strategy to convert
trial subscribers into paid subscribers would be undermined.
MARKETING AND SALES
Our marketing and sales strategy is designed to increase revenue
opportunities by:
- building increased brand recognition among PC users of the McAfee.com
name;
- increasing traffic to our web site; and
- increasing consumer adoption of our services for PC security and
management.
We are taking a number of actions to increase our brand recognition and
increase traffic to our web site. Initially, traffic to our web site resulted
only from word-of-mouth and favorable reviews in computer
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publications. In July 1999, we launched our first advertising campaign, using a
combination of television, radio, print and online advertising. Television
advertising includes nationwide broadcast and cable networks in major
metropolitan areas. We have focused our print advertising on technology-oriented
publications and mass market publications that frequently highlight technology
issues, such as Business Week and Newsweek. We intend to continue using the
unique resources of the Internet, as well as traditional media, in our marketing
effort to further build brand recognition. We have pursued and plan to continue
pursuing strategic arrangements with content providers, other web sites, PC
manufacturers, and other Internet access providers to build brand recognition
and drive sales of McAfee products.
We aim to increase consumer adoption of our services by first encouraging
consumers to register when they visit our web site and then converting
registered users to paying subscribers. To convert visitors into registered
users, we offer them a variety of free services, including an e-mail-based virus
notification service, our McAfee Briefcase, a free e-mail, calendar and file
sharing service that is co-branded through our sponsorship agreement with Visto
Corporation, and McAfee Downloads, a software evaluation service. When users of
our web site register for these free products we ask their permission to market
products and services to them, and we refrain from future direct marketing to
those registered users who have chosen to "opt-out." From the launch of our web
site through September 1, 1999, over six million users registered for our free
services. We also offer a 14-day free trial subscription to McAfee Clinic with
the goal of converting trial subscribers to paid subscribers by providing them
with full access to all centers on our web site for this limited period of time.
To convert registered users to paying subscribers and to sell new products
to existing customers, we continuously seek to expand the features and functions
of our web site and online marketing activities. We also regularly invite our
trial subscribers to return to our web site more often through online methods
such as e-mail-based virus alerts, update alerts and targeted product offers. We
have found that new virus outbreaks often trigger an increased level of activity
across all our services. Services such as McAfee Dispatch and the virus early
warning system in ActiveShield increase return visits from our user base. We
plan on expanding this service to notify customers about new services, new
products and breaking product-related news. On September 2, 1999, we began
charging a subscription fee for McAfee Clinic. To drive adoption of our paid
services, we recently began direct mail and direct e-mail marketing campaigns
targeted at our installed base of over 1.1 million McAfee Clinic trial
subscribers, six million registered users of our web site and the large number
of existing McAfee users, which we estimate at over 30 million. Our automatic
e-mail based campaign management system is capable of executing multiple e-mail
campaigns.
We plan on utilizing our contextual e-commerce technologies to provide
targeted marketing to convince our existing subscribers to make more product
purchases on our web site. We plan on using our contextual services, such as
Book Finder, Software Finder and our planned Hardware Finder, to provide
personalized purchase recommendations to subscribers when they return to our web
site. These purchase recommendations are based on the user's PC configuration,
software and attached peripherals and, as a result, are highly relevant to the
PC user.
STRATEGIC RELATIONSHIPS
We seek to create strategic relationships that will provide us with revenue
opportunities, increase the traffic to our web site, build and enhance the
content available to our users, and offer greater distribution of our products
and services. Our strategic arrangements may include:
Reseller Arrangements. Under these arrangements, third party resellers
purchase our products from us and distribute them to their customers. We have
two major arrangements with resellers: Beyond.com, which sells our products on
its web site and operates our Software Store on a reseller basis, and America
Online, which also resells our products on a purchase order basis for resale to
its subscribers.
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OEM Arrangements. Under these arrangements, consumer PC and software
original equipment manufacturers bundle our products and services with their
software and hardware products. We have relationships with a number of OEMs
which sell consumer PCs and software. We believe our most significant OEM
arrangements in terms of potential consumer reach are with Dell, Compaq,
Hewlett-Packard and Microsoft, which give us what we believe to be a broad
bundling opportunity with new PC users. These OEMs have agreed to bundle a trial
version of McAfee Software products, including VirusScan with their consumer PCs
or software. We are currently pursuing additional relationships with computer
OEMs, Internet access providers and others to bundle trial subscriptions for
McAfee Clinic and other products.
Sponsorship Arrangements. Under these arrangements, many of which are
exclusive to allow sole sponsorship of different areas of our web site, third
parties offer their products and services on our web site. These arrangements
not only allow third parties to have revenue opportunities, but also allow them
to permanently display branding information. We have sponsorship arrangements
with fatbrain.com, a provider of technical books, to sponsor our bookstore, with
Beyond.com to sponsor our software store where PC users can purchase McAfee and
other software products, with Atrieva to sponsor portions of our web site
including our Download Center, and with Net2Phone to sponsor portions of our web
site related to Internet telephony.
Co-hosting Arrangements. Under these arrangements, we partner with third
parties to provide co-branded services on our web site. We currently have two
co-hosting arrangements which provide for potential future revenue generation.
Through a co-hosting arrangement with Visto Corporation, we offer McAfee
Briefcase, which provides users of our web site with free e-mail and calendar
services. Through a co-host arrangement with Cadabra, we offer a comparative
shopping service that allows PC users to shop for consumer electronics based on
price and other desired features.
Online Marketing Affiliate Arrangements. Under these arrangements, we join
with Internet companies who provide users of their web site or their software
with a link to our web site and those users are then given an opportunity to
subscribe to our service. We currently have such arrangements with GlobalScape,
Cyberian Outpost and iChoose. We believe these arrangements are a key method of
driving potential subscribers to our web site.
MCAFEE.COM TECHNOLOGIES
The technologies underlying our hosted applications enable users to perform
the complex and vital tasks of PC security and management over the Internet. We
have developed a number of proprietary technologies, including:
- e-software -- an improved method for the delivery of software
applications via the Internet;
- contextual e-commerce -- provides targeted purchase recommendations based
on each user's PC configuration, attached peripherals and software; and
- contextual advertising -- extends our contextual e-commerce technology by
targeting advertisement opportunities for our advertising customers based
on each user's PC configuration, attached peripherals and software.
E-software. Our e-software architecture enables the searching and analysis
functions for our services, including VirusScan Online, Disk Clean, Software
Update Finder and PC Checkup. When a user selects an online application from our
web site, our Internet servers authenticate the user's identity and then
automatically download the most recent version of the selected application logic
and application support and product database information. The user can then
execute the hosted application with a single mouse click. After the application
analyzes the user's PC configuration, software and attached peripherals, the
application will advise the user to take steps to secure, repair, update and
upgrade their PC.
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Three-tier Architecture. Our three-tiered architecture includes (1) the
user interface, such as a web browser, (2) the software application logic and
application support functions and (3) a database of product information. Each of
these separate tiers collectively integrate into a single, multi-tiered, web-
based environment. This architecture is incorporated into all of our hosted
applications. This architecture also allows us to update one component, such as
adding new software titles to our product database, without requiring changes to
other components. By deploying this architecture, we:
- reduce the amount of disk space required to store an application on a
user's PC;
- enable any-time, any-place access to these critical services;
- minimize the amount of data traffic from the server to a user's PC
required to launch the application; and
- develop an efficient way to maintain up-to-date applications on our
server.
This architecture is also designed to address consumer security and privacy
concerns by performing the analysis locally, limiting the information retrieved
by our servers and by transmitting information to and from us anonymously.
Moreover, our hosted applications can only be executed when the user is
connected to the secure McAfee.com web site. This ensures that hackers cannot
remotely activate our applications and gain access to our subscribers' private
PC information.
Contextual E-commerce. Our e-commerce service scans and analyzes each
user's PC configuration, software and attached peripherals and recommends highly
personalized upgrades, books and other related products. For example, a user
with Microsoft Office 97 may be presented with options to purchase Microsoft
Office 2000 upgrades, as well as related books, training videos and other
accessories. We have designed the proprietary content format, detection
mechanism and delivery methods to scale rapidly to support thousands of users,
products and updates and upgrades.
Contextual Advertising. Our online advertising technology provides
contextual advertisements and banners based on each user's PC configuration,
attached peripherals and software. For example, a user with 32 megabytes of RAM
may be served advertisements for memory upgrades compatible with their PC and
individual need.
HARDWARE INFRASTRUCTURE
Our web site, including the hardware infrastructure, is designed to be
highly reliable, scalable and redundant and provide 24-hour-a-day,
seven-day-a-week availability to the large number of consumers using our web
site daily, as well as the increased number of visitors during significant
events, such as a new virus outbreak.
Our web site is built upon an array of servers running off-the-shelf
Microsoft software. Our system is designed so that no single function is mission
critical. As a result, for example, if a particular service goes down, our other
services should remain available. Our servers are operated in a clustered
environment in an effort to maintain 100% uptime even if an entire cluster or
subset is unavailable. Except for information provided by a separate database,
services and data are local to each server. To maintain consistency and speed of
implementation, we use scripts, which are predefined sets of software
instructions, to install software on new servers added to our infrastructure,
eliminating the need to manually configure new servers. Our in-house
infrastructure is housed in a telecom grade data center with redundant power,
air and physical carrier connections. We also maintain daily backups at an
offsite storage facility and distribute information daily to our co-location
providers described below.
We connect to the Internet through multiple vendors. Currently, we have
vendor relationships with four large Internet carriers and a carrier aggregator
which reaches other Internet carriers. These multiple relationships provide us
with the ability to balance traffic loads under peak demand and provide for
redundancy should any one carrier suffer an outage. We also use six different
co-location providers
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globally that maintain significant data centers in multiple locations. These
co-location providers enhance both the speed of download and system redundancy
should a disaster arise. For example, an individual in Europe can download
software from our co-location provider in Hamburg, Germany, resulting in less
download time than if the user had to download the software from a U.S.
location. If our web site server in Santa Clara, California fails, web site
servers will be activated at our co-location providers, enabling continued
consumer access to our web site. With limited exceptions, we maintain our own
infrastructure for purposes of consistency, quality and security. Our systems
are audited internally and externally for performance and for security issues on
a regular basis.
PRODUCT DELIVERY AND CUSTOMER PAYMENT
We have contracted with Beyond.com and CyberCash to provide our product
delivery and payment services. Beyond.com provides fulfillment for software
products sold on our web site for both electronic distribution and
"shrink-wrapped" box distribution to customers.
Credit card payment services for subscriptions and the recently introduced
McAfee One-Click-Buy service are provided to us by CyberCash. The McAfee
One-Click-Buy service provides the customer the convenience of entering credit
card information once upon the initial purchase without requiring re-entry upon
purchases during subsequent visits.
We have agreements with these companies that guarantee us levels of
acceptable service to our customers and regular monthly product and revenue
reports.
PRODUCT DEVELOPMENT
We believe that strong product development capabilities are essential if we
are to offer our subscribers innovative and up-to-date online PC security and
management products and services. Accordingly, our future success depends on our
ability to continually enhance existing products and to introduce new and
innovative products and services that satisfy our subscribers' PC security and
management requirements. We intend to introduce our Hardware Finder application,
which will include a contextual product upgrade and recommendation service, a
searchable online technical support yellow pages, and launch our contextual
advertising service. To meet these challenges, we have made and expect to
continue making substantial investments in product research and development.
These product and service innovations are complex and frequently require long
development cycles. Future revenue from these innovations may be insufficient to
recover the development costs.
As of October 31, 1999, we employed 58 full-time-equivalent engineers
engaged in the development of our new or improved products and services. A
majority of our engineers are dedicated to the improvement of our existing
online PC security and management products and services and most of our
remaining development engineers are currently working on our contextual
e-commerce and advertising services. Before we develop new or improved products,
we work with our subscribers to understand current problems and emerging
requirements to assist our development process. Our engineers then seek to
design and implement appropriate changes or additions to our applications or
product knowledge engines and databases.
We expended $287,000 in 1996, $326,000 in 1997, and $2.7 million in 1998 on
research and development. In addition, we expended $4.5 million in the nine
months ended September 30, 1999, as well as $1.4 million in the nine months
ended September 30, 1998 on research and development.
COMPETITION
In the anti-virus software market, we compete primarily against Symantec
and Trend Micro Systems, who offer software licenses to anti-virus software
products, including boxed products sold through retail store channels. In the
hosted PC security and management products and services market,
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we compete primarily against existing PC utility vendors such as Symantec and
Trend Micro Systems. In particular, Symantec has an online anti-virus service
and Trend Micro Systems offers an online hosted anti-virus service. In the
future, we may also compete against PC and system vendors such as Dell, Compaq,
IBM, Gateway and Intel looking to provide a higher level of support and service
to their customers. In particular, Dell has announced an online customer support
initiative including online PC management services. Operating system and
application vendors such as Microsoft provide or plan on providing hosted
services to better manage Windows-based PCs. Online PC content sites such as
CNET and ZDNet provide or have announced their intention to provide hosted
services to enhance their web sites. We are also aware of smaller
entrepreneurial companies that are focusing significant resources on developing
and marketing these services to consumers.
In addition, Network Associates currently competes with our hosted products
and services, and may continue to compete with us in the future. Network
Associates offers products through traditional non-online distribution channels,
such as retail stores. These products include McAfee VirusScan and McAfee
Office, a suite of products which incorporate a number of the features included
in our online products and services.
In the e-commerce and advertising markets, we compete on the basis of
number of visitors, product line depth, time spent at the site and return
visits. We compete primarily with established online retailers such as
Beyond.com, Gigabuys.com, Outpost.com and PC-related content sites such as CNET
and ZDNet. In addition, we compete with online comparative shopping services
provided by sites like Yahoo!, Excite and Amazon.com.
We believe that the principal competitive factors in attracting visitors to
our web site and converting them into paying subscribers and product purchasers
are:
- market acceptance of delivery of PC security and management services via
the Internet;
- brand recognition and reputation for providing trusted products and
services;
- the level of security of the products and services provided;
- price;
- the level of quality of the products and services provided;
- convenience and breadth of products and service offered;
- the quality and market acceptance of new enhancements to our current
services and features; and
- strategic arrangements with third parties.
INTELLECTUAL PROPERTY
We regard substantial elements of our web site and the underlying
technology as proprietary. We own three pending patent applications related to
our method of delivering software applications online. Because we own these
patent rights, rather than licensing them from Network Associates, we can assert
them independently of Network Associates to protect our technology. We will also
be the sole owners of patent rights in any inventions developed by our
employees. Other than these patents, we do not own much of the core technology
or intellectual property underlying our current products and our currently
planned products. We currently license copyrights, patents and trademarks from
Network Associates under a license agreement. The license agreement:
- restricts our use of the licensed technology to providing single-user
consumer licenses for our products and services sold over the Internet or
for Internet-based products and licensing the technology to OEMs for sale
to individual consumers;
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- allows Network Associates to continue to sell "shrink-wrapped" boxed
products incorporating the licensed technology through non-online
distribution channels, such as retail stores;
- prevents us from offering non-Network Associates based products if
Network Associates offers a competitive product;
- grants to Network Associates a license to all derivative works that we
create based on the technology that we license from Network Associates;
- does not enable us to independently enforce Network Associates'
intellectual property rights in the licensed technology against third
parties; and
- allows Network Associates to terminate the license if we fail to cure any
material breach of the license within 30 days after being notified by
Network Associates of the breach, subject to mandatory dispute resolution
prior to the effectiveness of any proposed termination.
We rely to a significant extent on Network Associates to protect the
technology that it licenses to us through a combination of patent, trademark,
trade secret and copyright law and contractual restrictions. Network Associates
has been, currently is and in the future may be subject to litigation regarding
the technology licensed to us. Adverse determinations in that litigation could
result in the loss of Network Associates', and as a result our, intellectual
property rights, which could prevent us from selling our products. In addition,
we could be subject to significant liabilities or Network Associates and/or we
could be required to seek licenses from third parties. See "Risks Related to Our
Relationship with Network Associates -- We do not own much of the core
technology and intellectual property underlying our current products and our
currently planned products."
Legal standards relating to the validity, enforceability and scope of
protection of some proprietary rights in Internet-related businesses are
uncertain and still evolving, and we can give no assurance regarding the future
viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or trademarks or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial expenses and diversion of resources and management attention.
Furthermore, other parties may assert infringement claims against us or Network
Associates. These claims and any resulting litigation, should it occur, might
subject us to significant liability for damages or an injunction against
marketing our products, and, even if not meritorious, might result in
substantial expenses and diversion of resources and management attention. Under
the terms of an indemnification agreement with Network Associates, it has agreed
to indemnify and defend us and hold us harmless from any losses as a result of
intellectual property claims known prior to the consummation of this offering.
