<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MCAFEE ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0316593
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2805 BOWERS AVENUE
SANTA CLARA, CA 95051
(408) 988-3832
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
WILLIAM L. LARSON
CHIEF EXECUTIVE OFFICER
2805 BOWERS AVENUE
SANTA CLARA, CA 95051
(408) 988-3832
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
Copies to:
<TABLE>
<S> <C> <C>
JEFFREY D. SAPER, ESQ. SCOTT C. NEELY ROD J. HOWARD, ESQ.
KURT J. BERNEY, ESQ. VICE PRESIDENT AND GENERAL JAMES M. KOSHLAND, ESQ.
JAN-MARC VAN DER SCHEE, ESQ. COUNSEL CHERYL K. HOUSE, ESQ.
WILSON SONSINI GOODRICH & NETWORK GENERAL CORPORATION GRAY CARY WARE &
ROSATI 4200 BOHANNON DRIVE FREIDENRICH
PROFESSIONAL CORPORATION MENLO PARK, CALIFORNIA 94025 A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD (650) 473-2000 400 HAMILTON AVENUE
PALO ALTO, CA 94304 PALO ALTO, CALIFORNIA 94301
(650) 493-9300 (650) 328-6561
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and
certain other conditions under the Reorganization Agreement are met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par Value
$0.01 per share....... 19,200,000 shares $48.50 $931,200,000 $282,182
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant
which may be issued to former stockholders of Network General Corporation
("Network General") pursuant to the Merger described herein giving effect
to the exercise of outstanding and exercisable options and shares expected
to be issued pursuant to Network General's 1989 Employee Stock Purchase
Plan.
(2) Each share of Network General Common Stock will be converted into the
right to receive 0.4167 of a share of Common Stock of the Registrant
pursuant to the Merger described herein. Pursuant to Rule 457(f) under the
Securities Act of 1933, as amended, the registration fee has been
calculated as of October 28, 1997.
(3) The amount of the registration fee includes $192,786 previously paid
pursuant to Section 14(g) of the Securities Exchange Act of 1934, as
amended, in connection with the filing by the Registrant and Network
General Corporation of a preliminary Joint Proxy Statement/Prospectus
related to the proposed Merger.
---------------
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>
[LOGO OF McAFEE]
2805 BOWERS AVENUE
SANTA CLARA, CA 95051
October 31, 1997
Dear Stockholder:
As most of you are aware, McAfee Associates, Inc. ("McAfee") has entered
into an agreement to combine with Network General Corporation ("Network
General") in a strategic business combination (the "Merger"). At our Special
Meeting on December 1, 1997, you will be asked to consider and vote upon (i)
the issuance of shares of the Common Stock, par value $0.01 per share, of
McAfee (the "McAfee Common Stock") to the stockholders of Network General
pursuant to an Agreement and Plan of Reorganization, dated as of October 13,
1997, as amended by the First Amendment thereto dated as of October 22, 1997
(the "Reorganization Agreement"), among McAfee, Network General and Mystery
Acquisition Corp., a wholly-owned subsidiary of McAfee ("Merger Sub"); (ii) an
amendment to the Second Restated Certificate of Incorporation of McAfee (the
"Certificate") to change the corporate name of McAfee to "Network Associates,
Inc." (the "Combined Company"), contingent upon consummation of the Merger;
(iii) an amendment to the Certificate to increase the number of authorized
shares of McAfee Common Stock by 200 million shares to 300 million shares
(which, if approved, will be effective whether or not the Merger is
consummated); and (iv) amendments to McAfee's 1997 Stock Incentive Plan to (a)
increase the number of shares of McAfee Common Stock authorized thereunder by
3.4 million shares to 5.85 million shares and (b) eliminate the ability to
grant options thereunder with an exercise price less than the fair market
value of McAfee Common Stock on the date of grant, each amendment contingent
upon consummation of the Merger. Each of the foregoing proposals is described
more fully in the accompanying Joint Proxy Statement/Prospectus.
Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company following the Merger will initially consist of six members,
four of whom are designees of McAfee, and two of whom are designees of Network
General. The designees of McAfee will be John C. Bolger, Virginia Gemmell,
Edwin L. Harper and William L. Larson, and the designees of Network General
will be Leslie G. Denend and Harry J. Saal. Mr. Bolger will be leaving the
Board of Directors of the Combined Company effective April 30, 1998, at which
time the size of the Board will be reduced to five members.
In addition, following the Merger, the principal executive officers of the
Combined Company will be as follows: William L. Larson, currently Chairman of
the Board and Chief Executive Officer of McAfee, will be Chairman of the Board
and Chief Executive Officer of the Combined Company; Leslie G. Denend,
currently President and Chief Executive Officer of Network General, will be
President of the Combined Company; and Prabhat K. Goyal, currently Chief
Financial Officer, Vice President of Finance and Administration, Treasurer and
Secretary of McAfee will hold the same positions in the Combined Company.
The McAfee Board by unanimous vote of the directors present and voting at a
special meeting of the McAfee Board on October 13, 1997 (which included all
directors except Mr. Denend, who did not participate in this or any other
McAfee Board meetings with respect to the Merger due to his status as
President, Chief Executive Officer and a director of Network General) approved
the Reorganization Agreement and the transactions contemplated thereby and
determined that the Merger is fair to, and in the best interests of, McAfee
and its stockholders. In addition, after careful consideration, the McAfee
Board of Directors has approved the proposed amendments to the Certificate and
the proposed amendments to McAfee's 1997 Stock Incentive Plan, and has
concluded that these matters are fair to, and in the best interests of, McAfee
and its stockholders. Your Board of Directors (other than Mr. Denend with
respect to the issuance of the McAfee Common Stock pursuant
<PAGE>
to the Reorganization Agreement) unanimously recommends a vote in favor of the
issuance of the McAfee Common Stock and the proposed amendments to the
Certificate and McAfee's 1997 Stock Incentive Plan.
The Merger will become effective as soon as practicable after all necessary
regulatory and stockholder approvals are obtained and certain other conditions
are satisfied (the time at which the Merger becomes effective being referred to
herein as the "Effective Time"). At the Effective Time, each outstanding share
of common stock of Network General, par value $0.01 per share ("Network General
Common Stock"), will be converted into the right to receive 0.4167 of a share
(the "Exchange Ratio") of McAfee Common Stock. In addition, each option to
purchase shares of Network General Common Stock (each, a "Network General
Common Stock Option") that is outstanding at the Effective Time will be assumed
by McAfee (each, an "Assumed Option"). Each Assumed Option will be converted
into an option to purchase the number of shares of McAfee Common Stock as is
equal (subject to rounding) to the number of shares of Network General Common
Stock that was subject to such option immediately prior to the Merger,
multiplied by the Exchange Ratio. The exercise price of each Assumed Option
will be equal to the quotient determined by dividing the exercise price per
share of Network General Common Stock at which such Network General Common
Stock Option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. The Merger is intended to
be a tax-free reorganization.
Following the Merger, based on the number of shares of Network General Common
Stock and McAfee Common Stock outstanding as of October 28, 1997, and the
Exchange Ratio, the stock of Network General prior to the Merger will be
converted into approximately 25.7% of the common stock of the Combined Company,
and the stock of McAfee outstanding prior to the Merger will represent
approximately 74.3% of the stock of the Combined Company.
All stockholders are invited to attend the Special Meeting in person. The
amendments to the Certificate require the affirmative vote of a majority of the
votes entitled to be cast by holders of outstanding shares of McAfee securities
(including McAfee Common Stock and other securities entitled to vote together
with McAfee Common Stock), and the issuance of the shares of McAfee Common
Stock in the Merger and the amendments to McAfee's 1997 Stock Incentive Plan
require the affirmative vote of a majority of the total votes cast in person or
by proxy regarding such proposal.