EMPLOYEES
As of October 31, 1999, we had 106 full-time-equivalent employees. We
consider our relations with our employees to be good. We have never had a work
stoppage, and none of our employees is represented by collective bargaining
agreements. We believe that our future success will depend in part on our
ability to attract, integrate, retain and motivate highly qualified personnel,
and upon the continued service of our senior management and key technical
personnel. None of our key personnel are bound by employment agreements.
Competition for qualified personnel in our industry and in the San Francisco Bay
Area is intense. We may be unsuccessful in attracting, integrating, retaining
and motivating a sufficient number of qualified employees to conduct our
business in the future.
FACILITIES
Our principal executive and corporate offices and network operations center
are located in Santa Clara, California. These facilities consist of
approximately 19,500 square feet. These facilities are leased
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and provided to us by Network Associates at an approximate monthly cost of
$27,000, charged to us under our services agreement with Network Associates. We
are currently evaluating our need for additional space as we continue to expand
our current operations, and believe that additional space can be obtained if
needed.
LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this prospectus,
we are not a party to any litigation or other legal proceeding, including
product liability claims, that, in our opinion, could have a material adverse
effect on our business, operating results or financial condition.
Network Associates is a party to several litigation matters, described
below, that relate to the anti-virus software technology they license to us.
Network Associates has indicated that it believes it has valid defenses to each
of these actions and intends to defend them vigorously. Under the terms of our
intercompany license agreement and indemnification and voting agreement, Network
Associates has agreed to indemnify us with respect to these existing matters.
See "Related Party Transactions -- Intercompany Agreements."
On April 24, 1997 Symantec filed suit against Network Associates in the
United States District Court, Northern District of California, alleging
copyright infringement and unfair competition by Network Associates. Symantec
alleges that Network Associates' computer software program called "PC Medic"
copied portions of a Symantec computer software program, "CrashGuard." On July
20, 1997, Symantec amended its complaint to also claim copyright infringement
and trade secret misappropriation pertaining to Network Associates' "VirusScan"
product. Symantec is seeking injunctive relief and unspecified money damages.
On September 4, 1998, Symantec filed suit in United States District Court
for the Northern District of California against Network Associates, alleging
copyright infringement, unfair competition, and trade secret misappropriation.
Symantec alleges that an unidentified Network Associates employee copied and
transported to Network Associates certain proprietary Symantec files, including
files containing Norton Antivirus software. On January 20, 1999, the court
dismissed those portions of Symantec's claims relating to Network Associates' PC
Medic and VirusScan products.
On May 13, 1997, Trend Micro, Inc. filed suit in United States District
Court for the Northern District of California against both Network Associates
and Symantec. Trend alleges that Network Associates' "WebShield," "GroupShield,"
and "Gauntlet Firewall" products infringe a Trend patent which was issued on
April 22, 1997. Trend's complaint seeks injunctive relief and unspecified money
damages.
On September 15, 1997, Network Associates was named as a defendant in a
patent infringement action filed by Hilgraeve Corporation in the United States
District Court, Eastern District of Michigan. Hilgraeve alleges that Network
Associates' VirusScan product infringes a Hilgraeve patent, which was issued on
June 7, 1994. Hilgraeve's action seeks injunctive relief and unspecified money
damages.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information with respect to our executive
officers, directors and other key employees as of September 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Srivats Sampath(1)............ 40 President and Chief Executive Officer, Director
Evan Collins(1)............... 36 Vice President, Chief Financial Officer and
Secretary
William Larson(2)............. 43 Chairman of the Board of Directors
Prabhat Goyal(3).............. 45 Director
Frank Gill(2)(3).............. 55 Director
Richard Schell(2)(3).......... 50 Director
Chandrasekar 32 Chief Technology Officer
Balasubramaniam.............
Lisa Romano................... 42 Vice President, Marketing
Jeffrey Platon................ 40 Vice President, Sales
Doug Cavit.................... 40 Vice President, Web and Information Technology
Ravi Lingarkar................ 35 Vice President, Engineering
Gregory Wharton............... 29 General Counsel
</TABLE>
- -------------------------
(1) Executive Officer
(2) Member of Compensation Committee
(3) Member of Audit Committee
EXECUTIVE OFFICERS AND DIRECTORS
Srivats Sampath has served as our President and Chief Executive Officer
since December 1998. Mr. Sampath has over 15 years of experience serving in
management and executive roles in the computer industry. From June 1998 to
December 1998, Mr. Sampath served as the Vice President of Worldwide Marketing
of Network Associates. From June 1996 to December 1997, Mr. Sampath served as
the Vice President of Product Marketing for Netscape Communications, a provider
of Internet software and services. From June 1993 to June 1996, Mr. Sampath
served as the President and Chief Executive Officer of Discussions Corporation,
a company that he founded to develop e-mail based groupware solutions. From 1991
to 1993, Mr. Sampath served as the Director of Product Marketing for Network and
Security Products of Central Point Software, Inc. From 1984 to 1991, Mr. Sampath
managed the LAN Enhancement Operations and Microcomputer Communications Division
of Intel Corporation. Mr. Sampath also serves on the boards of WebTrends
Corporation and Cadabra.com. Mr. Sampath received his B.S. degree in electronics
and telecommunications engineering from Madras University in India.
Evan Collins has served as our Vice President, Chief Financial Officer and
Secretary since July 1999. From September 1996 to July 1999, Mr. Collins was
Corporate Controller of Network Associates. From August 1989 to September 1996,
Mr. Collins held various financial positions at Sun Microsystems, a manufacturer
of open systems software and hardware. Mr. Collins received his B.S. degree in
electrical engineering from Stanford University and an MBA from Duke University.
William Larson has served as a Director and Chairman of the Board of
McAfee.com since our formation in December 1998. Since September 1993, Mr.
Larson has served as Chief Executive Officer of Network Associates, and since
October 1993 he has served as President and a director. Since April 1995, Mr.
Larson has been the Chairman of the Board of Directors of Network Associates.
Mr. Larson also serves on the board of directors of BackWeb Technologies, an
Internet software company. Mr. Larson received his B.S. degree from the Wharton
School of the University of Pennsylvania and a J.D. from Stanford University.
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Prabhat Goyal has served as a director at McAfee.com since September 1999.
Since March 1996, Mr. Goyal has served in various capacities at Network
Associates. Since July 1996, he has served as Vice President of Finance and
Chief Financial Officer, and from March 1996 to June 1996, he served as
Corporate Controller and Treasurer of Network Associates. From November 1991 to
March 1996, Mr. Goyal was employed in various capacities ultimately serving as
Director, Finance and OEM Development, of the Solaris Products Group of SunSoft,
Inc., a software company. Mr. Goyal received his B.S. in economics from the
London School of Economics and an MBA from the University of Chicago. Mr. Goyal
is also a Chartered Accountant and member of the Institute of Chartered
Accountants in England and Wales.
Frank Gill has served as a director at McAfee.com since September 1999. Mr.
Gill is a 23-year veteran of Intel Corporation where he held a variety of
positions in sales and marketing, product development, and manufacturing
operations. At the time of his retirement in June 1998, he was an Executive Vice
President of Intel. Mr. Gill also serves as a director of Inktomi Corporation,
Logitech, Inc., Sequent Computer Systems, Inc., Tektronix, Inc. and Telecom
Semiconductor. Mr. Gill received his B.S. degree in electrical engineering from
the University of California at Davis.
Richard Schell has served as a director at McAfee.com since September 1999.
Dr. Schell has spent 20 years in the high-tech industry. Most recently, from
October 1994 to February 1998, Dr. Schell served as Senior Vice President at
Netscape Communications where he led the engineering team and then moved on to
head up the Client Product Division. Prior to Netscape, from January 1993 to
October 1994, Dr. Schell was Vice President of Engineering at Central Point
Software, now part of Symantec. From 1989 to 1992, Dr. Schell served as Vice
President of the Languages and Database business for Borland International. Dr.
Schell received his A.B., M.S. and Ph.D. in computer science from the University
of Illinois.
Our executive officers are appointed by our board of directors and serve at
their discretion. There are no family relationships among any of our directors
or executive officers.
KEY EMPLOYEES
Chandrasekar Balasubramaniam has served as our Chief Technology Officer
since August 1999. From April 1999 to August 1999 Mr. Balasubramaniam was
Director of Architecture of Network Associates, and from September 1998 to April
1999 he was a Senior Architect at Network Associates. From June 1996 to
September 1998, Mr. Balasubramaniam was a Senior Software Engineer of
CyberMedia, Inc., which was acquired by Network Associates in September 1998,
where, among other things, he designed and implemented CyberMedia's flagship
Internet and e-commerce product Oil Change. From 1991, to June 1996, Mr.
Balasubramaniam worked at several companies in India where he was employed in
various capacities ranging from development to management of Internet related
products and services. Mr. Balasubramaniam received his B.Sc. degree from the
University of Madras in India.
Lisa Romano has served as our Vice President, Marketing since August 1999.
From August 1997 to August 1999, Ms. Romano ran her own consulting practice
where she acted as principal in projects developing strategies for subscriber
and content acquisition, marketing, and electronic commerce for such clients as
E*TRADE, Netscape and Palm Computing. From June 1996 to August 1997, Ms. Romano
served as Senior Director of New Business Development at Knight-Ridder
Information, a subsidiary of Knight-Ridder Corporation, with responsibility for
worldwide development of online consumer and enterprise markets. From 1984 to
February 1996, Ms. Romano worked at Apple Computer where she held a variety of
marketing management positions for networking and communications products. Ms.
Romano received her B.S. in marketing from Villanova University and an MBA from
Suffolk University.
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Jeffery Platon has served as our Vice President, Sales since September
1999. Prior to joining McAfee.com, Mr. Platon served as Vice President, Business
Development and OEM Sales of Network Associates from February 1997 to September
1999. From April 1995 to February 1997, Mr. Platon was Vice President of
Worldwide Sales and Marketing at Rexon, Inc., a data storage solutions company.
From April 1992 to April 1995, Mr. Platon served in several executive capacities
in marketing and business development at Exabyte Corporation, a network storage
and backup company. Prior to Exabyte, Mr. Platon held several executive
positions in sales, marketing and product marketing at Burroughs/ Unisys
Corporation. Mr. Platon received his B.A. degree in business administration from
the University of Texas.
Doug Cavit has served as our Vice President, Web and Information Technology
since July 1999. From April 1995 to July 1999, Mr. Cavit served as Director of
Information Technology of Network Associates. From September 1993 to March 1995,
Mr. Cavit served as Director of Information Technology for Trinzic Corporation,
a database software company. From April 1991 to July 1993, Mr. Cavit served as
Director of Technical Services for Halliburton Company, a diversified oilfield
services company. Mr. Cavit received his B.S. degree in geophysics and his
master's degree in geology from the University of California at Riverside.
Ravi Lingarkar has served as our Vice President, Engineering since July
1999. From June 1998 to July 1999, Mr. Lingarkar held senior engineering and
management positions at Network Associates. From November 1996 to September
1997, Mr. Lingarkar served as Principal Net Engineer at Berkeley Networks. From
October 1994 to October 1996, Mr. Lingarkar served as Principal Engineer at
Whitetree, Inc., which was acquired by Ascend Communications in February 1997.
Mr. Lingarkar has also published several papers in books, research journals, and
conference proceedings and has filed for several patents. Mr. Lingarkar received
his M.Sc. in computer science and a Ph.D. in electrical and computer engineering
from McMaster University in Canada.
Gregory Wharton has served as our General Counsel since July 1999. From
June 1998 to July 1999, Mr. Wharton served as Manager of Legal Affairs for
Network Associates. From May 1997 to June 1998, Mr. Wharton was a corporate
associate at the law firm of Wilson Sonsini Goodrich & Rosati, P.C. in Palo
Alto, California. From May 1995 to May 1997, Mr. Wharton was a corporate
associate specializing in mergers and acquisitions at the law firm of Sullivan &
Worcester LLP in Boston, Massachusetts. Mr. Wharton received his B.S. degree in
communications from Boston University and his J.D. from Yale Law School.
BOARD OF DIRECTORS
The number of our directors is currently set at five directors. Our
restated certificate of incorporation provides that the terms of office of the
directors are divided into three classes: Class I, whose term will expire at the
annual meeting of stockholders to be held in 2000; Class II, whose term will
expire at the annual meeting of stockholders to be held in 2001; and Class III,
whose term will expire at the annual meeting of stockholders to be held in 2002.
The Class I directors are Frank Gill and Prabhat Goyal, the sole Class II
director is Srivats Sampath and the Class III directors are William Larson and
Frank Schell. At each annual meeting of stockholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from time of election and
qualification until the third annual meeting following election or special
meeting held in lieu thereof. We expect that any additional directorships
resulting from an increase in the number of directors, if any, will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one third of the directors. This classification structure of the
board of directors may have the effect of delaying or preventing changes in
control or management of McAfee.com.
Our bylaws provide that the authorized number of directors may be changed
by an amendment to the bylaws adopted by our board of directors or by the
stockholders. In addition, our certificate of
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incorporation and our bylaws provide that, in general, vacancies on the board
may be filled by a majority of directors in office, although less than a quorum.
For so long as it owns at least 20% of our outstanding voting power,
Network Associates has agreed to vote its shares of our capital stock in favor
of the election of two independent directors. Currently, Messrs. Gill and Schell
are our two independent directors.
BOARD COMMITTEES
We have established an audit committee, a majority of whose members consist
of independent directors. We have appointed Messrs. Goyal, Gill and Schell to be
members of our audit committee. The audit committee will review, act on and
report to our board of directors on various auditing and accounting matters,
including the selection of our independent accountants, the scope of our annual
audits, fees to be paid to the independent accountants, the performance of our
independent accountants and our accounting practices.
We have established a compensation committee, a majority of whose members
consist of independent directors. We have appointed Messrs. Gill, Schell and
Larson to be the members of our compensation committee. Our compensation
committee will establish salaries, incentives and other forms of compensation
for officers and other employees. This committee will also administer our
incentive compensation and benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Messrs. Gill, Schell and
Larson. Mr. Larson is a director and executive officer of Network Associates.
Prior to the offering, all compensation matters were handled by the full board
of directors.
None of the members of our compensation committee is an officer or employee
of McAfee.com. No interlocking relationship exists between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has such an interlocking relationship
existed in the past.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors, but are reimbursed for their reasonable and necessary expenses for
attending board and board committee meetings.
We have adopted a director option plan. Members of the board who are not
our employees, or employees of any parent, subsidiary or affiliate of
McAfee.com, will be eligible to participate in the plan unless they are
representatives of venture capital funds or corporate investors. The option
grants under the plan will be automatic and nondiscretionary, and the exercise
price of the options will be the fair market value of the Class A common stock
on the date of grant.
In connection with their recent addition to our board, Messrs. Gill and
Schell were each granted an option to acquire 75,000 shares of our Class A
common stock under our 1999 stock plan, described below. Each eligible director,
other than Messrs. Gill and Schell, who is or becomes a member of the board on
or after the effective date of the registration statement of which this
prospectus forms a part will be granted an option to purchase 40,000 shares of
our Class A common stock under our director option plan. Each eligible director,
including Messrs. Gill and Schell, will automatically be granted an additional
option on the anniversary date of their service as a director to purchase shares
of Class A common stock if the director has served continuously as a member of
the board since the date of the director's initial grant.
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The options will have ten year terms, but will terminate three months after
the date the director ceases to be a director or six months after a termination
if the termination is due to death or disability.
All options granted under the directors plan will become exercisable over a
four year period with 25% of the shares exercisable after one year and the
remainder vesting at a rate of 2.083% each subsequent month, so long as the
optionee continues as a member of the board or as a consultant of McAfee.com. In
the event of our dissolution or liquidation, or a "change in control"
transaction, options granted under the plan will become fully vested and
immediately exercisable if not otherwise assumed or substituted by the acquiror,
or if the optionee does not continue to serve as a director.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or accrued during 1998
to our chief executive officer. There were no other executive officers employed
by us during 1998. The table also sets forth compensation on an annualized basis
for our chief executive officer and our chief financial officer for the fiscal
year ending December 31, 1999. There were no other executive officers as of
September 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES 1999
------------------ UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS SALARY
--------------------------- -------- ------- ------------ --------
<S> <C> <C> <C> <C>
Srivats Sampath............................................. $112,769 $15,652 -- $240,000
President and Chief Executive Officer
Evan Collins................................................ -- -- -- 175,000
Vice President, Chief Financial Officer and Secretary
</TABLE>
OPTION GRANTS
No options to purchase our common stock were issued during the year ended
December 31, 1998. Options to purchase an aggregate of 5,108,560 shares of our
Class A common stock have been granted as of October 31, 1999. The table set
forth below provides summary information regarding stock options granted to our
chief executive officer and our chief financial officer in the nine months ended
September 30, 1999. There were no other executive officers as of September 30,
1999. In addition to the option grants on the table set forth below, in October
1999, we granted an option to purchase 70,000 shares of Class A common stock to
Evan Collins, our chief financial officer, at an exercise price of $7.33 per
share.
All options granted to these executive officers are immediately exercisable
and nonqualified stock options and vest over four years at the rate of 25% of
the shares subject to the option on the first anniversary of the date of grant
and 2.083% each subsequent month. The options expire ten years from the date of
grant and were granted at an exercise price equal to the fair market value of
our common stock on the date of grant, as determined by the board.
All options were granted at an exercise price equal to the fair value of
the common stock on the date of grant. The fair value was based on third party
valuations at the date of grant.
Potential realizable values are computed by (a) multiplying the number of
shares of Class A common stock issuable upon exercise of a given option by the
exercise price per share, (b) assuming that the aggregate stock value derived
from that calculation compounds at the annual 5% or 10% rates shown in the table
for the entire ten year term of the option and (c) subtracting from that result
the aggregate option exercise price. In addition, potential realizable values do
not take into account taxes associated with exercise, if any. The 5% and 10%
assumed annual rates of stock price appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.
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<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TO TERM
OPTIONS EMPLOYEES DURING EXERCISE PRICE EXPIRATION -----------------------
NAME DATE OF GRANT GRANTED PERIOD ($/SHARE) DATE 5% 10%
---- ------------- ---------- ------------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Srivats Sampath...... 1/15/99 900,000 39.2% $3.67 1/15/09 $2,077,239 $5,264,131
Evan Collins......... 7/1/99 100,000 4.4 4.64 7/1/09 291,807 739,497
</TABLE>
OPTION EXERCISES AND HOLDINGS
No options were granted prior to January 1999. Therefore there were no
options held by any of the executive officers as of December 31, 1998. In
addition, there have not been any option exercises to date.
STOCK PLANS
1999 Stock Plan. Our 1999 stock plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code, or Code, and for the granting to employees, directors and
consultants of nonstatutory stock options and stock purchase rights, or SPRs.
The 1999 stock plan was approved by the board of directors and by our sole
stockholder in January 1999. Unless terminated sooner, the 1999 stock plan will
terminate automatically in 2009. A total of 8,388,000 shares of Class A common
stock is currently reserved for issuance pursuant to the 1999 stock plan, plus
the plan provides for automatic annual increases on the date of the annual
stockholders' meeting, equal to the lesser of:
- 2,500,000 shares of Class A common stock;
- 5% of the outstanding shares of all common stock on that date; or
- an amount determined by our board of directors.
As of October 31, 1999, options to purchase 5,108,560 shares of Class A common
stock were outstanding under the 1999 stock plan with a weighted average
exercise price of $4.65, and 3,279,440 shares were available for future grants.
The 1999 stock plan may be administered by our board of directors or a
committee of our board of directors, and the administrator shall, in the case of
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The administrator
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise. Our board of directors has the authority to amend, suspend or
terminate the 1999 stock plan, provided that no such action may affect any share
of Class A common stock previously issued and sold or any option previously
granted under the 1999 stock plan.
Options and SPRs granted under the 1999 stock plan are not generally
transferable by the optionee. Options granted under the 1999 stock plan must
generally be exercised within three months of the optionee's termination of
service with McAfee.com, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration of
the option's ten year term. In the case of SPRs, unless the administrator
determines otherwise, the stock purchase agreement shall grant McAfee.com a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with McAfee.com for any reason, including death or
disability. The purchase price for shares repurchased pursuant to the restricted
stock purchase agreement shall be the original price paid by the purchaser. The
repurchase option shall lapse at a rate determined by the administrator. The
exercise price of all incentive stock options granted under the 1999 stock plan
must be at least equal to the fair
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market value of the Class A common stock on the date of grant. The exercise
price of nonstatutory stock options and SPRs granted under the 1999 stock plan
is determined by the administrator, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the exercise price must at least be equal
to the fair market value of the Class A common stock on the date of grant. The
term of all incentive stock options granted under the 1999 stock plan may not
exceed ten years or five years if the optionee is a 10% stockholder at the time
of grant. The 1999 stock plan does not specify a term for nonstatutory options.
The 1999 stock plan provides that in the event of a merger of McAfee.com
with or into another corporation or a sale of substantially all of McAfee.com
assets, each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
administrator shall notify the optionee that he or she will have the right to
exercise the option or SPR as to all of the optioned stock, including shares as
to which he or she would not otherwise be exercisable, for a period of fifteen
(15) days from the date of such notice, and the option or SPR will terminate
upon the expiration of such period.
1999 Director Option Plan. Non-employee directors are entitled to
participate in the 1999 director option plan. The director plan was adopted by
the board of directors in September 1999 and approved by our sole stockholder in
September 1999, but it will not become effective until the date of this
offering. The director plan has a term of ten years, unless terminated sooner by
the board. A total of 150,000 shares of Class A common stock have been reserved
for issuance under the director plan, plus an annual increase as of the date of
the annual stockholders' meeting equal to the number of shares required to have
150,000 shares available for new option grants.
The director plan provides for the automatic grant of 40,000 shares of
Class A common stock, the "first option," to each non-employee director on the
effective date of the director plan, other than Messrs. Gill and Schell, who
each received an initial grant for 75,000 shares of our Class A common stock
under our 1999 stock plan when they joined our board in September 1999. After
the first option is granted to the non-employee director, he or she shall
automatically be granted an option to purchase 10,000 shares, a "subsequent
option," each year on his or her anniversary of service as a director. Each
first option and each subsequent option shall have a term of 10 years. The
exercise price of all options shall be 100% of the fair market value per share
of the Class A common stock, generally determined with reference to the closing
price of the Class A common stock as reported on the Nasdaq National Market on
the date of grant. Both the first and subsequent option vest as to 25% of the
shares on the first anniversary of the grant date and as to 2.083% of the shares
each month thereafter, so that the options are fully vested four years from the
grant date.
The director plan provides that in the event of a merger of McAfee.com with
or into another corporation or a sale of substantially all of our assets, each
option shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted as
described in the preceding sentence, the administrator shall notify the optionee
that he or she will have the right to exercise the option as to all of the
optioned stock, including shares as to which he or she would not otherwise be
exercisable, for a period of 15 days from the date of such notice, and the
option will terminate upon the expiration of such period. If after the merger or
asset sale, the optionee is no longer a director of either McAfee.com or the
successor corporation other than because of a voluntary resignation, the
optionee's options will become fully vested and exercisable for 90 days after
the director is no longer a member of the board.
1999 Employee Stock Purchase Plan. The 1999 employee stock purchase plan
was adopted by the board of directors in September 1999 and by our sole
stockholder in September 1999. A total of
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500,000 shares of Class A common stock have been reserved for issuance under the
1999 purchase plan, plus annual increases on the date of the annual
stockholders' meeting, equal to the lesser of:
- 1 million shares;
- 3% of the outstanding shares on such date; or
- an amount determined by the board of directors. As of the date of this
prospectus, no shares have been issued under the 1999 purchase plan.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Code contains successive 24 month offering periods. The offering periods
generally start on the first trading day on or after February 1 and August 1 of
each year, except for the first such offering period under the 1999 purchase
plan, which we expect will commence on the date of this offering and end on the
last trading day on or before February 1, 2001.
Employees are eligible to participate if they are customarily employed by
McAfee.com or any participating subsidiary for at least twenty hours per week
and more than five months in any calendar year. However, any employee:
- who immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of the capital stock of
McAfee.com; or
- whose rights to purchase stock under all employee stock purchase plans of
McAfee.com accrue at a rate which exceeds $25,000 worth of stock for each
calendar year may be not be granted an option to purchase stock under the
1999 purchase plan. The 1999 purchase plan permits participants to
purchase Class A common stock through payroll deductions of up to 15% of
the participant's "compensation." Compensation is defined as the
participant's base straight time gross earnings, commissions, incentive
compensation and bonuses, but exclusive of payments for overtime, profit
sharing payments, shift premium payments and incentive payments. The
maximum number of shares a participant may purchase during a single
purchase period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Class A common stock at the end of each offering period. The price of
stock purchased under the 1999 purchase plan is 85% of the lower of the fair
market value of the Class A common stock at the beginning date or ending date of
the purchase period. Participants may end their participation at any time during
an offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with McAfee.com.
Rights granted under the 1999 purchase plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1999 purchase plan. The 1999 purchase plan provides
that, in the event of a merger of McAfee.com with or into another corporation or
a sale of substantially all of our assets, offering periods then in progress may
be continued by the successor corporation. If the successor corporation refuses
to continue the offering periods then in progress, the offering periods will be
shortened and a new exercise date will be set. The 1999 purchase plan will
terminate in 2009. Our board of directors has the authority to amend or
terminate the 1999 purchase plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the 1999 purchase plan.
401(k) PLAN
Network Associates sponsors a tax-qualified employee savings and retirement
plan which covers the eligible employees of Network Associates and McAfee.com.
For so long as Network Associates retains at least an 80% ownership interest in
McAfee.com, all eligible McAfee.com employees may enter the Network Associates
401(k) plan on the first day of any calendar quarter. Participants may make
pre-tax
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contributions to the 401(k) plan of up to 15% of their eligible compensation,
subject to a statutorily prescribed annual limit, which is $10,000 in calendar
year 1999. Each participant is fully vested in his or her contributions and the
investment earnings thereon at all times. The 401(k) plan permits, but does not
require, matching contributions on behalf of participants. The 401(k) plan is
intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue
Code. Contributions by the participants, Network Associates, or McAfee.com to
the 401(k) plan, and the income earned on these contributions, are generally not
taxable to the participants until withdrawn. Contributions by Network Associates
and McAfee.com, if any, will be deductible when made by Network Associates and
McAfee.com, respectively. 401(k) plan assets are held in trust. The trustee of
the 401(k) plan invests the assets of the 401(k) plan in the various investment
options as directed by the participants. We intend to adopt our own 401(k) plan
after the consummation of this offering.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law.
Our bylaws provide that we will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection with
takeover defense measures. These provisions may have the effect of preventing
changes in the management.
Our bylaws provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
- we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our certificate of incorporation, our bylaws or agreements to which we
are party; and
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and officers to
give them additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
for which indemnification from us is sought. We are not aware of any threatened
litigation that may result in claims for indemnification from us.
We currently have liability insurance for our directors and officers and
intend to extend that coverage for public securities matters.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below,
since we were formed, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% of our
Class A common stock on an as-converted basis or any member of their
immediate family had or will have a direct or indirect material interest.
PRINCIPAL STOCKHOLDER; CONTROL OF MCAFEE.COM
We are a wholly-owned subsidiary of Network Associates. Upon completion of
this offering, Network Associates will own all the outstanding shares of our
Class B common stock, representing approximately 95% of the voting power of
McAfee.com, and approximately 5% of the voting power will be owned by the
public.
As a result of its ownership of Class B common stock, Network Associates
will be able to influence significantly matters affecting us and to control all
actions that require the approval of a majority of our voting power, including
amendments to our certificate of incorporation, the election of our directors
and any business combinations. However, Network Associates has agreed to vote in
the future in favor of two independent directors. Additionally, if, as described
below under the Stockholders Agreement, there is a Network Associates' change of
control which is not approved by the continuing Network Associates directors.
Network Associates has agreed to vote to elect at least a majority of
independent directors of our board.
INTERCOMPANY AGREEMENTS
We have entered into certain agreements with Network Associates for the
purpose of defining their ongoing relationship. These agreements were developed
in the context of a parent/subsidiary relationship and therefore are not the
result of arms-length negotiations between independent parties. The aggregate
net amount we paid to Network Associates under all the intercompany agreements
for the nine months ended September 30, 1999 was $6.95 million.
Services Agreement. We have entered into a services agreement with Network
Associates effective January 1, 1999 under which it has and will continue to
provide us a number of administrative services. Under this agreement, Network
Associates is providing to us services relating to tax, insurance, employee
benefits and administration, corporate record keeping and information
technology. The initial monthly fee under the agreement is a portion of the cost
of Network Associates' provision of the services to us, including all related
expenses, that is allocated to us based on our headcount, plus a ten percent
mark-up. In addition, we may request additional services, including legal, and
accounting services, to be provided from time-to-time in the future. During the
nine months ended September 30, 1999, Network Associates charged us $2.5 million
under this agreement.
The services agreement may be terminated either by us on 30 days notice or
by Network Associates when it ceases to own a majority of our outstanding voting
stock. We may be unable to secure the provision of these services from others on
acceptable terms. If we are unsuccessful in obtaining acceptable provision of
services upon termination of the corporate service agreement, our future
financial performance could be adversely affected.
Registration Rights Agreement. We have entered into a registration rights
agreement with Network Associates in connection with this offering. This
entitles Network Associates, or any transferee of at least
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10% of its shares, to include its shares of our common stock in any future
registration of common stock made by us, other than any registration statement
relating to an acquisition or stock option plan. In addition, at any time after
six months after this offering, Network Associates or any transferees of at
least 10% of its McAfee.com shares can request that we file a registration
statement so they can publicly sell their shares. We have agreed pursuant to the
terms of the registration rights agreement to pay all costs and expenses, other
than underwriting discounts and commissions related to shares to be sold by
Network Associates and expenses of legal counsel for Network Associates in
connection with any such registration.
License Agreement. We entered into a license agreement with Network
Associates, effective on January 1, 1999.
Licensed Technology. Under the license agreement, we and Network
Associates granted to each other limited rights to each others' patents,
copyrights, trademarks and trade secrets for use in defined markets. We have
worldwide, non-exclusive rights to Network Associates' patents and exclusive
rights to use Network Associates' copyright, trademark and trade secret rights
to create and deliver products and services directly or indirectly to individual
consumers over the Internet or for Internet based products. Under the agreement,
Network Associates is granted worldwide, non-exclusive rights to our patents and
exclusive rights to use our copyrights, trademarks and trade secrets to deliver
products and services to enterprise customers and individual consumers by any
means other than the Internet. Each party is also permitted to create products
derived from the technology licensed to it by the other. The creating party
retains ownership of their newly derived products but these derived products are
licensed to the other party subject to the terms of the license agreement.
Royalty Payments. In consideration for the rights granted under the
cross license agreement, we are required to pay Network Associates a royalty on
revenues we recognize from product and subscription sales that include Network
Associates' technology, initially at a rate of 20% commencing on January 1, 1999
and declining 1.625% per quarter until the rate is 7% in the quarter beginning
January 1, 2001, and remaining at 7% thereafter. In consideration for the rights
granted by us to Network Associates under the cross license agreement, Network
Associates is required to pay us a flat quarterly royalty of $250,000. During
the nine months ended September 30, 1999, Network Associates charged us $2.5
million for royalties and $3.4 million for support services under the agreement.
Limitations on Offered Products. During the term of the agreement, each
party has agreed that it will not offer products incorporating third-party
technology if those products are competitive with the products offered by the
other party.
Indemnification. Under the agreement, each party has agreed to
indemnify, defend and hold harmless the other for any losses incurred in
connection with claims arising in the covered countries that the technology
licensed under the agreement violates the patent, copyright, trademark or trade
secrets or other proprietary rights of a third party. Covered countries are
those countries that are party to the Berne Convention for the Protection of
Literary and Artistic Works, which include the U.S. and substantially all U.N.
member nations.
Term and Termination. The license agreement will remain in effect
indefinitely, but may be terminated:
- by mutual agreement of the parties;
- by the non-bankrupt party, in the event of a bankruptcy of the
other party; and
- by the non-defaulting party, in the event of a material breach by
the other party that remains uncured for 30 days following notice
of the breach, subject to mandatory dispute resolution prior to the
effectiveness of any proposed termination.
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Asset Contribution and Receivables Settlement Agreement. We entered into an
asset contribution agreement with Network Associates effective as of January 1,
1999 that transfers ownership of assets to McAfee.com. Among the assets
transferred to McAfee.com are:
- a number of co-hosting and technology agreements to which Network
Associates is a party;
- revenues from advertising and sponsorship agreements involving
McAfee.com;
- all ownership rights arising in connection with 3 patent
applications relating to the manner in which we deliver our
e-software applications;
- computers and Internet infrastructure hardware; and
- any other assets which both Network Associates' and McAfee.com's
boards of directors agree to transfer at a future date under this
agreement.
Under the asset contribution agreement, no liabilities were transferred to
McAfee.com, except for those directly resulting from the assets transferred.
Network Associates contributed $2.7 million of fixed assets to us in the nine
months ended September 30, 1999.