Stockholders are urged to review carefully the information contained in the
accompanying Joint Proxy Statement/Prospectus, including in particular the
information under the captions "Risk Factors," "McAfee Special Meeting--
Recommendations of McAfee Board of Directors," "Approval of the Merger and
Related Transactions--Joint Reasons For the Merger," "--McAfee's Reasons For
the Merger," "--Material Contacts and Board Deliberations" and "Terms of the
Merger--Interests of Certain Persons" prior to making any voting decision in
connection with their McAfee Common Stock.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may
revoke your proxy at any time before it has been voted, and if you attend the
Special Meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ WILLIAM L. LARSON
William L. Larson
Chairman of the Board and
Chief Executive Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
<PAGE>
[LOGO OF MCAFEE(R) ASSOCIATES, INC.]
MCAFEE ASSOCIATES, INC.
2805 BOWERS AVENUE
SANTA CLARA, CALIFORNIA 95051
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 1, 1997
---------------
TO THE STOCKHOLDERS OF McAFEE ASSOCIATES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "McAfee
Special Meeting") of McAfee Associates, Inc., a Delaware corporation
("McAfee"), will be held on December 1, 1997 at 8:00 a.m., local time, at the
Westin Hotel, 5101 Great America Parkway, Santa Clara, California 95054.
At the McAfee Special Meeting you will be asked to consider and vote upon
the following matters:
(1) the issuance of shares of the Common Stock, par value $0.01 per
share, of McAfee ("McAfee Common Stock") to the stockholders of Network
General Corporation, a Delaware corporation ("Network General"), pursuant
to an Agreement and Plan of Reorganization, dated as of October 13, 1997,
as amended by the First Amendment thereto dated as of October 22, 1997 (the
"Reorganization Agreement"), among McAfee, Network General and Mystery
Acquisition Corp., a wholly-owned subsidiary of McAfee ("Merger Sub"),
providing for the merger of Merger Sub with and into Network General (the
"Merger");
(2) an amendment to the Second Restated Certificate of Incorporation of
McAfee (the "Certificate") to change the corporate name of McAfee to
"Network Associates, Inc." (the "Combined Company"), contingent upon
consummation of the Merger;
(3) an amendment to the Certificate to increase the number of authorized
shares of McAfee Common Stock by 200 million shares to 300 million shares
(which, if approved, will be effective whether or not the Merger is
consummated); and
(4) amendments to McAfee's 1997 Stock Incentive Plan to (a) increase the
number of shares of McAfee Common Stock authorized thereunder by 3.4
million shares to 5.85 million shares and (b) eliminate the ability of
McAfee's Board to grant options thereunder with an exercise price less than
the fair market value of McAfee Common Stock on the date of grant, each
amendment contingent upon consummation of the Merger.
Each of the foregoing proposals is described more fully in the accompanying
Joint Proxy Statement/Prospectus.
Stockholders of record at the close of business on October 28, 1997 are
entitled to notice of, and to vote at, the McAfee Special Meeting and any
adjournments or postponements thereof, and are cordially invited to attend the
McAfee Special Meeting in person.
For the Board of Directors
/s/ Prabhat K. Goyal
Prabhat K. Goyal
Chief Financial Officer and Secretary
Santa Clara, California
October 31, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MCAFEE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE
NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
[LOGO OF NETWORK GENERAL CORPORATION]
4200 BOHANNON DRIVE
MENLO PARK, CA 94025
October 31, 1997
Dear Stockholder:
As most of you are aware, Network General Corporation ("Network General")
has entered into an Agreement and Plan of Reorganization, dated as of October
13, 1997, as amended by the First Amendment thereto dated as of October 22,
1997 (the "Reorganization Agreement") with McAfee Associates, Inc. ("McAfee"),
providing for a strategic business combination of Network General and McAfee.
A special meeting of stockholders (the "Network General Special Meeting") of
Network General will be held at Hotel Sofitel, 223 Twin Dolphin Drive, Redwood
City, California 94065 on December 1, 1997 at 8:00 a.m. local time to consider
and vote upon the approval and adoption of the Reorganization Agreement and
the approval of the merger of Network General with a wholly-owned subsidiary
of McAfee (the "Merger") pursuant to the Reorganization Agreement. Upon
consummation of the Merger, Network General will become a wholly-owned
subsidiary of McAfee, and McAfee plans to change its name to "Network
Associates, Inc." (the "Combined Company"). As a result of the Merger, each
outstanding share of Network General Common Stock will be converted into the
right to receive 0.4167 of a share (the "Exchange Ratio") of McAfee Common
Stock. The foregoing proposal is described more fully in the accompanying
Joint Proxy Statement/Prospectus.
After careful consideration, the Network General Board of Directors has
approved the Reorganization Agreement and the Merger and other transactions
contemplated thereby by the unanimous vote of the directors present and voting
at the Network General Board's Special Meeting on October 13, 1997, and
concluded that the Reorganization Agreement and Merger are fair to, and in the
best interests of, Network General and its stockholders. Your Board of
Directors recommends a vote in favor of approval the Merger and the approval
and adoption of the Reorganization Agreement.
Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company following the Merger will initially consist of six members,
four of whom are designees of McAfee, and two of whom are designees of Network
General. The designees of McAfee will be John C. Bolger, Virginia Gemmell,
Edwin L. Harper and William L. Larson, and the designees of Network General
will be Leslie G. Denend and Harry J. Saal. Mr. Bolger will be leaving the
Board of Directors of the Combined Company effective April 30, 1998, at which
time the size of the board will be reduced to five members.
Following the Merger, the principal executive officers of the Combined
Company will be as follows: William L. Larson, currently Chairman of the Board
and Chief Executive Officer of McAfee, will be Chairman of the Board and Chief
Executive Officer of the Combined Company; Leslie G. Denend, currently
President and Chief Executive Officer of Network General, will be President of
the Combined Company; and Prabhat K. Goyal, currently Chief Financial Officer,
Vice President of Finance and Administration, Treasurer and Secretary of
McAfee, will hold the same positions in the Combined Company.
Based on the shares of Network General Common Stock and McAfee Common Stock
outstanding as of October 28, 1997, and the Exchange Ratio, the stock of
Network General outstanding prior to the Merger will be converted into
approximately 25.7% of the common stock of the Combined Company and the stock
of McAfee outstanding prior to the Merger will represent approximately 74.3%
of the stock of the Combined Company.
<PAGE>
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by the Network General stockholders at the Network General
Special Meeting and a Proxy Card. The Joint Proxy Statement/Prospectus more
fully describes the proposed transactions. Stockholders are urged to review
carefully the information contained in the accompanying Joint Proxy
Statement/Prospectus, in particular the information under the captions "Risk
Factors," "Network General Special Meeting--Recommendations of Network General
Board of Directors," "Approval of the Merger and Related Transactions--Joint
Reasons For the Merger," "--Network General's Reasons For the Merger," "--
Material Contacts and Board Deliberations" and "Terms of the Merger--Interests
of Certain Persons" prior to voting on the proposal.
All stockholders are cordially invited to attend the Network General Special
Meeting in person. If you attend the Network General Special Meeting you may
vote in person if you wish even though you have previously returned your
proxy. Whether or not you plan to attend the Network General Special Meeting
it is important that your shares be represented and voted at the Network
General Special Meeting, regardless of the number of shares you hold. Approval
of the Merger requires the affirmative vote of the holders of a majority of
the outstanding shares of Network General Common Stock. BECAUSE AN ABSOLUTE
MAJORITY IS REQUIRED, THE EFFECT OF AN ABSTENTION OR BROKER NON-VOTE OR OF
FAILING TO RETURN A PROXY IS THE SAME AS A VOTE AGAINST THE MERGER AND THE
REORGANIZATION AGREEMENT. IT IS THEREFORE IMPORTANT THAT YOU COMPLETE, SIGN
AND DATE, AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
Sincerely,
/s/ LESLIE G. DENEND
Leslie G. Denend
President and Chief Executive
Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
<PAGE>
NETWORK GENERAL CORPORATION
4200 BOHANNON DRIVE
MENLO PARK, CALIFORNIA 94025
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 1, 1997
----------------
TO THE STOCKHOLDERS OF NETWORK GENERAL CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Network
General Special Meeting") of Network General Corporation, a Delaware
corporation ("Network General"), will be held on December 1, 1997 at 8:00
a.m., local time, at Hotel Sofitel, 223 Twin Dolphin Drive, Redwood City,
California 94065 to consider and vote upon the following:
1. A proposal: (a) to approve and adopt the Agreement and Plan of
Reorganization, dated as of October 13, 1997, as amended by the First
Amendment thereto dated as of October 22, 1997, among McAfee Associates,
Inc., a Delaware corporation ("McAfee"), Mystery Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of McAfee ("Merger
Sub"), and Network General, pursuant to which, among other things, (i)
Merger Sub will be merged with and into Network General, with Network
General continuing as the surviving corporation and becoming a wholly-owned
subsidiary of McAfee (the "Merger"), and (ii) each outstanding share of
common stock, par value $0.01 per share, of Network General (the "Network
General Common Stock") will be converted into the right to receive 0.4167
of a share of common stock, par value $0.01 per share, of McAfee; and (b)
to approve the Merger.