Joint Cooperation Agreement. We have entered into a joint cooperation and
master services agreement with Network Associates which governs the provision of
technology services among the parties. Under this agreement, Network Associates'
anti-virus emergency response team, known as AVERT, will provide us with
research and solutions for virus events. The agreement also contains standard
terms and conditions governing the provision of technology services from one
party to the other under statements of work that may be negotiated from time to
time. Currently we have entered into one such statement of work under which we
provide Network Associates the infrastructure and technical support services for
Network Associates' web site (www.nai.com). Network Associates pays us a fee for
these services in an amount equal to ten percent of our total quarterly
technology costs plus a ten percent service charge. We are obligated to provide
these services until December 31, 2000 under this statement of work. During the
nine months ended September 30, 1999 we charged Network Associates $590,000
under this agreement. This amount has been offset against technology costs.
Revolving Loan Agreement. Under an intercompany revolving loan agreement we
have entered into, Network Associates has agreed to make available to McAfee.com
up to $30 million in cash as a revolving loan. The interest rate of this
revolving loan is equal to the one-month LIBOR rate. Network Associates has the
option of having us repay the entire principal and interest then outstanding
beginning on the date that is 30 days after the closing of this offering, or at
any time thereafter. If Network Associates does not request repayment prior to
that time, the revolving loan is repayable in full on January 1, 2001, the
termination date of the agreement.
Tax Sharing Agreement. We entered into a tax sharing agreement with Network
Associates effective upon effectiveness of the registration statement relating
to this offering, whereby we pay federal, state and local income tax liability
amounts to Network Associates, determined on a pro forma basis, as if we filed
our own separate income tax returns for each year. Network Associates will not
reimburse us for Network Associates' or any other group member's use of our net
operating loss or other tax benefits in any consolidated or combined return.
However, we will be able, during the term of the agreement, to take into account
our past and future net operating loss and other tax attributes for purposes of
computing our hypothetical separate income tax return liability payment to, or
refund from, Network Associates.
The tax sharing agreement will terminate if we are no longer eligible to
join Network Associates in the filing of a consolidated federal income tax
return. In the event of such termination, any net operating losses or other
carryforward amounts would not be available to us upon departure from the group.
Under the agreement, we will not be reimbursed for any such loss of tax
benefits.
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Indemnification and Voting Agreement. We entered into an indemnification
and voting agreement with Network Associates which will become effective upon
the effectiveness of the registration statement relating to this offering.
Except as contemplated below, Network Associates will indemnify and defend us
and hold us harmless for all losses related to any third party claims relating
to events or circumstances arising out of actions or inaction of Network
Associates, including its subsidiaries and officers and directors, on or prior
to the completion of this offering. Matters for which Network Associates is not
obligated to indemnify us include:
- any obligations assumed by us, or payments required to be made by us,
under our agreements with Network Associates;
- any losses resulting from third party claims that are related to
intellectual property developed by us between August 20, 1999 and the
completion of this offering;
- any obligations incurred by us in the ordinary course of business;
- any losses resulting from third parties claims made against McAfee.com
alleging infringement of intellectual property rights unknown as of the
closing of this offering; and
- any losses resulting from third parties claims related to or arising from
a material misstatement contained in or material omission from this
prospectus or the registration statement of which this prospectus is a
part.
As a result of the above indemnification, Network Associates is, for
example, required to hold us harmless from its existing litigation related to
the anti-virus technology licensed to us under the cross license agreement. In
the event of a claim relating to a product that includes components supplied by
us and components supplied by Network Associates, Network Associates has the
right to determine whether and to what extent we are entitled to
indemnification, after reasonable consultation with us.
For so long as Network Associates owns at least 20% of our outstanding
voting power, it will vote its shares of our capital stock in favor of the
election of two independent directors. Additionally, if, as described below
under the Stockholders Agreement, there is a Network Associates' change of
control which is not approved by the continuing Network Associates directors, it
has agreed to vote to elect a majority of independent directors to our board.
Stockholders Agreement. We entered into a stockholders agreement with
Network Associates in October 1999. Network Associates has agreed that if (1)
without the prior approval of the Network Associates continuing directors, as
defined below, any person acquires or agrees to acquire 15% or more of Network
Associates outstanding common stock or (2) the Network Associates continuing
directors cease to constitute a majority of Network Associates serving
directors, then for so long but only for so long as that condition exists:
- the shares of our Class B common stock held by Network Associates shall
be entitled to only one vote per share instead of three votes per share;
and
- Network Associates shall be obligated to vote its McAfee.com shares to
cause, and to take such actions reasonably within its control to cause,
and shall seek to cause the McAfee.com directors appointed by it to
cause, our board of directors to consist of at least a majority of
independent directors.
Network Associates continuing directors will consist of the Network
Associates directors at the time this offering is consummated and any subsequent
Network Associates directors approved or not objected to by a majority of the
then-continuing Network Associates directors.
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OPTION GRANTS TO NETWORK ASSOCIATES' OFFICERS AND EMPLOYEES
In January 1999, we granted options for a total 3,420,000 shares of our
Class A common stock to four executive officers and one non-executive officer of
Network Associates at exercise price of $3.67 per share. At the time the options
were granted, they vested 25% on January 15, 2000 with 2.083% vesting each month
thereafter for the following 36 months. Vesting is based on service to Network
Associates or any subsidiary thereof. In September 1999, the aggregate number of
options granted and the amount of each individual grant, was reduced by 50%. In
exchange for this reduction, we agreed to vest in full the remaining options.
Included in these grants, as so reduced, is a grant to William Larson of 900,000
shares, to Prabhat Goyal of 360,000 shares, to Peter Watkins of 180,000 shares,
to Zachary Nelson of 180,000 shares and to Joanne Evans of 90,000 shares, all of
which are for our Class A common stock. Mr. Larson is an executive officer and
director of Network Associates and a McAfee.com director and Mr. Goyal is an
executive officer of Network Associates and a McAfee.com director.
In addition to the above option grants, as of October 31, 1999, we have
granted to approximately 170 other employees of Network Associates options for
an additional 341,000 shares of Class A common stock at an average exercise
price of $6.55 per share. These options are fully vested.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of McAfee.com's
common stock as of September 30, 1999 and as adjusted to reflect the sale of the
shares of Class A common stock offered hereby by:
- Network Associates as the sole beneficial owner of more than 5% of our
common stock;
- our named executive officers;
- each of our directors; and
- all officers and directors as a group.
The percentage of beneficial ownership for the following table is based on
36,000,000 shares of Class B common stock outstanding as of September 30, 1999
and assuming no exercise of the underwriters' over-allotment option.
Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities. Common stock
subject to options currently exercisable within 60 days of September 30, 1999
are not deemed outstanding for purposes of computing the percentage ownership of
any other person. Unless otherwise indicated, the address for each listed person
is c/o McAfee.com Corporation, 2805 Bowers Avenue, Santa Clara, CA 95051.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------ ---------------- -------- --------
<S> <C> <C> <C>
5% STOCKHOLDER
Network Associates, Inc............................ 36,000,000 100% 85.2%
3965 Freedom Circle
Santa Clara, CA 95054
NAMED EXECUTIVE OFFICERS & DIRECTORS
Srivats Sampath(1)................................. -- -- --
Evan Collins(2).................................... -- -- --
William Larson(3).................................. 36,900,000 100 85.5
Prabhat Goyal(4)................................... 360,000 * *
Frank Gill(5)...................................... -- -- --
Richard Schell(6).................................. -- -- --
All 6 directors and executive officers as a
group(7)......................................... 37,260,000 100% 85.6%
</TABLE>
- ----------------
* Represents beneficial ownership of less than 1%.
(1) Mr. Sampath has an option to purchase 900,000 shares of our Class A common
stock, none of which will have vested as of November 30, 1999.
(2) Mr. Collins has an option to purchase 100,000 shares of Class A common
stock, none of which will have vested as of November 30, 1999.
(3) Includes the 36,000,000 shares of Class B common stock owned by Network
Associates, Inc. and the 900,000 shares of Class A common stock issuable
upon exercise of an immediately exercisable option issued to Mr. Larson on
January 15, 1999 and held in trusts for which Mr. Larson or his wife act as
trustee. Mr. Larson is chief executive officer, president and chairman of
the board of Network Associates. Excluding the shares attributed to him
which are owned by Network Associates, of which Mr. Larson disclaims
beneficial ownership, the number of shares Mr. Larson beneficially owned
would be 900,000.
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(4) Consists of 360,000 shares of Class A common stock issuable upon exercise of
an immediately exercisable option issued to Mr. Goyal on January 15, 1999.
(5) Mr. Gill has an option to purchase 75,000 shares of our Class A common
stock, none of which will have vested as of November 30, 1999.
(6) Mr. Schell has an option to purchase 75,000 shares of our Class A common
stock, none of which will have vested as of November 30, 1999.
(7) Consists only of shares beneficially owned by the persons in footnotes (3)
and (4).
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DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the authorized capital
stock of McAfee.com will consist of 165,000,000 shares of common stock, of which
100,000,000 are authorized as Class A common stock, $.001 par value per share,
and 65,000,000 are authorized as Class B common stock, $.001 par value per
share; and 10,000,000 shares of undesignated preferred stock, $.001 par value
per share. As of October 31, 1999 there were outstanding 36,000,000 shares of
Class B common stock all of which were held by Network Associates, no shares of
Class A common stock and options to purchase 5,108,560 shares of Class A common
stock.
COMMON STOCK
The shares of Class A common stock and Class B common stock are identical
in all respects, except for voting rights and conversion rights, as described
below.
Voting Rights. Each holder of outstanding Class A common stock is entitled
to one vote per share on all matters submitted to a vote of our stockholders,
including the election of directors, and, except as described below, each share
of Class B common stock entitles the holder to three votes on those matters.
Except as required by applicable law, holders of the Class A common stock and
Class B common stock vote together as a single class on all matters submitted to
a vote of our stockholders. There is no cumulative voting in the election of
directors. See "Risk Factors -- Risks Related to Our Relationship with Network
Associates -- We may be unable to pursue business opportunities available to us
because of our relationship with Network Associates," "-- Network Associates'
ability to exert control over us following this offering could result in actions
that are not consistent with the interests of our other stockholders,
particularly with respect to a change of control" and "Risk Factors -- Risks
Related to this Offering -- Provisions in our certificate of incorporation and
bylaws and Delaware law and our relationship with Network Associates may
discourage takeover attempts."
Any action that may be taken at a meeting of the stockholders may be taken
by written consent in lieu of a meeting if we receive consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present and voted. This could permit us to take action regarding
certain matters without providing other stockholders the opportunity to voice
dissenting views or raise other matters.
We have entered into a stockholders' agreement with Network Associates, the
sole holder of our Class B common stock, that would entitle the holders of Class
B common stock to only one vote per share in the event that any person without
the prior approval of Network Associates board becomes a beneficial owner of 15%
or more of its outstanding common stock.
Dividends, Distributions and Stock Splits. Holders of Class A common stock
and Class B common stock are entitled to receive dividends out of assets legally
available therefor at the same rate, at the same time and in the same amounts as
our board of directors may from time to time determine. See "Dividend Policy."
In the case of dividends or distributions payable in Class A common stock
or Class B common stock, only shares of Class A common stock will be distributed
with respect to the Class A common stock and only shares of Class B common stock
will be distributed with respect to the Class B common stock.
Neither the Class A common stock nor the Class B common stock may be
subdivided or combined in any manner unless the other class is subdivided or
combined in the same proportion.
Conversion. The shares of Class A common stock are not convertible. The
shares of Class B common stock are convertible into Class A common stock, in
whole or in part, at any time and from time to time at the option of the holder,
on the basis of one share of Class A common stock for each share of Class B
common stock converted. Each share of Class B common stock would also
automatically convert
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into one share of Class A common stock upon the sale or transfer of the share of
Class B common stock by the initial holder thereof, other than to a person or
entity controlling, controlled by or under common control with the initial
holder or a qualified employee stock ownership plan. The holders of Class B
common stock would have, upon conversion of their shares of Class B common stock
into Class A common stock, one vote per share of Class A common stock held on
all matters submitted to a vote of McAfee.com's stockholders.
Liquidation. In the event of any dissolution, liquidation, or winding up of
the affairs of McAfee.com, whether voluntary or involuntary, after payment of
the debts and other liabilities of McAfee.com, the remaining assets of
McAfee.com will be distributed ratably among the holders of the Class A common
stock and the Class B common stock, treated as a single class.
Mergers and Other Business Combinations. Upon a merger, combination, or
other similar transaction of McAfee.com in which shares of common stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, holders of the Class A common stock and Class B common stock will be
entitled to receive an equal per share amount of stock, securities, cash, and/or
any other property, as the case may be, into which or for which each share of
any other class of common stock is exchanged or changed. However, in any
transaction in which shares of capital stock are distributed, the shares so
exchanged for or changed into may differ as to voting rights and certain
conversion rights to the extent and only to the extent that the voting rights
and certain conversion rights of Class A common stock and Class B common stock
differ at that time.
Other Provisions. The holders of the Class A common stock and Class B
common stock are not entitled to preemptive rights. There are no redemption
provisions or sinking fund provisions applicable to the Class A common stock or
the Class B common stock.
All shares of Class B common stock outstanding are fully paid and
nonassessable, and all of the shares of Class A common stock to be outstanding
upon completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
We are authorized, subject to limitations prescribed by Delaware law, to
issue preferred stock in one or more series, to establish from time to time the
number of shares to be included in each series, to fix the rights, preferences
and privileges of the shares of each wholly unissued series and any of its
qualifications, limitations or restrictions. The board can also increase or
decrease the number of shares of any series, but not below the number of shares
of that series then outstanding, without any further vote or action by the
stockholders. The board may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of McAfee.com and may
adversely affect the market price of the common stock and the voting and other
rights of the holders of common stock. We have no current plan to issue any
shares of preferred stock.
Network Associates or its transferees has the registration rights with
respect to its shares of our Class A common stock described above under "Related
Party Transactions -- Intercompany Agreements -- Registration Rights Agreement."
ANTI-TAKEOVER PROVISIONS
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or discouraging another person
from acquiring control of our company. Our
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certificate of incorporation and bylaws contain a number of provisions that
could have the effect of delaying, preventing or discouraging a change of
control of our company. These include:
- our certificate of incorporation provides for a classified board of
directors;
- our stockholders are unable, in general, to fill any interim vacancy on
our board of directors;
- our bylaws provide that special meetings of the stockholders may be
called at any time by the board of directors, the chairman of the board
of directors, the chief executive officer, or by one or more stockholders
holding shares in the aggregate entitled to cast 10% or more of the vote
of all shares of our stock; and
- stockholders must follow specified procedures in order to properly submit
any business before a stockholder meeting.
These provisions are designed to reduce the vulnerability of McAfee.com to
an unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of
McAfee.com. These provisions are also intended to discourage tactics that may be
used in proxy fights but could, however, have the effect of discouraging others
from making tender offers for our shares and, consequently, may also inhibit
fluctuations in the market price for our shares that could result from actual or
rumored takeover attempts. These provisions may also have the effect of
preventing changes in our management. See "Risk Factors -- Risks Related to This
Offering -- Provisions in our certificate of incorporation and bylaws and
Delaware law and our relationship with Network Associates may discourage
takeover attempts."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Boston EquiServe.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our Class A common
stock. Future sales of substantial amounts of Class A common stock, including
shares issued upon exercise of outstanding options, in the public market could
adversely affect prevailing market prices. Furthermore, as described below,
36,000,000 shares of Class B common stock currently outstanding will be
available for sale after the expiration of contractual restrictions on resale
with us and/or the underwriters. The shares of Class B common stock held by
Network Associates will automatically convert into shares of Class A common
stock upon transfer by Network Associates to a third party. Sales of substantial
amounts of our Class A common stock in the public market after contractual
restrictions lapse could adversely affect the prevailing market price and our
ability to raise capital in the future.
Upon completion of this offering, we will have outstanding 42,250,000
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants. Of these shares, the
6,250,000 shares of Class A common stock sold in this offering will be freely
tradable without restriction under the Securities Act unless purchased by our
"affiliates." Based on shares outstanding as of September 30, 1999, the
remaining shares will become eligible for public sale as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER
OF SHARES
ELIGIBLE
FOR FUTURE
DATE SALE COMMENT
---- ----------- -------
<S> <C> <C>
Date of this prospectus.............. 0
181 days after the date of this 36,000,000 Lock-up released. These shares may be
prospectus........................... sold under Rule 144.
</TABLE>
LOCK-UP AGREEMENTS WITH THE UNDERWRITERS
Network Associates, currently our sole stockholder, and each of the
individuals holding options that will be vested within the 180-day period after
the date of this prospectus, have signed lock-up agreements under which they
agreed not to sell, transfer or dispose of, directly or indirectly, any shares
of common stock or any securities convertible into or exercisable or
exchangeable for shares of common stock without the prior consent of Morgan
Stanley & Co. Incorporated for a period of 180 days after the date of this
prospectus.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of: 1% of
the number of shares of our common stock then outstanding, which will equal
approximately 422,500 shares immediately after this offering; or the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale. Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of current public
information about McAfee.com.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is
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entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, 144(k) shares may be sold immediately upon the
completion of this offering.