2. Such other matters as may properly come before the Network General
Special Meeting, including any motion to adjourn the Network General
Special Meeting to a later date to permit further solicitation of proxies,
or any postponements or adjournments thereof.
Information relating to the above matters is set forth in the attached Joint
Proxy Statement/Prospectus. Stockholders of record at the close of business on
October 28, 1997 are entitled to notice of, and to vote at, the Network
General Special Meeting and any adjournments or postponements thereof.
Approval of the Merger will require the affirmative vote of the holders of a
majority of the shares of Network General Common Stock outstanding on the
record date. All stockholders are cordially invited to attend the Network
General Special Meeting in person.
For the Board of Directors
/s/ SCOTT C. NEELY
Scott C. Neely
Vice President, General Counsel and
Secretary
Menlo Park, California
October 31, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE NETWORK GENERAL SPECIAL MEETING,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO
POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES. DO
NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD.
<PAGE>
McAFEE ASSOCIATES, INC. AND NETWORK GENERAL CORPORATION
JOINT PROXY STATEMENT
----------------
McAFEE ASSOCIATES, INC. PROSPECTUS
----------------
McAfee Associates, Inc., a Delaware corporation ("McAfee"), and Network
General Corporation, a Delaware corporation ("Network General"), have entered
into an Agreement and Plan of Reorganization, dated as of October 13, 1997, as
amended by the First Amendment thereto dated as of October 22, 1997 (the
"Reorganization Agreement"), among McAfee, Mystery Acquisition Corp., a
wholly-owned subsidiary of McAfee ("Merger Sub"), and Network General.
Pursuant to the Reorganization Agreement, Merger Sub will merge with and into
Network General, Network General will continue as the surviving corporation
and will become a wholly-owned subsidiary of McAfee, and each outstanding
share of common stock of Network General, $0.01 par value ("Network General
Common Stock"), will be converted into the right to receive 0.4167 of a share
(the "Exchange Ratio") of the common stock of McAfee (all such actions
collectively, the "Merger"). In addition, subject to the approval of McAfee
stockholders and the consummation of the Merger, the corporate name of McAfee
will be changed to "Network Associates, Inc." (the "Combined Company").
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
McAfee in connection with the solicitation of proxies by the McAfee Board of
Directors (the "McAfee Board") for use at the Special Meeting of McAfee
stockholders to be held on December 1, 1997, at the Westin Hotel, 5101 Great
America Parkway, Santa Clara, California 95054, commencing at 8:00 a.m., local
time, and at any adjournment or postponement thereof (the "McAfee Special
Meeting").
This Joint Proxy Statement/Prospectus is also being furnished to
stockholders of Network General in connection with the solicitation of proxies
by the Network General Board of Directors (the "Network General Board") for
use at the Special Meeting of Network General stockholders to be held on
December 1, 1997, at Hotel Sofitel, 223 Twin Dolphin Drive, Redwood City,
California 94065, commencing at 8:00 a.m., local time, and at any adjournment
or postponement thereof (the "Network General Special Meeting").
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
McAfee with respect to the common stock of McAfee, par value $0.01 (the
"McAfee Common Stock"), to be issued in the Merger in exchange for outstanding
shares of Network General Common Stock.
----------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS (INCLUDING THE ANNEXES HERETO) HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE
STOCKHOLDERS OF MCAFEE AND NETWORK GENERAL ARE URGED TO READ AND CONSIDER
CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS (INCLUDING THE ANNEXES HERETO)
IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO BEGINNING ON PAGE 13 UNDER
"RISK FACTORS."
----------------
This Joint Proxy Statement/Prospectus and the accompanying proxy cards are
first being mailed to stockholders of McAfee and Network General on or about
October 31, 1997.
The date of this Joint Proxy Statement/Prospectus is October 31, 1997.
<PAGE>
Upon consummation of the Merger, each issued and outstanding share of
Network General Common Stock (other than shares owned by McAfee, Merger Sub,
or any subsidiary of McAfee) will be converted into the right to receive
0.4167 of a share of McAfee Common Stock and each outstanding option to
purchase Network General Common Stock under the stock option plans of Network
General will be assumed by McAfee and will become an option to purchase that
number of shares of the McAfee Common Stock as is equal (subject to rounding)
to the number of shares of Network General Common Stock that were subject to
such option immediately prior to the Merger, multiplied by the Exchange Ratio.
Upon consummation of the Merger, all shares of Network General Common Stock
will cease to be outstanding and will be canceled and retired and will cease
to exist, and each holder of a certificate formerly representing shares of
Network General Common Stock will thereafter cease to have any rights with
respect thereto, except the right to receive shares of McAfee Common Stock.
McAfee Common Stock is listed on the Nasdaq National Market ("Nasdaq") under
the symbol MCAF. It is a condition of the obligations of McAfee and Network
General to the consummation of the Merger that the shares to be issued in the
Merger be approved for quotation on Nasdaq, upon notice of issuance. Following
consummation of the Merger, Network General Common Stock will be removed from
registration under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and will no longer be listed for quotation on Nasdaq.
On October 13, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement,
the closing sale prices of the McAfee Common Stock and Network General Common
Stock on Nasdaq were $66.375 per share and $23.375 per share, respectively. On
October 30, 1997, the closing sale prices of the McAfee Common Stock and
Network General Common Stock were $49.375 per share and $19.875 per share,
respectively.
Because the Exchange Ratio is fixed, changes in the market price of McAfee
Common Stock will affect the dollar value of the McAfee Common Stock to be
received by stockholders of Network General in the Merger. Stockholders of
McAfee and Network General are encouraged to obtain current market quotations
for McAfee Common Stock and Network General Common Stock prior to the McAfee
Special Meeting and Network General Special Meeting, respectively.
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MCAFEE,
NETWORK GENERAL OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MCAFEE
OR NETWORK GENERAL SINCE THE DATE HEREOF, OR THAT INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-2-
<PAGE>
AVAILABLE INFORMATION
McAfee and Network General are subject to the information reporting
requirements of the Exchange Act, and in accordance therewith file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Such reports, proxy statements and other information
may be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the SEC's regional offices located at Seven World Trade
Center, Suite 1300, New York, New York 10048, and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511.
Copies of such material may be obtained by mail from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The SEC also 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. McAfee Common Stock and Network General Common Stock are
quoted on Nasdaq, and such reports, proxy statements and other information can
also be inspected at the offices of the National Association of Securities
Dealers, Inc. located at 9513 Key West Avenue, Rockville, Maryland 20850.
After the consummation of the Merger, Network General will no longer file
reports, proxy statements or other information with the SEC or Nasdaq. Instead
such information will be provided, to the extent required, in filings made by
the Combined Company.