RULE 701
Any employee, officer or director of, or consultant to, McAfee.com or
Network Associates who purchased his or her shares under a written compensatory
plan or contract may be entitled to sell their shares in reliance on Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell these shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. Under this rule, all holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling those shares. However, because all shares that we have
issued under Rule 701 are subject to lock-up agreements, they will only become
eligible for sale when the 180-day lock-up agreements expire. As a result, they
may be sold 90 days after the offering only if the holder obtains the prior
written consent of Morgan Stanley & Co. Incorporated.
REGISTRATION RIGHTS
Upon completion of this offering, Network Associates or its transferees
will be entitled to rights with respect to the registration of the shares of
Class A common stock held by it under the Securities Act. See "Related Party
Transactions -- Intercompany Agreements -- Registration Rights Agreement." After
these shares are registered, they will be freely tradable without restriction
under the Securities Act.
STOCK OPTIONS
Immediately after this offering, we intend to file a registration
statement, on Form S-8 under the Securities Act, to register shares of Class A
common stock which have been reserved for issuance under our stock option and
employee stock purchase plans. As of October 31, 1999, options to purchase
5,108,560 shares of our Class A common stock were issued and outstanding.
This registration statement is expected to be filed and become effective as
soon as practicable after the effective date of this offering. Accordingly,
shares registered under this registration statement will, subject to vesting
provisions and Rule 144 volume limitations applicable to our affiliates, be
available for sale in the open market immediately after the expiration of the
180-day lock-up agreements.
80
<PAGE> 82
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and
Hambrecht & Quist LLC are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, severally, the respective number
of shares of Class A common stock set forth opposite the names of the
underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BancBoston Robertson Stephens Inc...........................
Hambrecht & Quist LLC.......................................
--------
Total.....................................................
========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The terms and conditions of the
underwriting agreement set forth the following:
- the obligations of the underwriters to pay for and accept delivery of the
shares of Class A common stock;
- the conditions to these obligations, which include, among other things,
delivery of legal opinions by our counsel and underwriters' counsel; and
- representations and warranties made by us to the underwriters.
The underwriters are obligated to take and pay for all of the shares of
Class A common stock offered by this prospectus, other than the over-allotment
option, if any of the shares are taken. Morgan Stanley Dean Witter Online, Inc.
is acting as the facilitator of Internet distribution as well as a selected
dealer in this offering.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price set forth on
the cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ a share to other underwriters or to
certain other dealers. After the initial offering of the shares of Class A
common stock, the offering price and other selling terms may from time to time
be varied by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 937,500 additional shares of
Class A common stock at the public offering price set forth on the cover page of
this prospectus, less underwriting discounts and commissions. The underwriters
may exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with this offering of the shares of Class A common
stock. To the extent this option is exercised, each underwriter will become
obligated, subject to specific conditions, to purchase approximately the same
percentage of additional shares of common stock as the number set forth next to
that underwriter's name in the preceding table bears to the total number of
shares of Class A common stock set forth next to the names of all underwriters
in the preceding table. If the underwriters' over-allotment option is exercised
in full:
- the total price to public would be $ ;
- the total underwriters' discounts and commissions would be $ ;
and
- the total proceeds to us would be $ before deducting estimated
offering expenses of $ .
81
<PAGE> 83
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by McAfee.com. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY MCAFEE.COM NO EXERCISE FULL EXERCISE
------------------ ----------- -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
At our request, the underwriters have reserved up to 486,000 shares of
Class A common stock to be sold in the offering for sale, at the public offering
price, to our directors, Network Associates' directors and employees, our
officers, employees, members of their families, and customers and other persons
with whom we have strategic relationships through a directed share program. The
number of shares of Class A common stock available for sale to the general
public will be reduced to the extent these individuals and entities purchase the
reserved shares. These shares will also be subject to the 180-day lock-up period
described in the next paragraph. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.
We, Network Associates, currently our sole stockholder, and each of the
individuals holding options to acquire shares of our Class A common stock that
will be vested within 180 days after the date of this prospectus, have each
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 180 days
after the date of this prospectus, we or they will not:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase;
- lend or otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock, whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale to the underwriters of the shares of Class A common stock under
the underwriting agreement;
- the issuance by McAfee.com of shares of Class A common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus which is described in the
prospectus;
- transactions by any person other than McAfee.com relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock;
- gifts and transfer by will or intestacy, provided that the transferee
agrees in writing to be bound by the restrictions described above;
- transfers to members, partners, affiliates or immediate family or
transfers to a trust for the benefit of the transferor or the
transferor's immediate family, provided that the transferee agrees in
writing to be bound by the restrictions described above; and
- issuances of shares of common stock or options to purchase shares of
common stock under our employee benefit plans as in existence on the date
of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.
82
<PAGE> 84
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol: "MCAF."
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters may
over-allot in connection with the offering, creating a short position in the
Class A common stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the Class A common stock
in the offering if the syndicate repurchases previously distributed shares of
Class A common stock in transactions to cover syndicate short positions or in
stabilization transactions. Any of these activities may stabilize or maintain
the market price of the Class A common stock above independent market levels.
The underwriters are not required to engage in these activities and may end any
of these activities at any time.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1.1 million.
We and Network Associates, on the one hand, and the underwriters, on the
other hand, have agreed to indemnify each other against liabilities, including
liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between McAfee.com and the
representatives of the underwriters. The primary factors to be considered in
determining the public offering price will be our record of operations, our
current financial position and future prospects, the experience of our
management, sales, earnings and certain of our other financial and operating
information in recent periods, the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to ours.
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, will pass upon the validity of the issuance of the shares of Class A
common stock offered by this prospectus. Gray Cary Ware & Freidenrich LLP will
pass upon certain legal matters in connection with this offering for the
Underwriters. Wilson Sonsini Goodrich & Rosati, Professional Corporation is
general outside counsel to Networks Associates, Inc.
EXPERTS
The financial statements of McAfee.com Corporation as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
83
<PAGE> 85
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and the common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete. If a contract
or document has been filed as an exhibit to the registration statement, we refer
you to the copy of the contract or document that has been filed. Each statement
in this prospectus relating to a contract or document filed as an exhibit is
qualified in all respects by the filed exhibit. The registration statement,
including exhibits and schedules, may be inspected without charge at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and
copies of all or any part of it may be obtained from that office after payment
of fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference room. The SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC at
http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial data for
the first three quarters of each year.
84
<PAGE> 86
MCAFEE.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets December 31, 1997 and 1998 and September 30,
1999 (unaudited)............................................ F-3
Statements of Operations
Years ended December 31, 1996, 1997 and 1998 and each of
the nine month periods ended September 30, 1998 and
1999 (unaudited)....................................... F-4
Statements of Stockholder's/Divisional Deficit
Years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999 (unaudited)............ F-5
Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998 and each of
the nine month periods ended September 30, 1998 and
1999 (unaudited)....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 87
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder
McAfee.com Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholder's/divisional deficit, and cash flows present fairly,
in all material respects, the financial position of McAfee.com Corporation, (See
Note 1) at December 31, 1997 and 1998 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
August 20, 1999
F-2
<PAGE> 88
MCAFEE.COM CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997(1) 1998(2) 1999(2)
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ -- $ -- $ 2,410
Accounts receivable, less sales returns reserve of $100
at December 31, 1998 and September 30, 1999........... -- 1,087 2,735
Prepaid expenses and other current assets................ -- -- 91
Receivable from NAI...................................... -- 1,286 1,290
------- ------- --------
Total current assets.................................. -- 2,373 6,526
Fixed assets, net.......................................... 21 65 3,543
------- ------- --------
Total assets.......................................... $ 21 $ 2,438 $ 10,069
======= ======= ========
LIABILITIES
Current liabilities:
Accounts payable......................................... $ -- $ 51 $ 167
Accrued liabilities...................................... 17 1,130 7,037
Deferred revenue......................................... 2,976 6,388 19,869
Payable to NAI........................................... 275 -- --
------- ------- --------
Total liabilities..................................... 3,268 7,569 27,073
------- ------- --------
Commitments and contingencies (Note 8)
STOCKHOLDER'S / DIVISIONAL DEFICIT
Preferred Stock, par value $.001, Authorized 5,000,000
shares, none outstanding
Common Stock, Class A; par value $.001, Authorized
100,000,000 shares, none outstanding
Common Stock, Class B; par value $.001, Authorized
65,000,000; no shares issued and outstanding at December
31, 1997 and 36,000,000 shares issued and outstanding at
December 31, 1998 and September 30, 1999................. -- 36 36
Additional paid-in capital................................. -- 124 10,049
Accumulated/divisional deficit............................. (3,247) (5,291) (27,089)
------- ------- --------
Stockholder's/divisional deficit......................... (3,247) (5,131) (17,004)
------- ------- --------
Total liabilities and stockholder's/divisional
deficit............................................. $ 21 $ 2,438 $ 10,069
======= ======= ========
</TABLE>
- -------------------------
(1) Through December 31, 1998, our activities were included in the operations of
Network Associates. Our financial statements for these periods have been
prepared on a carve-out basis.
(2) From January 1, 1999, we have operated as a wholly-owned subsidiary of
Network Associates.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 89
MCAFEE.COM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996(1) 1997(1) 1998(1) 1998(1) 1999(2)
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................... $ 539 $ 2,530 $ 6,292 $ 4,268 $ 16,095
------- ------- ------- ------- --------
Cost of revenue:
Product costs............................. 53 142 730 272 2,065
Technology costs.......................... 206 1,960 2,975 2,433 4,860
License fees payable to NAI............... -- -- -- -- 1,707
------- ------- ------- ------- --------
Total cost of revenue.................. 259 2,102 3,705 2,705 8,632
------- ------- ------- ------- --------
Operating expenses:
Research and development.................. 287 326 2,661 1,417 4,458
Marketing and sales....................... 1,438 1,469 1,152 396 14,061
General and administrative................ 345 141 767 573 3,491
Stock-based compensation.................. -- -- -- -- 7,251
------- ------- ------- ------- --------
Total operating expenses............... 2,070 1,936 4,580 2,386 29,261
------- ------- ------- ------- --------
Loss from operations........................ (1,790) (1,508) (1,993) (823) (21,798)
------- ------- ------- ------- --------
Net loss.................................... $(1,790) $(1,508) $(1,993) $ (823) $(21,798)
======= ======= ======= ======= ========
Net loss per share, basic and diluted....... -- -- -- -- $ (.61)
Shares used in per share calculation........ -- -- -- -- 36,000
Pro forma net loss per share, basic and
diluted................................... -- -- $ (.06) -- --
Shares used in pro forma per share
calculation............................... -- -- 36,000 -- --
</TABLE>
- -------------------------
(1) Through December 31, 1998, our activities were included in the operations of
Network Associates. Our financial statements for these periods have been
prepared on a carve-out basis.
(2) From January 1, 1999, we have operated as a wholly-owned subsidiary of
Network Associates.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 90
MCAFEE.COM CORPORATION
STATEMENTS OF STOCKHOLDER'S/DIVISIONAL DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDER'S
DIVISIONAL --------------- PAID-IN ACCUMULATED /DIVISIONAL
DEFICIT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996................. $ -- -- $-- $ -- $ -- $ --
Contribution of fixed assets from NAI...... 51 -- -- -- -- 51
Net loss for the period.................... (1,790) -- -- -- -- (1,790)
------- ------ --- ------- -------- --------
Balance at December 31, 1996............... (1,739) -- -- -- -- (1,739)
Net loss for the period.................... (1,508) -- -- -- -- (1,508)
------- ------ --- ------- -------- --------
Balance at December 31, 1997............... (3,247) -- -- -- -- (3,247)
Contribution of fixed assets from NAI...... 73 -- -- -- -- 73
Net loss for the period.................... (1,993) -- -- -- (1,993)
Stock issued to NAI........................ 5,167 36,000 36 124 (5,291) 36
------- ------ --- ------- -------- --------
Balance at December 31, 1998............... -- 36,000 36 124 (5,291) (5,131)
Contribution of fixed assets from NAI...... -- -- -- 2,674 -- 2,674
Stock-based compensation................... -- -- -- 7,251 -- 7,251
Net loss for the period.................... -- -- -- -- (21,798) (21,798)
------- ------ --- ------- -------- --------
Balance at September 30, 1999
(unaudited).............................. -- 36,000 $36 $10,049 $(27,089) $(17,004)
======= ====== === ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 91
MCAFEE.COM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996(1) 1997(1) 1998(1) 1998(1) 1999(2)
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $(1,790) $(1,508) $(1,993) $ (823) $(21,798)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation........................... 13 17 29 19 540
Stock-based compensation............... -- -- -- -- 7,251
Changes in assets and liabilities:
Accounts receivable.................. -- -- (1,087) (376) (1,648)
Prepaid expenses and other current
assets............................ -- -- -- -- (91)
Accounts payable and accrued
liabilities....................... 100 (83) 1,164 331 6,023
Deferred revenue..................... 1,003 1,973 3,412 1,117 13,481
------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities.............. (674) 399 1,525 268 3,758
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................. -- -- -- -- (1,344)
------- ------- ------- ------- --------
Net cash used in investing activities..... -- -- -- -- (1,344)
------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in amount due to (from) NAI........ 674 (399) (1,561) (268) (4)
Common stock issued to NAI................ -- -- 36 -- --
------- ------- ------- ------- --------
Net cash (used in) provided by
financing activities.............. 674 (399) (1,525) (268) (4)
------- ------- ------- ------- --------
Net increase in cash........................ -- -- -- -- 2,410
Cash at beginning of year................... -- -- -- -- --
------- ------- ------- ------- --------
Cash at end of year......................... $ -- $ -- $ -- $ -- $ 2,410
======= ======= ======= ======= ========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Contribution of fixed assets from NAI..... $ 51 $ -- $ 73 $ 37 $ 2,674
</TABLE>
- -------------------------
(1) Through December 31, 1998, our activities were included in the operations of
Network Associates. Our financial statements for these periods have been
prepared on a carve-out basis.
(2) From January 1, 1999, we have operated as a wholly-owned subsidiary of
Network Associates.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 92
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
McAfee.com (the "Company"), a wholly owned subsidiary of Networks
Associates, Inc. ("NAI"), a publicly traded corporation, was incorporated in
December 1998, and commenced operations as a separate legal entity in January
1999.
The Company is an Internet destination site which allows users to secure,
repair, update, upgrade and manage their personal computers (PCs) over the
Internet. The Company's electronic commerce activities include, software
licensing, sponsorship and co-hosting, and advertising. The Company's objective
is to become the leading and most trusted online destination where consumers
secure, repair, update, upgrade and manage their PCs and other Internet access
devices.
Basis of Presentation
The accompanying financial statements include the operations of McAfee as
part of NAI (on a carved out basis as discussed below) through December 31,
1998, (the "divisional statements") and as a separate legal entity from January
1, 1999. The balance sheet at December 31, 1997 represents the assets,
liabilities and divisional deficit of McAfee as a part of NAI (on a carved out
basis as discussed below) and at December 31, 1998, represents the balance sheet
of McAfee as a separate legal entity. The divisional financial statements have
been derived from the historical books and records of NAI. The balance sheet at
December 31, 1997 includes all assets and liabilities directly attributable to
the Company, which are derived from historical cost information of NAI and which
are presented at the carryover basis of NAI. The divisional statements of
operations include all revenue and expenses directly incurred for the McAfee
business, as well as charges for shared facilities, functions and services used
by the Company. The amounts charged for these shared costs have been calculated
based on relative headcount plus 10% of such costs. These charges are believed
by management to be based on reasonable assumptions, however they may not
necessarily be indicative of the expenses that would have been incurred had the
Company operated as a separate unaffiliated entity during these periods.
Beginning January 1, 1999, McAfee began recording intercompany charges for
services provided by NAI and technology license fees to NAI, based on agreements
with NAI (see Note 4). Except for the technology license fees, the costs for
services provided by NAI have been calculated on the same basis used in
preparing the divisional statements prior to January 1, 1999. Accordingly, the
divisional statements have been prepared on the same basis as the statements of
the Company after December 31, 1998. The pro forma impact of the technology fees
on the divisional statements is presented in Note 4.
Interim Financial Information
The unaudited financial information as of September 30, 1999 and for the
nine months ended September 30, 1998 and 1999 has been prepared on the same
basis as the annual financial statements and, in the opinion of the Company's
management, contains all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation. Operating results for any
interim period are not necessarily indicative of results to be expected for the
entire year.
F-7
<PAGE> 93
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Certain Risks and Concentrations
The Company is subject to certain risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of the Internet, dependence on third party technology, new
service introductions and other activities of competitors, dependence on key
personnel, international expansion and limited operating history.