Under the rules and regulations of the SEC, the solicitation of proxies from
stockholders of Network General to approve and adopt the Reorganization
Agreement and to approve the Merger constitutes an offering of McAfee Common
Stock to be issued in connection with the Merger. Accordingly, McAfee has
filed with the SEC a registration statement on Form S-4 (herein, together with
all amendments and exhibits, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"). This
Joint Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information,
reference is hereby made to the Registration Statement. Copies of the
Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the offices of the SEC or through the
Commission's Electronic Data Gathering and Retrieval System ("EDGAR") at
http://www.sec.gov, or obtained at prescribed rates from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the SEC by McAfee (File No. 0-
20558) pursuant to the Exchange Act are incorporated by reference in this
Joint Proxy Statement/Prospectus:
1. McAfee's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
2. McAfee's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997; and
3. McAfee's Current Report on Form 8-K filed on March 14, 1997.
The following documents previously filed with the SEC by Network General
(File No. 0-17431) pursuant to the Exchange Act are incorporated by reference
in this Joint Proxy Statement/Prospectus:
1. Network General's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997;
2. Network General's Quarterly Report on Form 10-Q for the quarters ended
June 30, 1997 and September 30, 1997; and
3. Network General's Current Reports on Form 8-K filed on August 20, 1997
and October 21, 1997.
All documents and reports subsequently filed by McAfee and by Network
General pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Joint Proxy Statement/Prospectus prior to the date of
the McAfee and Network General Special Meetings shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus and to be
part hereof from the dates of filing of such documents and reports.
<PAGE>
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
All information contained or incorporated by reference in this Joint Proxy
Statement/Prospectus relating to McAfee and Merger Sub has been supplied by
McAfee and all such information relating to Network General has been supplied
by Network General.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS
HAS BEEN DELIVERED, IN THE CASE OF DOCUMENTS RELATING TO McAFEE, FROM McAFEE,
2805 BOWERS AVENUE, SANTA CLARA, CALIFORNIA 95051, ATTENTION: INVESTOR
RELATIONS; TELEPHONE NUMBER: (408) 988-3832, AND IN THE CASE OF DOCUMENTS
RELATING TO NETWORK GENERAL, FROM NETWORK GENERAL, 4200 BOHANNON DRIVE, MENLO
PARK, CALIFORNIA 94025, ATTENTION: INVESTOR RELATIONS; TELEPHONE NUMBER: (650)
473-2000. IN ORDER TO ASSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE
SPECIAL MEETINGS, ANY SUCH REQUEST SHOULD BE MADE BY NOVEMBER 21, 1997.
TRADEMARKS
This Joint Proxy Statement/Prospectus contains trademarks of McAfee and
Network General and may contain trademarks of others.
FORWARD-LOOKING STATEMENTS
OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS MADE IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, INCLUDING STATEMENTS AS TO THE BENEFITS EXPECTED
TO RESULT FROM THE MERGER AND AS TO FUTURE FINANCIAL PERFORMANCE AND THE
ANALYSES PERFORMED BY THE FINANCIAL ADVISORS TO McAFEE AND NETWORK GENERAL,
ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS
A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS"
BELOW, WHICH STOCKHOLDERS SHOULD CAREFULLY REVIEW.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY.................................................................... 1
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA......... 10
RISK FACTORS............................................................... 13
COMPARATIVE PER SHARE DATA................................................. 25
COMPARATIVE MARKET PRICE DATA.............................................. 26
McAFEE SPECIAL MEETING..................................................... 27
Date, Time and Place of McAfee Special Meeting........................... 27
Purpose.................................................................. 27
Record Date and Outstanding Shares....................................... 27
Vote Required............................................................ 27
Proxies.................................................................. 28
Solicitation of Proxies; Expenses........................................ 28
Recommendations of McAfee Board of Directors............................. 28
NETWORK GENERAL SPECIAL MEETING............................................ 29
Date, Time and Place of Network General Special Meeting.................. 29
Purpose.................................................................. 29
Record Date and Outstanding Shares....................................... 29
Vote Required............................................................ 29
Proxies.................................................................. 30
Solicitation of Proxies; Expenses........................................ 30
No Appraisal Rights...................................................... 30
Recommendations of Network General Board of Directors.................... 30
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................ 31
Joint Reasons For the Merger............................................. 31
McAfee's Reasons For the Merger.......................................... 32
Network General's Reasons For the Merger................................. 33
Material Contacts and Board Deliberations................................ 35
Opinion of McAfee's Financial Advisor.................................... 40
Opinion of Network General's Financial Advisor........................... 44
Certain Federal Income Tax Considerations................................ 48
Governmental and Regulatory Approvals.................................... 50
Accounting Treatment..................................................... 50
No Appraisal Rights...................................................... 51
TERMS OF THE MERGER........................................................ 52
Effective Time........................................................... 52
Manner and Basis of Converting Securities................................ 52
Stock Ownership Following the Merger..................................... 53
Conduct Following the Merger............................................. 53
Conduct of Network General's and McAfee's Business Prior to the Merger... 54
Representations and Warranties........................................... 56
No Solicitation.......................................................... 57
Break Up Fees............................................................ 59
Stock Options and Employee Benefits...................................... 60
</TABLE>
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<TABLE>
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PAGE
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<S> <C>
Interests of Certain Persons............................................ 61
Affiliate Agreements.................................................... 62
Voting Agreements....................................................... 62
Conditions to the Merger................................................ 63
Termination of the Reorganization Agreement............................. 64
COMPARISON OF CAPITAL STOCK............................................... 66
Description of McAfee Capital Stock..................................... 66
Description of Network General Capital Stock............................ 66
Comparison of Rights of Network General and McAfee Stockholders......... 68
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS......................... 70
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY McAFEE STOCKHOLDERS.. 76
Proposal Two--Amendment to Second Restated Certificate of
Incorporation--Name Change.................................. 76
Proposal Three--Amendment to Second Restated Certificate of
Incorporation--Increase to Authorized Common Stock.......... 76
Proposal Four--Amendment of McAfee's 1997 Stock Incentive Plan--Increase
in Number of Shares Eligible for Grant and Elimination of
Ability to Make Certain Option Grants....................... 77
McAFEE ASSOCIATES, INC.................................................... 82
McAfee Business......................................................... 82
McAfee Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 94
McAfee Management....................................................... 104
Stock Ownership of Certain Beneficial Owners and Management of McAfee... 106
McAfee Executive Compensation and Other Matters......................... 108
NETWORK GENERAL CORPORATION............................................... 112
Network General Business................................................ 112
Network General Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 126
Network General Management.............................................. 135
Stock Ownership of Certain Beneficial Owners and Management of Network
General................................................................ 137
Network General Executive Compensation and Other Matters................ 139
LEGAL MATTERS............................................................. 143
EXPERTS................................................................... 143
STOCKHOLDER PROPOSAL...................................................... 144
FINANCIAL STATEMENTS...................................................... F-1
Index to Consolidated Financial Statements.............................. F-1
Report of Coopers & Lybrand L.L.P....................................... F-2
Report of Arthur Andersen LLP........................................... F-23
</TABLE>
ANNEX A--Agreement and Plan of Reorganization, dated as of October 13, 1997,
as amended by the First Amendment thereto dated as of October 22,
1997, among McAfee, Mystery Acquisition Corp. and Network General
ANNEX B--Opinion of Morgan Stanley & Co. Incorporated
ANNEX C--Opinion of Hambrecht & Quist LLC
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. This summary does not contain a complete
statement of all material elements of the proposals to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Joint Proxy Statement/Prospectus and in the information and documents
annexed hereto.
THE COMPANIES
McAfee Associates, Inc.
McAfee develops, markets, distributes and supports network security and
management software products. McAfee provides network security products for
anti-virus protection as well as client/server network management tools. Many
of McAfee's network management products are available as individual software
modules as well as integrated product suites. McAfee is also a pioneer in
electronic software distribution, which is the principal channel through which
it distributes its products to large corporations, institutions and government
entities. McAfee generally utilizes a two-year subscription licensing model for
this distribution method. McAfee's executive offices are located at 2805 Bowers
Avenue, Santa Clara, California 95051, and its telephone number is (408) 988-
3832.
Network General Corporation
Network General designs, manufactures, markets and supports software-based
fault and performance (also known as analysis and monitoring) solutions for
managing computer networks. Recognizing the growing diversity of network
technologies and the need to make them work together, Network General develops
products and provides services which help maximize network productivity and
minimize downtime. Network General's products consist of portable tools and
centralized systems incorporating a proprietary technology linking advanced
protocol decodes with expert analysis capabilities to facilitate real-time
identification, diagnosis and resolution of network problems. Network General
also provides product support, education and network consulting services.
Network General sells its products and services to domestic end users
principally through its direct sales force, although Network General also
maintains an indirect distribution channel using authorized resellers and
systems integrators. Network General sells its products and services to
international end users through its direct sales force in several countries, as
well as through a combination of distributors, systems integrators and
authorized resellers worldwide. Network General's executive offices are located
at 4200 Bohannon Drive, Menlo Park, California 94025, and its telephone number
is (650) 473-2000.
Mystery Acquisition Corp.
Merger Sub is a corporation recently organized by McAfee for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's executive offices
are located at 2805 Bowers Avenue, Santa Clara, California 95051, and its
telephone number is (408) 988-3832.
SPECIAL MEETING OF STOCKHOLDERS OF McAFEE
Date, Time, Place and Purpose
The McAfee Special Meeting will be held at the Westin Hotel, 5101 Great
America Parkway, Santa Clara, California 95054 on December 1, 1997 at 8:00
a.m., local time. The purpose of the McAfee Special Meeting is to consider and
vote upon proposals to approve (i) the issuance of shares of McAfee Common
Stock to the stockholders of Network General pursuant to the Reorganization
Agreement; (ii) an amendment to the Second Restated Certificate of
Incorporation of McAfee (the "Certificate") to change the corporate name of
McAfee to
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"Network Associates, Inc.," contingent upon consummation of the Merger; (iii)
an amendment to the Certificate to increase the number of authorized shares of
McAfee Common Stock by 200 million shares to 300 million shares (which, if
approved, will be effective whether or not the Merger is consummated); and (iv)
amendments to the McAfee 1997 Stock Incentive Plan to (a) increase the number
of shares of McAfee Common Stock authorized thereunder by 3.4 million shares to
5.85 million shares and (b) eliminate the ability to grant options at less than
the fair market value of McAfee Common Stock on the date of grant, each
amendment contingent upon consummation of the Merger. See "McAfee Special
Meeting--Date, Time and Place of McAfee Special Meeting," and "--Purpose."
Record Date and Vote Required
Only McAfee stockholders of record at the close of business on October 28,
1997 (the "McAfee Record Date") are entitled to notice of and to vote at the
McAfee Special Meeting. Under Delaware law, the charter documents of McAfee and
the rules of Nasdaq, the amendments to the Certificate require the affirmative
vote of a majority of the votes entitled to be cast by holders of outstanding
shares of McAfee securities (including McAfee Common Stock and other securities
entitled to vote together with McAfee Common Stock), and the issuance of the
shares of McAfee Common Stock pursuant to the Reorganization Agreement and the
amendments to McAfee's 1997 Stock Incentive Plan require the affirmative vote
of a majority of the total votes cast in person or by proxy regarding such
proposal. See "McAfee Special Meeting--Record Date and Outstanding Shares" and
"--Vote Required."
As of the McAfee Record Date, there were approximately 375 stockholders of
record of McAfee Common Stock and 51,403,965 shares of McAfee Common Stock
outstanding, with each share entitled to one vote on each matter to be acted
upon at the McAfee Special Meeting. As of the McAfee Record Date, there was one
share of McAfee Series A Preferred Stock outstanding, with such share entitled
to vote with the McAfee Common Stock and having 325,062 votes on each matter to
be acted upon at the McAfee Special Meeting. See "McAfee Special Meeting--Vote
Required."
As of the McAfee Record Date, the executive officers and directors of McAfee
owned less than 1% of the outstanding shares of McAfee Common Stock,
representing less than 1% the votes entitled to be cast by holders of McAfee
securities entitled to vote together with McAfee Common Stock issued and
outstanding as of the McAfee Record Date. Each of these executive officers and
directors has entered into a Voting Agreement with Network General obligating
such officer or director, among other things, to vote his or her shares of
McAfee Common Stock in favor of the issuance of McAfee Common Stock pursuant to
the Reorganization Agreement. See "Terms of the Merger--Voting Agreements" and
"--Conditions to the Merger."
Recommendations of McAfee Board of Directors
The McAfee Board by unanimous vote of the directors present and voting at a
special meeting of the McAfee Board on October 13, 1997 (which included all
directors except Leslie G. Denend, who did not participate in this or any other
McAfee Board meeting with respect to the Merger due to his status as President,
Chief Executive Officer and a director of Network General) approved the
Reorganization Agreement and the transactions contemplated thereby, and
determined that the Merger is fair to, and in the best interests of, McAfee and
its stockholders. After careful consideration, the McAfee Board recommends a
vote in favor of (i) the issuance of shares of McAfee Common Stock pursuant to
the Reorganization Agreement; (ii) the amendment of the Certificate to change
the corporate name of McAfee to "Network Associates, Inc.," contingent upon
consummation of the Merger; (iii) the amendment of the Certificate to increase
the number of authorized shares of Common Stock by 200 million shares to 300
million shares (which, if approved, will be effective whether or not the Merger
is consummated); and (iv) the amendments to the McAfee 1997 Stock Incentive
Plan to (a) increase the number of shares of McAfee authorized thereunder by
3.4 million shares to 5.85 million shares and (b) eliminate the ability to
grant options with an exercise price less than the fair market value of McAfee
Common Stock on the date of grant, each amendment contingent upon consummation
of the Merger.
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<PAGE>
Stockholders should read this Joint Proxy Statement/Prospectus carefully before
voting. See "McAfee Special Meeting--Recommendations of McAfee Board of
Directors," "Approval of the Merger and Related Transactions--Joint Reasons For
the Merger," "--McAfee's Reasons For the Merger," "--Material Contacts and
Board Deliberations" and "Terms of the Merger--Interests of Certain Persons."
SPECIAL MEETING OF STOCKHOLDERS OF NETWORK GENERAL
Date, Time, Place and Purpose
The Network General Special Meeting will be held at Hotel Sofitel, 223 Twin
Dolphin Drive, Redwood City, California 94065, on December 1, 1997 at 8:00
a.m., local time. The purpose of the Network General Special Meeting is to
consider and vote upon a proposal to approve and adopt the Reorganization
Agreement and to approve the Merger. See "Network General Special Meeting--
Date, Time and Place of Network General Special Meeting" and "--Purpose."
Record Date and Vote Required
Only Network General stockholders of record at the close of business on
October 28, 1997 (the "Network General Record Date") are entitled to notice of
and to vote at the Network General Special Meeting. Under Delaware law, the
Third Restated Certificate of Incorporation of Network General and the Bylaws
of Network General, the affirmative vote of the majority of votes entitled to
be cast by the holders of Network General Common Stock outstanding as of the
Network General Record Date is required to approve and adopt the Reorganization
Agreement and to approve the Merger.
As of the Network General Record Date, there were approximately 420
stockholders of record of Network General Common Stock and 42,631,354 shares of
Network General Common Stock outstanding, with each share entitled to one vote
on the matter to be acted upon at the Network General Special Meeting. See
"Network General Special Meeting--Vote Required."
As of the Network General Record Date, the executive officers and directors
of Network General owned approximately 4.4% of the outstanding shares of
Network General Common Stock, representing approximately 4.4% of the votes
entitled to be cast by holders of Network General Common Stock issued and
outstanding as of the Network General Record Date. Each of these executive
officers and directors has entered into a Voting Agreement with McAfee
obligating such officer or director, among other things, to vote his or her
shares of Network General Common Stock in favor of the Merger. See "Terms of
the Merger--Voting Agreements" and "--Conditions to the Merger."