The Company's product revenues are concentrated in the computer software
industry which is highly competitive and rapidly changing. Significant
technological changes in the industry or customer requirements, changes in
customer buying behavior, or the emergence of competitive products with new
capabilities or technologies could adversely affect operating results. Also, a
significant portion of the Company's revenues are derived from sales fulfilled
through one company, Beyond.com. Significant changes in operations or financial
stability of Beyond.com could adversely affect operating results.
The Company's products are substantially based on technology which is
licensed from NAI. Any significant changes in operations or financial stability
of NAI could adversely affect operating results.
Revenue Recognition
Revenue from product licenses is recognized when persuasive evidence of an
arrangement exists, the fee is fixed and determinable, collectibility is
probable, and delivery and acceptance of the software products have occurred.
When contracts contain multiple elements wherein vendor specific objective
evidence exists for all undelivered elements, the Company recognizes revenue for
the delivered elements and defers revenue for the undelivered elements until the
remaining obligations have been satisfied. Any maintenance included in these
arrangements is recognized ratably over the term of the agreement. For contracts
containing multiple elements wherein vendor specific objective evidence does not
exist for all undelivered elements, revenue for the delivered and undelivered
elements is deferred until remaining obligations have been satisfied, which
typically do not extend beyond twelve months. Maintenance revenues are
recognized ratably over the term of the maintenance contract, which is generally
twelve months. Allowances for estimated returns are provided upon product
delivery.
Revenue from fees for providing sponsorships, co-hosting arrangements and
software subscriptions for our hosted applications is deferred at the time of
the transaction and is recognized ratably over the term of the arrangements or
subscriptions.
Revenue from banner advertising and other advertising arrangements is
recognized as advertisement impressions are delivered.
F-8
<PAGE> 94
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
Research and Development
Research and development expenditures prior to establishing technological
feasibility are charged to operations as incurred. Under the Company's
development process, technological feasibility is established on completing a
working model. Subsequent expenses for the Company have not been significant and
all software development expenses have therefore been expensed.
Advertising Expenses
Advertising production expenses are expensed as incurred. Other advertising
expenses are expensed as the advertisement is published or broadcast. Total
advertising expenses were none, $19,000 and $46,000 for the years ended December
31, 1996, 1997, 1998, respectively, and none and $3.8 million for the nine month
periods ended September 30, 1998 and 1999, respectively.
Cash
NAI maintains the cash balance of the Company. Cash received from
operations of the Company is shown as a receivable from NAI. Cash used in
operations is deducted from this receivable balance.
Fixed Assets
Fixed assets are presented at carryover basis or cost less accumulated
depreciation. Depreciation and amortization of fixed assets is computed using
the straight-line method over the estimated useful lives of the assets (2 to 5
years).
Impairment of Long-Lived Assets
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. The Company has not
identified any such impairment losses.
Fair Value of Financial Instruments
Carrying amounts of the Company's financial instruments including cash,
amounts due from NAI, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to their short maturities.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
common shares outstanding during the period. Diluted net income per share is
computed using the weighted average common shares and common equivalent shares
outstanding during the period.
The Company issued Common Stock in December 1998 and commenced operations
as a separate legal entity in January 1999. Accordingly, historical earnings per
share have been presented only for the
F-9
<PAGE> 95
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
nine month period ended September 30, 1999. Pro forma earnings per share
information are presented for the year ended December 31, 1998 as if the
Company's capitalization occurred on January 1, 1998.
Income Taxes
The Company is not a separate taxable entity for federal, state or local
income tax purposes and its operations are included in the tax returns of NAI.
The Company calculates its income taxes under the separate return method and
accounts for income taxes in accordance with Financial Accounting Standards
Board Statement 109 (SFAS 109), "Accounting for Income Taxes." Deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the tax basis of assets and liabilities and
their financial statement reported amounts. The Company records a valuation
allowance against deferred tax assets when it is more likely than not that such
assets will not be realized.
Stock-based Compensation
As permitted by Financial Accounting Standards Board Statement 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company accounts for
employee stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and
related interpretations in accounting for its stock based compensation plans.
Stock compensation related to non-employees is based on the fair value of the
related stock or options in accordance with SFAS 123 and its interpretations.
Comprehensive Income
The Company has adopted Statement of Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income and its components in the financial statements.
To date, the Company has had no transactions that are required to be included in
comprehensive income.
Segment Information
The Company identifies its operating segments based on business activities,
management responsibility and geographical location. The Company has organized
its operations into a single operating segment, providing delivery of
personalized e-commerce offerings and local content. Further, the Company
derives the significant majority of its revenues from operations in the United
States.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, March 1998 and December 1998, the American Institute of
Certified Public Accountants ("AICPA") issued SOP 97-2, "Software Revenue
Recognition," SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, 'Software Revenue Recognition' ", and SOP 98-9, "Modification of SOP 97-2,
'Software Revenue Recognition' with Respect to Certain Transactions"
(collectively, "SOP 97-2"). SOP 97-2 provides guidance on recognizing revenue on
software transactions and superseded SOP 91-1. The adoption of SOP 97-2 did not
have a significant impact on the Company's results of operations.
F-10
<PAGE> 96
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through net income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for years beginning after June 15,
2000. The Company does not expect this pronouncement to materially impact the
Company's results of operations.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position No. 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed of Obtained for Internal Use." SOP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. Adoption of this
pronouncement, which is effective for fiscal 1999, did not materially impact the
Company's results of operations.
In April 1998, the AcSEC issued Statement of Position No. 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that the
costs of start-up activities, including organizational costs, are expensed as
incurred. Adoption of this pronouncement, which is effective for 1999, did not
materially impact the Company's results of operations.
3. BALANCE SHEET DETAIL (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
---- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Fixed assets:
Computers and equipment................................. $ 51 $ 124 $3,993
Furniture and fixtures................................ -- -- 131
Leasehold improvements................................ -- -- 18
---- ------ ------
51 124 4,142
---- ------ ------
Less accumulated depreciation and amortization........ (30) (59) (599)
---- ------ ------
$ 21 $ 65 $3,543
==== ====== ======
Accrued liabilities:
Accrued compensation.................................. $ 17 $ 87 $ 538
Accrued legal and accounting.......................... -- 400 1,400
Accrued taxes......................................... -- -- 769
Accrued marketing..................................... -- 31 2,314
Accrued outside services.............................. -- 523 632
Other accrued expenses................................ -- 89 1,384
---- ------ ------
$ 17 $1,130 $7,037
==== ====== ======
</TABLE>
F-11
<PAGE> 97
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
4. RELATED PARTY TRANSACTIONS
The Company has entered into certain agreements with NAI for the purpose of
defining their ongoing relationship. These agreements were developed in the
context of a parent/subsidiary relationship and therefore are not the result of
arms-length negotiations between independent parties. Although these agreements
or the transactions contemplated by these agreements may not have been effected
on terms at least as favorable to the Company as could have been obtained from
unaffiliated third parties, the Company believes that these agreements taken as
a whole are fair to both parties and that the amount of the expenses
contemplated by the agreements would not be materially different if the Company
operated on a stand-alone basis.
Corporate Management Services Agreement. On January 1, 1999, the Company
entered into a Corporate Management Services Agreement with NAI under which NAI
provides the Company certain administrative services. Under this agreement, NAI
provides to the Company services relating to tax, accounting, insurance,
employee benefits administration, corporate record-keeping, payroll, information
technology infrastructure, and facilities management. In addition, the Company
may request certain additional services to be provided from time-to-time in the
future, with the fee for such additional services subject to negotiation between
the parties. The initial monthly fee that the Company is required to pay for
these services under the agreement is a portion of the costs to NAI plus a 10%
mark-up. The Company's share of such costs is calculated based on headcount.
During the nine month period to September 30, 1999, NAI charged the Company
$2,472,000 under this agreement. For the fiscal periods prior to 1999, general
and administrative expenses allocated to the Company were based on a similar
calculation.
The corporate management services agreement may be terminated either by the
Company upon 30 days notice, or by NAI when it ceases to own a majority of the
Company's outstanding voting stock. Following a termination of this agreement,
the Company may be unable to secure these services from others on acceptable
terms. If the Company is unsuccessful in obtaining acceptable provision of these
services upon termination of the corporate management services agreement, the
Company's future financial performance could be adversely affected.
Cross License Agreement. The Company entered into a technology cross
license agreement with NAI through one of NAI's wholly-owned subsidiaries. Under
this agreement, NAI has granted the Company worldwide non-exclusive patent
licenses and exclusive copyright licenses for the sale or licensing of software
products or software services to certain OEMs and end users solely via the
Internet. Eligible end users include only single-node, individual consumers. In
consideration for the license and rights granted under this license, the Company
is required to pay NAI a royalty on revenues from related product and
subscription sales, initially at a rate of 20% commencing on January 1, 1999 and
declining 1.625% per quarter until the rate is 7% in the quarter beginning
January 1, 2001, and remaining at 7% thereafter. Also under this agreement, the
Company has granted NAI a non-exclusive patent licenses and exclusive copyright
licenses for the sale of products to enterprise customers through any method of
distribution including the Internet and to end users through any method
excluding the Internet. In consideration for the rights granted under this
license, NAI is required to pay the Company a royalty of $250,000 per quarter.
Under this cross technology agreement, NAI will provide end user support to the
Company's customers. Charges for such support will be equal to a portion of the
costs to NAI plus a 10% markup.
F-12
<PAGE> 98
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
During the nine months ended September 30, 1999, the Company was charged
$1,707,000 and $3,364,000 for royalties and support services, respectively. Had
the technology agreement been in effect in prior years, royalties, exclusive of
the royalty payable from NAI, would have been $50,000, $478,000, and $1.2
million for 1996, 1997 and 1998, respectively.
In the event that the Company does not undergo an initial public offering
prior to December 31, 2000, NAI has the right to terminate this agreement and
all licenses granted under it.
Asset Contribution and Receivables Settlement Agreement. The Company
entered into an asset contribution agreement with NAI effective as of January 1,
1999 that transfers ownership of certain assets to the Company. Among the assets
transferred to the Company are: a number of co-hosting and technology agreements
to which NAI is a party; revenues from advertising and sponsorship agreements
involving the Company; ownership rights in 3 patent applications; computers and
Internet infrastructure hardware; and any other assets which both NAI and the
Company's board of directors agree to transfer at a future date. All assets
transferred from NAI have been recorded as a permanent contribution to capital,
at NAI's carryover basis. No liabilities were transferred to the Company, except
for those directly resulting from the assets transferred. NAI will settle the
receivable/payable amount in cash, without interest, on a quarterly basis. As of
September 30, 1999, the receivable due from NAI amounted to $1.3 million which
was fully paid in October 1999.
Revolving Loan Agreement. In January 1999, the Company entered into a
revolving loan agreement with NAI. Under the agreement, NAI has agreed to make
available to the Company up to $30 million in cash as a revolving loan. The
interest rate under this revolving loan is equal to the one-month LIBOR rate.
NAI has the option of having the Company repay the entire principal and interest
then outstanding on the date that is 30 days after the closing of the public
offering covered by this prospectus. Alternatively, if NAI does not request
repayment prior to that time, the revolving loan is repayable in full on January
1, 2001, the termination date of the agreement.
Tax Sharing Agreement. The Company and NAI have entered into a tax-sharing
agreement under which the Company calculates income taxes on a separate return
basis. The Company will be included in NAI's consolidated group for federal
income tax purposes for so long as NAI beneficially owns at least 80% of the
total voting power and the value of the outstanding common stock. Each member of
a consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the tax-sharing agreement allocates tax liabilities between the Company and NAI,
during the period in which the Company is included in NAI's consolidated group,
the Company could be liable in the event that any federal tax liability is
incurred, but not discharged, by any other members of NAI's consolidated group.
Under the tax sharing agreement, NAI and each other member has agreed to
indemnify the Company if the Company is required to pay any tax liability amount
in excess of its hypothetical separate income tax liability, provided the
Company is not in default in its obligation to pay such hypothetical separate
income tax liability to NAI.
The tax sharing agreement will terminate if the Company is no longer
eligible to join NAI in the filing of a consolidated federal income tax return.
In the event of such termination, any net operating losses or other carryforward
amounts would not be available to the Company upon departure from the group.
Under the tax sharing agreement, the Company will not be reimbursed for any such
loss of tax benefits.
F-13
<PAGE> 99
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
Joint Cooperation Agreement. The Company has entered into a Joint
Cooperation and Master Services Agreement with NAI which governs the provision
of technology services among the parties. Under this agreement, NAI's anti-virus
emergency response team (AVERT) will provide us with research and solutions for
virus events. The agreement also contains standard terms and conditions
governing the provision of technology services from one party to the other under
statements of work that may be negotiated from time to time. Currently we have
entered into one such statement of work under which we provide Network
Associates the infrastructure and technical support services for Network
Associates' web site (www.nai.com). Network Associates pays us a fee for these
services in an amount equal to ten percent of our total quarterly technology
costs plus a ten percent service charge. We are obligated to provide these
services until December 31, 2000 under this statement of work. During the nine
months ended September 30, 1999 the charge to NAI was $590,000. This amount has
been offset against technology costs. For the fiscal periods prior to 1999, we
provided similar services to NAI which were allocated and accounted for in the
same manner.
Indemnification and Voting Agreement. The Company has entered into an
indemnification and voting agreement with NAI which will become effective upon
consummation of this offering. Except under certain specified circumstances, NAI
will indemnify the Company for all losses related to any third party claims
relating to events or circumstances arising out of actions or inaction of NAI,
including its subsidiaries and officers and directors, on or prior to the
completion of this offering. Additionally, for so long as NAI owns at least 20%
of the Company's outstanding voting power, it will vote its shares of the
Company's common stock in favor of the election of two independent directors.
Registration Rights Agreement. The Company has entered into a registration
rights agreement with NAI that entitles NAI to include its shares of Company
common stock in any future registration of common stock made by the Company,
other than any registration statement relating to an acquisition or a stock
option plan. In addition, at any time after six months after this offering, NAI
or certain transferees can request that the Company file a registration
statement so they can publicly sell their shares. The Company has agreed
pursuant to the terms of this registration rights agreement to pay all costs and
expenses, other than underwriting discounts and commissions, related to shares
to be sold by NAI or certain transferees in connection with any such
registration.
5. EMPLOYEE BENEFIT PLANS
401(k) and Profit Sharing Plan
NAI has a 401(k) Savings Plan which covers substantially all Company
full-time employees. Participants may make tax-deferred contributions of up to
15% of annual compensation (subject to other limitations specified by the
Internal Revenue Code). Administrative and matching expenses, which are charged
to the Company by NAI, have, to date, not been significant.
Employee Stock Purchase Plan
All Company full-time employees are eligible to participate in NAI's 1994
Employee Qualified Stock Purchase Plan. The Plan is comprised of one year
offering periods with exercise dates approximately every six months (beginning
each August and February). Shares are purchased through employees' payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of NAI's common stock at either the first day of an offering period or the
last day of such offering period. No participant may purchase more than $25,000
worth of common stock in any one calendar year.
F-14
<PAGE> 100
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
In September 1999 the Company's Board of Directors adopted the Company's
Employee Stock Purchase Plan, (the "1999 Purchase Plan"). A total of 500,000
shares of common stock have been reserved for issuance under the 1999 Purchase
Plan, plus annual increases equal to the lesser of: (1) 1 million shares; (2) 3%
of the outstanding shares on such date; or (3) an amount determined by the Board
of Directors. As of the date of this prospectus, no shares have been issued
under the 1999 Purchase Plan.
6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, par value
$.001 per share. The Company's Board of Directors has authority to provide for
the issuance of the shares of preferred stock in series, to establish from
time-to-time the number of shares to be included in each such series and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof, without any
further vote or action by the shareholders. As of September 30, 1999, no shares
of preferred stock have been issued.
Common Stock
The Company has authorized 100,000,000 shares of Class A common stock, par
value $.001 per share. The Company also has authorized 65,000,000 shares of
Class B common stock, par value $.001 per share. As of September 30, 1999,
36,000,000 shares of Class B common stock have been issued to NAI, and no shares
of Class A shares have been issued.
Class A and B shares are identical in all respects except for voting rights
and certain conversion rights. Class A shares are entitled to one vote per share
and Class B shares are entitled to three votes per share. Class A common stock
is not convertible. Class B common stock is convertible, in whole or in part, at
any time and from time-to-time at the option of the holder, on the basis of one
share of Class A common stock for each share of Class B common stock. Class A
and Class B common stock will be treated as a single class in the event of
liquidation of the Company. Any share of Class B common stock transferred by NAI
will automatically convert into Class A common stock upon transfer.
Stock Option Plans
In January 1999, the Board of Directors approved the 1999 Stock Plan (the
"Plan"), as amended June 19, 1999. Under the Plan, the Company has reserved
8,388,000 shares for issuance to employees, officers, directors and consultants.
The Plan also provides for automatic annual increases to be added at the annual
stockholder's meeting, equal to the lower of: (a) 2.5 million shares of Class A
common stock, (b) 5% of the outstanding shares of all Class A common stock on
that date, or (c) an amount determined by the Company's Board of Directors. The
Plan provides for an option price no less than 100% of the fair market value of
the Company's common stock on the date of grant for incentive stock options
granted to employees and officers (including directors who are also employees)
or 85% of the fair market value on the date of grant for all others. The options
may be exercisable immediately, or over time, generally vest 25% one year after
commencing employment or from date of grant and vest thereafter in monthly
increments over three years. All options under the Plan expire ten years after
grant.
F-15
<PAGE> 101
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
Aggregate activity under stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------
SHARES AVAILABLE NUMBER PRICE AGGREGATE WEIGHTED AVERAGE
FOR GRANT OF SHARES PER SHARE PRICE EXERCISE PRICE
---------------- ---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Options authorized
January 1999........... 8,388,000 -- -- -- --
Options
granted -- company
employees................ (2,571,700) 2,571,700 $3.67-$6.55 $111,577,688 $4.51
Options granted -- NAI
officers and
employees.............. (3,756,000) 3,756,000 $3.67-$6.55 $14,752,200 $3.93
Options cancelled --
company employees...... 37,250 (37,250) $4.64 $ (172,840) $4.64
Options cancelled -- NAI
officers and
employees.............. 1,710,000 (1,710,000) $3.67 $(6,275,700) $3.67
---------- ---------- ----------- ----------- -----
Balance at September 30,
1999 (unaudited)....... 3,807,550 4,580,450 $3.67-$6.55 $19,881,348 $4.34
========== ========== =========== =========== =====
</TABLE>
Stock-based Compensation Charge
In January 1999, certain officers of NAI were granted options to purchase
3,420,000 shares of the Company's Class A common stock. These options originally
vested over four years. Since these officers are not employees of the Company,
these options are accounted for at fair market value in accordance with SFAS 123
and its interpretations. The determination of the total compensation to be
recognized in connection with these grants requires the remeasurement of the
fair value of the options each reporting period until the options are fully
vested. Compensation expense is reflected in the Company's results of operations
over the vesting period. The Company recorded compensation expense of
approximately $1.2 million and $1.6 million for the three and six months ended
June 30, 1999, respectively. On September 22, 1999, with the agreement of the
optionholders, the Company cancelled options for 1,710,000 shares and amended
the remaining options to make them fully vested. As a result of this change we
recorded a charge of approximately $5.6 million, including a charge for options
for 336,000 shares granted to Network Associates employees in September 1999,
during the three months ended September 30, 1999.
Director Option Plan
In September 1999, the Company adopted the 1999 Director Option Plan. The
Company has reserved 150,000 shares for issuance under the plan to certain
members of its Board who are not employees of the Company or any affiliated
corporation. Under the plan the number of shares reserved under the plan will
automatically increase at the date of the Annual Stockholder's Meeting by the
number of shares required to restore the reserve available for new options to
150,000 shares. Each outside director will automatically be granted an option to
purchase 40,000 shares of Company common stock on the date at which they become
a director. Each anniversary thereafter, each outside director will
automatically be granted an option to purchase 10,000 shares of Company common
stock. Both the initial and subsequent grants vest at a rate of 25% after one
year and 1/48 each month thereafter.
F-16
<PAGE> 102
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
Reverse Stock Split
On July 28, 1999, the Company effected a 5:3 reverse stock split. All share
and per share information included in these financial statements has been
retroactively adjusted to reflect this reverse stock split.
Initial Public Offering
In September 1999, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission for an Initial Public Offering of the Company's Class A Common Stock.
7. PROVISION FOR INCOME TAXES
Under the Company's tax sharing agreement with NAI, it calculates its
income taxes on a separate return basis, including utilization of any carryback
or carryforward amounts.
The Company has provided a full valuation allowance against its deferred
tax assets due to the uncertainty that such assets may be realizable.
Significant components of net deferred tax assets at December 31, 1996,
1997 and 1998 consist of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ----- -------
<S> <C> <C> <C>
Accrued liabilities and reserves............................ $ -- $ -- $ 264
Net operating loss carryover................................ 681 724 966
----- ----- -------
681 724 1,230
Valuation allowance......................................... (681) (724) (1,230)
----- ----- -------
$ -- $ -- $ --
===== ===== =======
</TABLE>
8. CONTINGENCIES AND LIABILITIES
Litigation
Symantec, Hilgraeve and Trend Micro have each filed suit against NAI with
respect to the anti-virus technology that the Company licenses from NAI. NAI has
indicated that it believes it has valid defenses to these actions and intends to
defend them vigorously. In addition to naming NAI as a defendant in these
litigation matters, claimants may seek to name the Company as a defendant in
related actions and seek damages from the Company. Under the terms of an
indemnification agreement with NAI, subject to certain exemptions, NAI has
agreed to indemnify and defend the Company and hold it harmless from any losses
as a result of these or other intellectual property claims arising out of events
or circumstances occurring prior to the consummation of the Company's initial
public offering. The litigation process is subject to inherent uncertainties and
the Company and/or NAI may not prevail in these matters, or the Company and/or
NAI may be unable to obtain licenses with respect to any patents or other
intellectual property rights of third parties that may be held valid or
infringed upon by the Company or the Company's products. Uncertainties inherent
in the litigation process involve, among
F-17
<PAGE> 103
MCAFEE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1999 IS UNAUDITED)
other things, the complexity of the technologies involved, potentially adverse
changes in the law and discovery of facts unfavorable to NAI or the Company. In
addition, any involvement in legal actions regarding the Company's intellectual
property rights could be expensive and could distract management from the
Company's day-to-day operations.
9. NET INCOME (LOSS) PER SHARE
Net income (loss) available to common shareholders and weighted average
shares outstanding are the same for basic and fully diluted earnings per share
calculations for all periods presented.
The fully diluted earnings per share calculation for the nine months ended
September 30, 1999 excludes options for 4,580,450 shares as they are
anti-dilutive.
F-18
<PAGE> 104
APPENDIX TO GRAPHICS
[Inside Front Cover]
The Place for Your PC
MCAFEE.COM IS THE PLACE FOR YOUR PC ON THE INTERNET
[Left upper corner]
[Display of McAfee. com home page on web site]
MCAFEE CLINIC
McAfee.com at a Glance
- - Check and Clean PC Viruses
- - Optimize and Repair Your PC
- - Clean Up Your Hard Drive
- - Check for Y2K Compliance [Right Lower Corner]
Display of McAfee Clinic
- - Update your PC with Patches Center on website]
And Upgrades
<PAGE> 105
[Inside Back Cover]
Keep Your PC Healthy and Fit Online
THE ANTI - VIRUS CENTER:
- VirusScan Online
- Virus Information Library
[Left upper corner] - Virus Calendar
[Display of McAfee Anti-
Virus Center on website] - ActiveShield
- Recent Virus List
- Rescue Disk
THE Y2K CENTER:
- Software Analyzer
- Hardware Analyzer
[Middle center of page] - File Analyzer
[Display of McAfee Y2K Center
on website] - Y2K Resource Center
<PAGE> 106
THE McAfee CLINIC CENTER:
- VirusScan Online
- Clean Hard Drive
- Y2K Compliance
[Left side, lower half of page]
- Optimize Performance
- Software Update Finder
- Windows 95/98 Advisor
THE PC CHECK-UP CENTER:
- Hard Drive Cleaner
[Bottom middle of page]
- PC Optimizer
- Software Update Finder
- Report System Info
- Windows Advisor
<PAGE> 107
[MCAFEE.COM LOGO]
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale of
the securities being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 15,985
NASD Filing Fee............................................. 6,250
Nasdaq National Market Listing Fee.......................... 95,000
Printing Costs.............................................. 150,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 300,000
Blue Sky Fees and Expenses.................................. 15,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous............................................... 107,765
Total..................................................... $ 1,100,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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 Act of 1933. Article Nine of our Amended
and Restated Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of
our current Bylaws (Exhibit 3.2 hereto) provide for indemnification of our
directors, officers, employees and other agents to the maximum extent permitted
by Delaware law. In addition, we have entered into Indemnification Agreements
(Exhibit 10.1 hereto) with our officers and directors. The Underwriting
Agreement (Exhibit 1.1) also provides for cross-indemnification among
McAfee.com, Network Associates and the Underwriters with respect to certain
matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in December 1998, we have sold and issued the
following securities:
1. In December 1998 in connection with its formation, the Company
issued 36,000,000 shares of Class B common stock to Networks Associates,
Inc. pursuant to an exemption under Section 4(2) of the Securities Act.
2. From inception in December 1998 through October 31, 1999, the
Company granted an aggregate of 5,108,560 options to purchase its Class A
common stock at exercise prices ranging from $3.67 to $7.33 per share
pursuant to exemptions under Section 4(2) of the Securities Act and Rule
701 promulgated thereunder, to directors, officers and employees of
McAfee.com and to officers and employees of Network Associates, Inc.
pursuant to the Company's 1999 Stock Plan.
The recipients of securities in each the above transactions represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions. All
recipients either received adequate information about McAfee.com or had adequate
access, through their relationships with McAfee.com, to information about us.
II-1
<PAGE> 109
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of
McAfee.com Corporation, as currently in effect.
3.2** Bylaws of McAfee.com Corporation, as currently in effect.
4.1 Specimen Class A common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1** Form of Indemnification Agreement between the Company and
each of its directors and officers.
10.2** 1999 Amended and Restated Stock Plan and form of agreements
thereunder.
10.3** 1999 Director Option Plan and form of agreements thereunder.
10.4** 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.5** Corporate Management Services Agreement between the Company
and Networks Associates, Inc., dated as of January 1, 1999.
10.6** Technology Cross License Agreement between McAfee.com and
Networks Associates, Inc., dated as of January 1, 1999.
10.7** Registration Rights Agreement between McAfee.com and
Networks Associates, Inc., dated as of January 1, 1999.
10.8** Asset Contribution and Receivables Settlement Agreement
between McAfee.com and Networks Associates, Inc., dated as
of January 1, 1999.
10.9** Intercompany Revolving Loan Agreement between McAfee.com and
Networks Associates, Inc., dated as of January 1, 1999.
10.10** Tax Sharing Agreement between McAfee.com and Networks
Associates, Inc., dated as of January 1, 1999.
10.11** Indemnification and Voting Agreement between McAfee.com and
Networks Associates, Inc. dated August 20, 1999.
10.12** Joint Cooperation and Master Services Agreement between
McAfee.com and Networks Associates, Inc. dated as of January
1, 1999.
10.13+** Amended and Restated Electronic Software Reseller/Web Site
Services Agreement between Beyond.com Corporation and
McAfee.com, dated as of May 17, 1999.
10.14* Stockholders' Agreement between McAfee.com and Network
Associates, Inc., dated October 31, 1999.
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included
in Exhibit 5.1)
24.1** Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ McAfee.com has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
None
II-2
<PAGE> 110
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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.
II-3
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California on November 3, 1999.
By: /s/ SRIVATS SAMPATH
------------------------------------
Srivats Sampath
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on November 3, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ SRIVATS SAMPATH President, Chief Executive Officer and
- ------------------------------------------- Director (Principal Executive Officer)
Srivats Sampath
/s/ EVAN COLLINS Vice President, Chief Financial Officer and
- ------------------------------------------- Secretary (Principal Financial and
Evan Collins Accounting Officer)
* Chairman of the Board
- -------------------------------------------
William Larson
* Director
- -------------------------------------------
Frank Gill
* Director
- -------------------------------------------
Prabhat Goyal
* Director
- -------------------------------------------
Richard Schell
*By: /s/ SRIVATS SAMPATH
----------------------------------------
Srivats Sampath
Attorney-in-fact
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following person on behalf of
the Registrant and in the capacity and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SRIVATS SAMPATH President, Chief Executive Officer November 3, 1999
- ---------------------------------- and Director
Srivats Sampath
</TABLE>
II-4
<PAGE> 112
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of
McAfee.com Corporation, as currently in effect.
3.2** Bylaws of McAfee.com Corporation, as currently in effect.
4.1 Specimen Class A common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1** Form of Indemnification Agreement between the Company and
each of its directors and officers.
10.2** 1999 Amended and Restated Stock Plan and form of agreements
thereunder.
10.3** 1999 Director Option Plan and form of agreements thereunder.
10.4** 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.5** Corporate Management Services Agreement between the Company
and Networks Associates, Inc., dated as of January 1, 1999.
10.6** Technology Cross License Agreement between McAfee.com and
Networks Associates, Inc., dated as of January 1, 1999.
10.7** Registration Rights Agreement between McAfee.com and
Networks Associates, Inc., dated as of January 1, 1999.
10.8** Asset Contribution and Receivables Settlement Agreement
between McAfee.com and Networks Associates, Inc., dated as
of January 1, 1999.
10.9** Intercompany Revolving Loan Agreement between McAfee.com and
Networks Associates, Inc., dated as of January 1, 1999.
10.10** Tax Sharing Agreement between McAfee.com and Networks
Associates, Inc., dated as of January 1, 1999.
10.11** Indemnification and Voting Agreement between McAfee.com and
Networks Associates, Inc. dated August 20, 1999.
10.12** Joint Cooperation and Master Services Agreement between
McAfee.com and Networks Associates, Inc. dated as of January
1, 1999.
10.13+** Amended and Restated Electronic Software Reseller/Web Site
Services Agreement between Beyond.com Corporation and
McAfee.com, dated as of May 17, 1999.
10.14* Stockholders' Agreement between McAfee.com and Network
Associates, Inc., dated October 31, 1999.
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included
in Exhibit 5.1)
24.1** Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ McAfee.com has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
<PAGE> 1
EXHIBIT 1.1
_______________ SHARES
MCAFEE.COM CORPORATION
CLASS A COMMON STOCK
($0.001 PAR VALUE PER SHARE)
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
_____________, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
McAfee.com Corporation, a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several Underwriters named in Schedule I hereto (the
"UNDERWRITERS") _______________ shares of its Class A Common Stock, $0.001 par
value per share (the "FIRM SHARES"). The Company also proposes to issue and sell
to the several Underwriters not more than an additional ______________ shares of
its Class A Common Stock, $0.001 par value per share (the "ADDITIONAL SHARES"),
if and to the extent that you, as Managers of the offering, shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 2 hereof. The
Firm Shares and the Additional Shares are hereinafter collectively referred to
as the "SHARES." The shares of the Company's Class A Common Stock, $0.001 par
value per share, and shares of Class B Common Stock, $0.001 par value per share,
to be outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to collectively as the "COMMON STOCK." In addition, Network
Associates, Inc., a Delaware corporation ("NAI") is a party to this Underwriting
Agreement for purposes of the third paragraph of Section 2 and Sections 7 and 8.
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to
reserve a portion of the Shares to be purchased by it under this Agreement for
sale to the Company's directors, officers, employees and business associates and
other parties related to the Company (collectively, "Participants"), as set
forth in the Prospectus under the heading "Underwriters"
1
<PAGE> 3
(the "Directed Share Program"). The Shares to be sold by Morgan Stanley and its
affiliates pursuant to the Directed Share Program are referred to hereinafter as
the "Directed Shares." Any Directed Shares not orally confirmed for purchase by
any Participants by the end of the business day on which this Agreement is
executed will be offered to the public by the Underwriters as set forth in the
Prospectus.
1. Representations and Warranties. The Company represents and warrants
to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph do
not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole; all of the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned directly
by the Company, free and clear of all liens, encumbrances, equities or claims.
2
<PAGE> 4
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) Upon the filing of the Amended and Restated Certificate of
Incorporation filed as Exhibit 3.2 to the Registration Statement, the authorized
capital stock of the Company will conform as to legal matters to the description
thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by-laws of
the Company or any agreement or other instrument binding upon the Company or any
of its subsidiaries that is material to the Company and its subsidiaries, taken
as a whole, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
3
<PAGE> 5
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(p) Other than as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the Company
or to require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(r) Except as described in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, (1) the Company and its subsidiaries have not incurred any
material liability or obligation, direct or contingent, nor entered into any
material transaction not in the ordinary course of business; (2) the Company has
not purchased any of its outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on its capital stock
other than ordinary and customary dividends; and (3) there has not been any
material change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus.
(s) The Company and its subsidiaries have good and marketable title
to all personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such
4
<PAGE> 6
property and buildings by the Company and its subsidiaries, in each case except
as described in the Prospectus. The Company owns no real property.