Recommendations of Network General Board of Directors
The Network General Board, by unanimous vote of the directors present and
voting at a special meeting of the Network General Board on October 13, 1997
(which included all directors except Mr. Denend, who recused himself from all
deliberations and votes regarding the Merger due to his status as a director of
McAfee, and Gregory M. Gallo, who participated in all other meetings regarding
the Merger and in the first portion of the October 13, 1997 meeting and
expressed his support for the Merger, but was not present for the Board's
formal vote) approved the Reorganization Agreement and the transactions
contemplated thereby and determined that the Merger is fair to, and in the best
interests of, Network General and its stockholders. After careful
consideration, the Network General Board unanimously (with the exception of Mr.
Denend) recommends a vote in favor of approval and adoption of the
Reorganization Agreement and approval of the Merger. Network General
stockholders should read this Joint Proxy Statement/Prospectus carefully prior
to voting. See "Network General Special Meeting--Recommendations of Network
General Board of Directors," "Approval of the Merger and Related Transactions--
Joint Reasons For the Merger," "--Network General's Reasons For the Merger,"
"--Material Contacts and Board Deliberations" and "Terms of the Merger--
Interests of Certain Persons."
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<PAGE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the combined businesses of McAfee and Network General.
REASONS FOR THE MERGER
The Boards of Network General and McAfee have approved the Reorganization
Agreement with the expectation that the proposed Merger would provide the
Combined Company with the potential to realize improved long-term operating and
financial results and a stronger competitive position than their respective
companies on a stand-alone basis. See "Risk Factors," "Approval of the Merger
and Related Transactions--Joint Reasons For the Merger," "--McAfee's Reasons
For the Merger," and "--Network General's Reasons For the Merger."
FAIRNESS OPINIONS
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has delivered to the
McAfee Board its written opinion, dated October 13, 1997, to the effect that,
as of such date, the Exchange Ratio pursuant to the Reorganization Agreement
was fair from a financial point of view to McAfee. The full text of the opinion
of Morgan Stanley, which sets forth assumptions made and matters considered, is
attached as Annex B to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference. Holders of McAfee Common Stock are urged to,
and should, read such opinion in its entirety. See "Approval of the Merger and
Related Transactions--Opinion of McAfee's Financial Advisor" and Annex B
hereto.
Hambrecht & Quist LLC ("Hambrecht & Quist") has delivered to the Network
General Board its written opinion, dated October 13, 1997, to the effect that,
as of such date, the consideration to be received by the holders of Network
General Common Stock in the Merger was fair to such holders from a financial
point of view. The full text of the opinion of Hambrecht & Quist, which sets
forth assumptions made and matters considered, is attached as Annex C to this
Joint Proxy Statement/Prospectus, and is incorporated herein by reference.
Holders of Network General Common Stock are urged to, and should, read such
opinion in its entirety. See "Approval of the Merger and Related Transactions--
Opinion of Network General's Financial Advisor" and Annex C hereto.
INCOME TAX TREATMENT
The Merger is intended to qualify as a reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), in which case no
gain or loss generally should be recognized by the holders of shares of Network
General Common Stock on the exchange of their shares of Network General Common
Stock solely for shares of McAfee Common Stock. As a condition to the
consummation of the Merger, each of McAfee and Network General will have
received an opinion from its respective tax counsel to the effect that the
Merger will constitute a reorganization under Section 368(a) of the Code.
However, all Network General stockholders are urged to consult their own tax
advisors. See "Approval of the Merger and Related Transactions--Certain Federal
Income Tax Considerations."
REGULATORY MATTERS
Consummation of the Merger is subject to compliance with the Hart-Scott-
Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"). On
October 28, 1997, McAfee and Network General filed the notifications required
under the HSR Act, as well as certain information required to be furnished to
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division"). In addition, all material
filings, if any, required under foreign antitrust laws in connection with the
consummation of the Merger will be made by McAfee and Network General. The
Merger is also subject to
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satisfaction of the requirements of federal securities laws and applicable
securities and "blue sky" laws of the various states. See "Approval of the
Merger and Related Transactions--Governmental and Regulatory Approvals."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon receipt by McAfee and Network
General of letters at the closing of the Merger from Coopers & Lybrand L.L.P.,
McAfee's independent accountants, and Arthur Andersen LLP, Network General's
independent public accountants, respectively, regarding the firms' concurrence
with McAfee management's and Network General management's conclusions,
respectively, as to the appropriateness of pooling of interests accounting for
the Merger under Accounting Principles Board Opinion No. 16 ("APB No. 16"), if
consummated in accordance with the Reorganization Agreement. See "Approval of
the Merger and Related Transactions--Accounting Treatment" and "Terms of the
Merger--Conditions to the Merger."
THE MERGER
Terms of the Merger; Exchange Ratio
At the Effective Time (as defined below) of the Merger and subject to and
upon the terms and conditions of the Reorganization Agreement, Merger Sub will
merge with and into Network General and Network General will become a wholly-
owned subsidiary of McAfee. Once the Merger is consummated, Merger Sub will
cease to exist as a corporation and all of the business, assets, liabilities
and obligations of Merger Sub will be merged with and into Network General with
Network General remaining as the surviving corporation. As a result of the
Merger, each outstanding share of Network General Common Stock, other than
shares owned by Merger Sub, McAfee or any wholly-owned subsidiary of McAfee,
will be converted into the right to receive 0.4167 of a share (the "Exchange
Ratio") of McAfee Common Stock, and each outstanding option to purchase Network
General Common Stock under Network General's stock option plans (each, a
"Network General Common Stock Option") will be assumed by McAfee (each, an
"Assumed Option") and will become an option to purchase that number of shares
of McAfee Common Stock as is equal (subject to rounding) to the number of
shares of Network General Common Stock that were subject to such option
immediately prior to the Merger, multiplied by the Exchange Ratio. The exercise
price of each Assumed Option will be equal to the quotient determined by
dividing the exercise price per share of Network General Common Stock at which
such Network General Common Stock Option was exercisable immediately prior to
the effective time of the Merger by the Exchange Ratio, rounded up to the
nearest whole cent.
On October 13, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement, the
closing prices per share of McAfee Common Stock and Network General Common
Stock on Nasdaq were $66.375 and $23.375, respectively. On October 30, 1997,
the closing prices per share of McAfee Common Stock and Network General Common
Stock on Nasdaq were $49.375 and $19.875, respectively. See "Comparative Market
Price Data." Because the Exchange Ratio is fixed, changes in the market price
of McAfee Common Stock will affect the market value of the McAfee Common Stock
to be received by stockholders of Network General in the Merger. McAfee
stockholders and Network General stockholders are encouraged to obtain current
market quotations for McAfee Common Stock and Network General Common Stock
prior to the McAfee Special Meeting and Network General Special Meeting,
respectively.
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of Merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware or at such later time as may be agreed in writing by McAfee
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and Network General and specified in the Certificate of Merger (the "Effective
Time"). Assuming all conditions to the Merger are met or waived prior thereto,
it is anticipated that the Closing Date of the Merger (the "Closing Date") and
Effective Time will be on or about December 1, 1997. See "Terms of the Merger--
Effective Time."
Exchange of Network General Stock Certificates; Assumption of Network General
Options
Promptly after the Effective Time, McAfee, acting through Boston EquiServe as
its exchange agent (the "Exchange Agent"), will deliver to each Network General
stockholder of record a letter of transmittal with instructions to be used by
such stockholder in surrendering certificates which, prior to the Merger,
represented shares of Network General Common Stock. CERTIFICATES SHOULD NOT BE
SURRENDERED BY THE HOLDERS OF NETWORK GENERAL COMMON STOCK UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective
Time, each outstanding Network General Common Stock option will be assumed by
McAfee as described above. OPTION AGREEMENTS NEED NOT BE SURRENDERED. See
"Terms of the Merger--Manner and Basis of Converting Shares."
Form S-8 Registration Statement
Within five days after the Effective Date, McAfee will file a registration
statement on Form S-8 under the Securities Act covering the shares of McAfee
Common Stock issuable with respect to the Assumed Options. See "Terms of the
Merger--Manner and Basis of Converting Shares."
Stock Ownership Following the Merger
Based upon the number of shares of Network General Common Stock outstanding
as of October 28, 1997, an aggregate of approximately 17,764,485 shares of
McAfee Common Stock will be issued to Network General stockholders in the
Merger, and McAfee will assume Network General options in exchange for options
to purchase up to approximately 3,281,876 additional shares of McAfee Common
Stock. Based upon the number of shares of McAfee Common Stock issued and
outstanding as of October 28, 1997, and after giving effect to the issuance of
McAfee Common Stock as described in the previous sentence, the former holders
of Network General Common Stock outstanding immediately prior to the Merger
would be converted into, and have voting power with respect to, approximately
25.7% of the Combined Company's total issued and outstanding shares as of the
Effective Time, and holders of former Network General options would hold
options to purchase approximately 4.5% of the Combined Company's total issued
and outstanding shares (assuming the exercise of only such former Network
General options). The foregoing numbers of shares and percentages are subject
to change in the event that the capitalization of either McAfee or Network
General changes subsequent to October 28, 1997 and prior to the Effective Time,
and there can be no assurance as to the actual capitalization of McAfee or
Network General at the Effective Time or the Combined Company at any time
following the Effective Time. See "Terms of the Merger--Stock Ownership
Following the Merger."
Board of Directors; Management Following the Merger
Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company following the Merger will initially consist of six members,
four of whom are designees of McAfee, and two of whom are designees of Network
General. The designees of McAfee will be John C. Bolger, Virginia Gemmell,
Edwin L. Harper and William L. Larson, and the designees of Network General
will be Leslie G. Denend and Harry J. Saal. The Combined Company will have a
staggered board, with three classes of directors: Classes I, II and III. The
classes of directors will be elected in sequential years for three year terms.
At the Combined Company's next Annual Meeting, currently expected to take place
in June 1998, the Class III directors will be elected. Mr. Denend will retain
his present position as a Class II Director and Dr. Saal will be offered a
position as a Class II Director, with their terms expiring in 2000. Mr. Bolger
(a Class I director with his term expiring in
6
<PAGE>
1999) will be leaving the Combined Company Board effective April 30, 1998, at
which time the size of the Board will be reduced to five members.
Following the Merger, the principal executive officers of the Combined
Company will be as follows: William L. Larson, currently Chairman of the Board
and Chief Executive Officer of McAfee, will be Chairman of the Board and Chief
Executive Officer of the Combined Company; Leslie G. Denend, currently
President and Chief Executive Officer of Network General, will be President of
the Combined Company; and Prabhat K. Goyal, currently Chief Financial Officer,
Vice President of Finance and Administration, Treasurer and Secretary of
McAfee, will hold the same positions in the Combined Company. See "Terms of the
Merger--Conduct Following the Merger."
Conduct of Business Prior to the Merger
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, Network General (and each of its subsidiaries) has agreed,
except (i) as indicated in the disclosure schedule delivered by Network General
to McAfee in connection with the Reorganization Agreement or (ii) to the extent
that McAfee shall otherwise consent in writing, to conduct its business in the
usual, regular and ordinary course, in substantially the same manner as
previously conducted and in compliance with all applicable laws and
regulations, to pay its debts and taxes when due subject to good faith disputes
over such debts or taxes, to pay or perform other material obligations when
due, and use its commercially reasonable efforts consistent with past practices
and policies to preserve intact its present business organization, keep
available the services of its present officers and employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees,
and others with which it has business dealings. Network General has agreed to
promptly notify McAfee of any material event involving its business or
operations. In addition, in connection with certain material non-ordinary
course actions and acquisitions, McAfee is obligated to consult with and seek
the advice of certain Network General directors prior to the earlier of the
public announcement or consummation of such material action or acquisition.
Furthermore, except as provided in their respective disclosure schedules,
Network General and McAfee have agreed that they shall not, without the prior
written consent of the other, perform or engage in certain activities in the
conduct of their business and the business of their subsidiaries. See "Terms of
the Merger--Conduct of Network General's and McAfee's Business Prior to the
Merger."
No Solicitation
Under the terms of the Reorganization Agreement, except under certain limited
circumstances, each of McAfee and Network General has agreed that it will not
engage in certain activities relating to, or which could result in, an
acquisition proposal from a third party. See "Terms of the Merger--No
Solicitation."
Termination; Fees
The Reorganization Agreement may be terminated by either party under certain
circumstances. Each of McAfee and Network General has agreed that if the Merger
is not consummated as a result of certain specified events, it will pay to the
other party a termination fee of $30 million. See "Terms of the Merger--
Termination of the Reorganization Agreement" and "--Break Up Fees."
Conditions to the Merger
Consummation of the Merger is subject to certain conditions, including: (i)
certain approvals by the stockholders of Network General and McAfee in
connection with the Merger; (ii) declaration by the SEC of the effectiveness of
the Registration Statement; (iii) absence of any law or order prohibiting
consummation of the
7
<PAGE>
Merger; (iv) receipt by McAfee and Network General of tax-law opinions of their
respective tax counsel that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code; (v) receipt by McAfee and Network
General of letters from their independent public accountants regarding the
firms' respective concurrence with McAfee management's and Network General
management's conclusions as to the appropriateness of pooling of interests
accounting for the Merger under APB No. 16; (vi) approval for listing on
Nasdaq, upon notice of issuance, of the shares of McAfee Common Stock to be
issued to Network General stockholders pursuant to the Merger; (vii) the
continued accuracy in all material respects of the representations and
warranties given by each party in the Reorganization Agreement; (viii)
performance in all material respects of all covenants required by the
Reorganization Agreement; (ix) the absence of a material adverse change or
event with regard to either McAfee or Network General; and (x) receipt of
certain consents, waivers or approvals from the other party as set forth in the
respective disclosure schedules of McAfee and Network General. See "Terms of
the Merger--Conditions to the Merger."
Affiliate Agreements
Each executive officer and director of McAfee has entered into an agreement
restricting sales, dispositions or other transactions reducing their risk of
investment in respect of the shares of McAfee Common Stock held by him or her
to help ensure that the Merger will be treated as a pooling of interests for
accounting and financial reporting purposes. Each executive officer and
director of Network General has entered into an agreement restricting sales,
dispositions or other transactions reducing their risk of investment in respect
of the shares of Network General Common Stock held by him or her prior to the
Merger and the shares of McAfee Common Stock received by him or her in the
Merger so as to comply with the requirements of applicable federal securities
and tax laws and to help ensure that the Merger will be treated as a pooling of
interests for accounting and financial reporting purposes. See "Terms of the
Merger--Conditions to the Merger" and "--Affiliate Agreements."
Voting Agreements
Each executive officer and director of McAfee and Network General has entered
into a Voting Agreement. Pursuant to these Voting Agreements, which are
irrevocable, such persons have agreed to vote all shares of McAfee Common Stock
or Network General Common Stock, as applicable, of which they have beneficial
ownership or acquire beneficial ownership prior to the termination of the
Voting Agreements in favor of (i) approval of the issuance of shares of McAfee
Common Stock by virtue of the Merger in the case of such McAfee stockholders
and (ii) approval and adoption of the Reorganization Agreement and approval of
the Merger in the case of Network General stockholders. In addition, each such
person has granted an irrevocable proxy to the Board of Directors of the other
party to vote such persons' shares in favor of approval of the Reorganization
Agreement and the Merger. McAfee has received Voting Agreements in respect of
approximately 4.4% of the outstanding Network General Common Stock, and Network
General has received Voting Agreements in respect of approximately 0.2% of the
outstanding McAfee Common Stock. See "Terms of the Merger--Conditions to the
Merger" and "--Voting Agreements."
Interests of Certain Persons in the Merger
In considering the recommendation of the Network General Board with respect
to the Reorganization Agreement and the Merger, holders of Network General
Common Stock should be aware that certain directors and executive officers of
the Network General have certain interests in the Merger that are in addition
to the interests of holders of Network General Common Stock generally. In
particular, each of Messrs. Denend, Carver, Richardson and Stringer have
existing severance arrangements under which they will receive certain benefits
as a result of the Merger. Mr. Denend, the President and Chief Executive
Officer and a director of Network General, is also a director of McAfee. See
"Terms of the Merger--Interests of Certain Persons."