(t) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, and neither the Company nor
any of its subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse affect on the Company and its
subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or, to
the knowledge of the Company, is imminent; and the Company is not aware of any
existing, threatened or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors that could have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(v) The Company and its subsidiaries are collectively insured by the
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries has been refused
any insurance coverage sought or applied for; and neither the Company nor any of
its subsidiaries has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, except
to the extent that the failure to obtain such certificates, authorizations and
permits would not have a material adverse effect on the Company and its
subsidiaries taken as a whole, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described the Prospectus
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
5
<PAGE> 7
(y) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be affected by the Year 2000 Problem
(that is, any significant risk that computer hardware or software applications
used by the Company and its subsidiaries will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1, 2000); as a
result of such review, (i) the Company has no reason to believe, and does not
believe, that (A) there are any issues related to the Company's preparedness to
address the Year 2000 Problem that are of a character required to be described
or referred to in the Registration Statement or Prospectus which have not been
accurately described in the Registration Statement or Prospectus and (B) the
Year 2000 Problem will have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, or result in any material loss
or interference with the business or operations of the Company and its
subsidiaries, taken as a whole; and (ii) the Company reasonably believes, after
due inquiry, that the suppliers, vendors, customers or other material third
parties used or served by the Company and such subsidiaries are addressing or
will address the Year 2000 Problem in a timely manner, except to the extent that
a failure to address the Year 2000 Problem by any supplier, vendor, customer or
material third party would not have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole.
(z) Each of NAI and the Company have all requisite corporate power
and authority to enter into each of the Intercompany Agreements and to
consummate the transactions contemplated thereby and each of the Intercompany
Agreements has been duly and validly executed and delivered by NAI and the
Company, are in full force and effect and constitute a valid and binding
obligation of NAI and the Company, enforceable in accordance with their terms.
(aa) The Registration Statement, the Prospectus and any preliminary
prospectus comply, and any amendments or supplements thereto will comply, with
any applicable laws or regulations of foreign jurisdictions in which the
Prospectus or any preliminary prospectus, as amended or supplemented, if
applicable, are distributed in connection with the Directed Share Program.
(bb) No consent, approval, authorization or order of, or
qualification with, any governmental body or agency, other than those obtained,
is required in connection with the offering of the Directed Shares in any
jurisdiction where the Directed Shares are being offered.
(cc) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or supplier of
the Company to alter the customer's or supplier's level or type of business with
the Company, or (ii) a trade journalist or publication to write or publish
favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not
6
<PAGE> 8
jointly, to purchase from the Company the respective numbers of Firm Shares set
forth in Schedule I hereto opposite its name at $______ a share (the "PURCHASE
PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company and NAI each hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 180 days after the date of the Prospectus,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Shares to be sold hereunder or (B) the
issuance by the Company of shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof of
which the Underwriters have been advised in writing or which is described in the
Prospectus.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New
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York City time, on ____________, 1999, or at such other time on the same or such
other date, not later than _________, 1999, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [_____] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and that makes it, in
your judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in Section 5(a)(i) above and to the effect that
the representations and warranties of the Company
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<PAGE> 10
contained in this Agreement are true and correct as of the Closing Date and that
the Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before the
Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, outside
counsel for the Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its property and
to conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms
as to legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly issued, fully
paid and non-assessable;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and, except as described in the Prospectus, are
owned directly by the Company or through a subsidiary of the Company and, to
such counsel's knowledge, are free and clear of all liens, encumbrances,
equities or claims;
(vi) the Shares have been duly authorized and, when issued
and delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized, executed
and delivered by the Company and NAI;
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<PAGE> 11
(viii) the execution and delivery by the Company and NAI
of, and the performance by each of the Company and NAI of its obligations under,
this Agreement will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon the Company
or any of its subsidiaries that is material to the Company and its subsidiaries,
taken as a whole, or, to the best of such counsel's knowledge, any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over the Company or any subsidiary, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of the various states
in connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the
captions "Risk Factors - Risks Related to our Relationship with Network
Associates - We do not own much of the core technology and intellectual property
underlying our current products and our currently planned products, - Our
agreements with Network Associates are not the result of arm's length
negotiations and as a result the agreements may be less favorable to us than
agreements negotiated at arm's length, - Network Associates' ability to exert
control over us following this offering could result in actions that are not
consistent with the interests of our other stockholders, particularly with
respect to a change of control, - We rely on Network Associates to adequately
protect and defend our licensed technology and intellectual property and any
failure by Network Associates to do so could adversely affect our business, -
Because we license our anti-virus and other technology from Network Associates,
our ability to compete in our markets depends in part on the success of Network
Associates' research and development and - We rely on Network Associates to
provide critical services to us, and any failure on its part to effectively do
so could adversely affect our business," "- Future sales of our common stock may
affect our stock price," "- Intellectual Property," "Legal Proceedings," "Share
Eligible for Future Sale," "Related Party Transactions - Intercompany
Agreements," "Description of Capital Stock" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with respect to
such legal matters, documents and proceedings and fairly summarize the matters
referred to therein;
(x) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described or of
any statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
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<PAGE> 12
(xii) each of NAI and the Company have all requisite
corporate power and authority to enter into each of the Intercompany Agreements
and to consummate the transactions contemplated thereby and each of the
Intercompany Agreements has been duly and validly executed and delivered by NAI
and the Company, are in full force and effect and constitute a valid and binding
obligation of NAI and the Company, enforceable in accordance with their terms;
(xiii) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein as to which
such counsel need not express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except for financial
statements and schedules and other financial and statistical data as to which
such counsel need not express any belief) the Registration Statement and the
prospectus included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) has no reason to believe that (except
for financial statements and schedules and other financial and statistical data
as to which such counsel need not express any belief) the Prospectus contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Gray Cary Ware & Freidenrich LLP, counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in Sections 5(c)(vi),
5(c)(vii), 5(c)(ix) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters") and 5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Wilson Sonsini Goodrich &
Rosati, Professional Corporation and Gray Cary Ware & Freidenrich LLP may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified.
The opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation described in Section 5(c) above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters, from
PricewaterhouseCoopers LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus; provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
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(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and directors
of the Company relating to sales and certain other dispositions of shares of
Common Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 a.m. New York City time on the business day next succeeding the date of
this Agreement and during the period mentioned in Section 6(c) below, as many
copies of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus required
to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers (whose names
and addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
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(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the twelve-month
period ending December 31, 2000 that satisfies the provisions of Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel and the Company's accountants in connection with the registration and
delivery of the Shares under the Securities Act and all other fees or expenses
in connection with the preparation and filing of the Registration Statement, any
preliminary prospectus, the Prospectus and amendments and supplements to any of
the foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 6(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to listing the Shares on the
Nasdaq National Market, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and 50% of
the cost of any aircraft chartered in connection with the road show, (ix) all
reasonable fees and disbursements of counsel incurred by the Underwriters in
connection with the Directed Share Program and stamp duties, similar taxes or
duties or other taxes, if any, incurred by the Underwriters in connection with
the Directed Share Program, and (x) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision is
not otherwise made in this Section. It is understood, however, that except as
provided in this Section, Section 7 entitled "Indemnity and Contribution", and
the last paragraph of Section 10 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
(g) To place stop transfer orders on any Directed Shares that
have been sold to Participants subject to the 180-day restriction on sale,
transfer, assignment, pledge or hypothecation imposed by NASD Regulation, Inc.
under its Interpretative Material 2110-1 on
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free-riding and withholding to the extent necessary to ensure compliance with
the 180-day restrictions.
(h) To comply with all applicable securities and other applicable
laws, rules and regulations in each jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
7. Indemnity and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided, however that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter, or any person controlling such
Underwriter, from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto ) was not sent or given by or on behalf of such Underwriter, if required
by law so to have been delivered, at or prior to the written confirmation of the
sale of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless NAI, the Company, and their respective directors,
and officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company and NAI to such Underwriter, but only with reference
to information relating to such Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a) or 7(b), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the
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<PAGE> 16
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7(a), and by the Company, in the case of
parties indemnified pursuant to Section 7(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section
7(a) or 7(b) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case
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<PAGE> 17
as set forth in the table on the cover of the Prospectus, bear to the aggregate
Public Offering Price of the Shares. The relative fault of the Company on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 7(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Directed Share Program Indemnification.
(a) The Company agrees to indemnify and hold harmless Morgan
Stanley and its affiliates and each person, if any, who controls Morgan Stanley
or its affiliates within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the consent of the Company for distribution to
Participants in connection with the Directed Share Program, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (ii)
caused by the failure of
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any Participant to pay for and accept delivery of Directed Shares that the
Participant has agreed to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program other than losses, claims, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Morgan
Stanley Entities.
(b) In case any proceeding (including any governmental
investigation) shall be instituted involving any Morgan Stanley Entity in
respect of which indemnity may be sought pursuant to Section 8(a), the Morgan
Stanley Entity seeking indemnity shall promptly notify the Company in writing
and the Company, upon request of the Morgan Stanley Entity, shall retain counsel
reasonably satisfactory to the Morgan Stanley Entity to represent the Morgan
Stanley Entity and any other indemnified party the Company may designate in such
proceeding and shall pay the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any Morgan Stanley Entity shall have
the right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Morgan Stanley Entity unless (i) the Company
shall have agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the Company
and the Morgan Stanley Entity and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing interests
between them. The Company shall not, in respect of the legal expenses of the
Morgan Stanley Entities in connection with any proceeding or related proceedings
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Morgan Stanley
Entities. Any such firm for the Morgan Stanley Entities shall be designated in
writing by Morgan Stanley. The Company shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Company agrees to
indemnify the Morgan Stanley Entities from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time a Morgan Stanley Entity shall have requested the Company to
reimburse it for fees and expenses of counsel as contemplated by the second and
third sentences of this paragraph, the Company agrees that it shall be liable
for any settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 30 days after receipt by the Company
of the aforesaid request and (ii) the Company shall not have reimbursed the
Morgan Stanley Entity in accordance with such request prior to the date of such
settlement. The Company shall not, without the prior written consent of Morgan
Stanley, effect any settlement of any pending or threatened proceeding in
respect of which any Morgan Stanley Entity is or could have been a party and
indemnity could have been sought hereunder by such Morgan Stanley Entity, unless
such settlement includes an unconditional release of the Morgan Stanley Entities
from all liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section
8(a) is unavailable to a Morgan Stanley Entity or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then the Company, in
lieu of indemnifying the Morgan Stanley Entity thereunder, shall contribute to
the amount paid or payable by the Morgan Stanley Entity as a result of such
losses, claims, damages or liabilities (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is
17
<PAGE> 19
appropriate to reflect not only the relative benefits referred to in clause
8(c)(i) above but also the relative fault of the Company on the one hand and of
the Morgan Stanley Entities on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and of the Morgan Stanley Entities on
the other hand in connection with the offering of the Directed Shares shall be
deemed to be in the same respective proportions as the net proceeds from the
offering of the Directed Shares (before deducting expenses) and the total
underwriting discounts and commissions received by the Morgan Stanley Entities
for the Directed Shares, bear to the aggregate Public Offering Price of the
Shares. If the loss, claim, damage or liability is caused by an untrue or
alleged untrue statement of a material fact, the relative fault of the Company
on the one hand and the Morgan Stanley Entities on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement or the omission or alleged omission relates to information
supplied by the Company or by the Morgan Stanley Entities and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it
would not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(c). The amount paid or payable by the Morgan Stanley Entities as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the Morgan Stanley Entities in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 8, no
Morgan Stanley Entity shall be required to contribute any amount in excess of
the amount by which the total price at which the Directed Shares distributed to
the public were offered to the public exceeds the amount of any damages that
such Morgan Stanley Entity has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. The remedies
provided for in this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any Morgan Stanley Entity at law
or in equity.
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Morgan Stanley Entity or the Company and NAI and their respective
officers or directors or any person controlling the Company and (iii) acceptance
of and payment for any of the Directed Shares.
9. NAI Guarantee of Company Obligations.
(a) The Underwriters or Morgan Stanley shall promptly notify NAI
of any claim for indemnification pursuant to Section 7 or 8.
(b) In the event that the Underwriters or Morgan Stanley shall
have properly made any request for indemnification pursuant to Section 7 or 8 or
made a legal claim for damages in
18
<PAGE> 20
connection with a breach of the Company's representations and warranties set for
in Section 1, and the Company (i) shall have failed to pay such amount or
otherwise failed to satisfy its obligations set forth in Section 1, 7 or 8, as
the case maybe, within 30 days of such request, or (ii) shall be, in such
indemnified party's reasonable judgment, unable or unwilling to satisfy such
obligations, NAI shall promptly indemnify such indemnified party to the same
extent as the Company shall be required to indemnify such indemnified party, or
shall contribute to the amount paid or payable by such indemnified party to the
same extent as the Company shall be required to contribute to such amount in the
event indemnification is unavailable or is insufficient as contemplated by
Section 7(d) or 8(c).
(c) The indemnity and contribution provision contained in this
Section 9 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Morgan Stanley Entity or the Company and its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
10. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 11 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters
19
<PAGE> 21
shall fail or refuse to purchase Firm Shares and the aggregate number of Firm
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you and the Company for the purchase of such Firm Shares are not made within
36 hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. If, on the Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional Shares
and the aggregate number of Additional Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
McAfee.com Corporation
By:
------------------------------------
Name:
Title:
Network Associates, Inc.
20
<PAGE> 22
By:
------------------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
---------------------------------
Name:
Title:
21
<PAGE> 23
SCHEDULE I
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
<PAGE> 24
EXHIBIT A
FORM OF LOCK-UP LETTER
Lock-up Letter
September 1, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens
Hambrecht & Quist
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with McAfee.com Corporation, a Delaware corporation
(the "COMPANY") providing for the public offering (the "PUBLIC OFFERING") by the
several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of shares
(the "SHARES") of the Class A Common Stock, par value $0.001, of the Company
(the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering.
Notwithstanding the foregoing (i) gifts and transfers by will or intestacy or
(ii) transfers to (A) the undersigned's members, partners, affiliates or
immediate family or (B) a trust, the beneficiaries of which are the undersigned
and/or members of the undersigned's immediate family, shall not be prohibited by
this agreement; provided that (x) the donee or transferee agrees in writing to
be bound by the foregoing in the same manner as it applies to the
1
<PAGE> 25
undersigned and (y) if the donor or transferor is a reporting person subject to
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), any
gifts or transfers made in accordance with this paragraph shall not require such
person to, and such person shall not voluntarily, file a report of such
transaction of Form 4 under the Exchange Act. "Immediate family" shall mean
spouse, lineal descendants, father, mother, brother or sister of the transferor
and father, mother, brother or sister of the transferor's spouse. In addition,
the undersigned agrees that, without the prior written consent of Morgan Stanley
on behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
REMAINDER OF PAGE INTENTIONALLY BLANK
2
<PAGE> 26
Very truly yours,
--------------------------------
(Signature)
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
3
<PAGE> 1
EXHIBIT 4.1
NUMBER MCF___________ MCAFEE.COM CORPORATION ___________ SHARES
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 579062 10 0
THIS CERTIFIES THAT ___________________________ is the owner of
___________________________________ fully paid and non-assessable shares of the
Class A Common Stock, $.001 par value, of MCAFEE.COM CORPORATION transferable on
the books of the Corporation by the holder hereof in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ EVAN COLLINS /s/ SRIVATS SAMPATH
- --------------------------------------- -----------------------------
Vice President, Chief Financial Officer President and Chief
and Secretary Executive Officer
<PAGE> 2
MCAFEE.COM CORPORATION
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________Custodian ____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with rights under Uniform Gifts to Minors
of survivorship and not as Act _______________________________
tenants in common (State)
UNIF TRF MIN ACT -- _________Custodian (until age _______)
(Cust)
______________ under Uniform Transfers
(Minor)
to Minors Act ______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________
_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated______________________________
X________________________________________
X________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURES MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad 15.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated August 20, 1999, relating to the financial statements of McAfee.com
Corporation, a wholly owned subsidiary of Networks Associates, Inc., which
appear in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Registration
Statement.
PricewaterhouseCoopers LLP
San Jose, California
November 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 0 2,410
<SECURITIES> 0 0
<RECEIVABLES> 1,087 2,735
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,373 6,526
<PP&E> 124 4,142
<DEPRECIATION> (59) (599)
<TOTAL-ASSETS> 2,438 10,069
<CURRENT-LIABILITIES> 7,569 27,073
<BONDS> 0 0
0 0
0 0
<COMMON> 36 36
<OTHER-SE> (5,167) (17,040)
<TOTAL-LIABILITY-AND-EQUITY> 2,438 10,069
<SALES> 6,292 16,095
<TOTAL-REVENUES> 6,292 16,095
<CGS> 3,705 8,632
<TOTAL-COSTS> 3,705 8,632
<OTHER-EXPENSES> 4,580 29,261
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,993) (21,798)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,993) (21,798)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,993) (21,798)
<EPS-BASIC> (0.06) (0.61)
<EPS-DILUTED> (0.06) (0.61)
</TABLE>