8
<PAGE>
NO APPRAISAL RIGHTS
Network General stockholders are not entitled to appraisal rights under the
Delaware General Corporation Law (the "DGCL") in connection with the Merger.
See "Approval of the Merger and Related Transactions--No Appraisal Rights."
Accordingly, Network General stockholders who do not wish to receive McAfee
Common Stock in exchange for their shares of Network General Common Stock must
liquidate their investment by selling their Network General Common Stock prior
to the consummation of the Merger.
MARKET AND PRICE DATA
McAfee Common Stock is traded on Nasdaq under the symbol MCAF. On October 13,
1997, the last trading day before public announcement of the execution of the
Reorganization Agreement, the closing price of McAfee Common Stock as reported
on Nasdaq was $66.375 per share. On October 30, 1997, the closing price of
McAfee Common Stock as reported on Nasdaq was $49.375 per share. There can be
no assurance as to the actual price of McAfee Common Stock prior to, at or at
any time following the Effective Time of the Merger, or in the event the Merger
is not consummated. See "Comparative Market Price Data."
Network General Common Stock is traded on Nasdaq under the symbol NETG. On
October 13, 1997, the last trading day before public announcement of the
execution of the Reorganization Agreement, the closing price of Network General
Common Stock as reported on Nasdaq was $23.375 per share. On October 30, 1997,
the closing price of Network General Common Stock as reported on Nasdaq was
$19.875 per share. There can be no assurance as to the actual price of Network
General Common Stock prior to, or at the Effective Time of the Merger, or in
the event the Merger is not consummated. See "Comparative Market Price Data."
Following the Merger, Network General Common Stock will no longer be traded on
Nasdaq. See "Risk Factors" and "Comparison of Capital Stock."
Because the Exchange Ratio is fixed, changes in the market price of McAfee
Common Stock will affect the market value of the McAfee Common Stock to be
received by stockholders of Network General in the Merger. McAfee stockholders
and Network General stockholders are encouraged to obtain current market
quotations for McAfee Common Stock and Network General Common Stock prior to
the McAfee Special Meeting and Network General Special Meeting, respectively.
9
<PAGE>
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected historical annual financial information of McAfee and
Network General has been derived from their respective audited and unaudited
historical financial statements and should be read in conjunction with such
consolidated financial statements and notes thereto. The consolidated financial
statements for McAfee for the three fiscal years ended December 31, 1996 and
for Network General for the three fiscal years ended March 31, 1997 are
included elsewhere in this Joint Proxy Statement/Prospectus. The selected
historical financial information as of September 30, 1997, and for the nine
month periods ended September 30, 1996 and 1997, for McAfee and Network General
has been derived from the unaudited consolidated financial statements of McAfee
and Network General as of and for such periods which are included elsewhere in
this Joint Proxy Statement/Prospectus, and which, in the opinion of McAfee's
and Network General's respective management, reflect all adjustments necessary
for the fair presentation of this unaudited interim financial information. The
results of operations for these interim periods are not necessarily indicative
of the results to be expected for the entire year. The selected pro forma
combined financial information is derived from the unaudited pro forma combined
condensed financial statements included in this Joint Proxy
Statement/Prospectus, and should be read in conjunction with such unaudited pro
forma financial statements and the notes thereto. For purposes of the pro forma
operating data, Network General's consolidated financial statements for each of
the three fiscal years ended March 31, 1997, and for the nine month periods
ended September 30, 1996 and 1997, have been combined with McAfee's
consolidated financial statements for each of the three fiscal years ended
December 31, 1996, and the nine month periods ended September 30, 1996 and
1997. As a result, Network General's results for the three month period ended
March 31, 1997 are included in the pro forma combined statement of operations
data for both the twelve months ended December 31, 1996 and the nine months
ended September 30, 1997, and results for the three month period ended March
31, 1996 are included in the pro forma combined statement of operations data
for both the twelve months ended December 31, 1995 and the nine months ended
September 30, 1996. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
at the beginning of the periods indicated, nor is it necessarily indicative of
future operating results or financial position.
McAFEE SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- -----------------
1992(1) 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $20,836 $31,039 $52,937 $90,065 $181,126 $121,902 $247,960
Income from operations.. 11,463 13,350 3,285 24,258 67,269 42,470 103,499
Net income.............. 7,062 8,506 2,605 14,916 39,017 23,381 67,850
Net income per share.... $ 0.17 $ 0.19 $ 0.06 $ 0.30 $ 0.73 $ 0.44 $ 1.26
Common and common stock
equivalent shares used
in per share
calculation............ 40,928 43,920 46,175 49,365 53,207 52,810 54,012
</TABLE>
- --------
(1) The statement of operations data for 1992 reflects an estimate of McAfee's
financial results that would have been reported had McAfee been a
corporation since inception and had certain outstanding debentures been
exchanged for common stock upon issuance. The related pro forma adjustments
to McAfee's historical statements of income include the reversal of the
interest expense associated with the debentures and a provision for income
taxes.
10
<PAGE>
McAFEE SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA:
Working capital......... $13,123 $22,994 $31,594 $ 54,832 $122,653 $183,148
Total assets............ 31,791 44,095 73,757 104,020 194,485 342,493
Deferred revenue........ 16,112 19,494 31,549 29,420 23,845 37,608
Total equity............ 9,142 17,989 36,911 63,542 149,527 274,054
</TABLE>
NETWORK GENERAL SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $86,483 $114,900 $139,755 $188,845 $240,668 $161,011 $190,928
Income (loss) from
operations............. 10,415 13,915 31,768 35,438 38,577 36,468 (7,271)
Net income (loss)....... 8,645 11,276 25,411 27,425 25,093 28,861 (15,310)
Net income (loss) per
share.................. $ 0.22 $ 0.27 $ 0.57 $ 0.60 $ 0.55 $ 0.63 $ (0.36)
Common and common stock
equivalent shares used
in per share
calculation............ 39,614 42,346 44,626 45,822 45,703 45,772 42,912
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA:
Working capital......... $ 41,014 $ 65,457 $101,536 $125,841 $124,018 $ 101,501
Total assets............ 132,033 160,846 196,190 223,330 263,271 221,699
Deferred revenue and
taxes.................. 8,825 14,762 16,600 24,164 35,076 35,990
Total stockholders'
equity................. 109,562 132,283 165,587 180,117 179,396 153,588
</TABLE>
11
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1994(1) 1995(1) 1996(1) 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS
DATA:
Net revenue...................... $192,692 $278,910 $421,794 $282,913 $438,888
Income from operations........... 35,053 59,696 105,846 78,938 96,228
Net income....................... 28,016 42,341 64,110 52,242 52,540
Net income per share............. $ 0.43 $ 0.62 $ 0.89 $ 0.73 $ 0.72
Common and common stock
equivalent
shares used in per share
calculation..................... 64,771 68,459 72,251 71,883 72,512
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................... $275,199
Total assets...................................................... 564,192
Deferred revenue and taxes........................................ 73,598
Total stockholders' equity........................................ 418,192
</TABLE>
- --------
(1) Includes Network General results for the year ended March 31, 1995, 1996
and 1997, respectively.
12
<PAGE>
RISK FACTORS
The following factors should be considered carefully by holders of Network
General Common Stock in evaluating whether to approve and adopt the
Reorganization Agreement and to approve the Merger, and by holders of McAfee
Common Stock in evaluating whether to approve the issuance of McAfee Common
Stock pursuant to the Reorganization Agreement. These factors should be
considered in conjunction with the other information included or incorporated
by reference in this Joint Proxy Statement/Prospectus. The following
discussion contains "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, which can be
identified by the use of forward-looking terminology, such as "could," "may,"
"expect," "anticipate," "estimate," "project," "continue," "potential" or
"opportunity" or the negative thereof or other variations thereon or
comparable terminology. See "Forward-Looking Statements." The matters set
forth below constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
RISKS RELATED TO MERGER
Difficulties of Integrating Two Companies. The successful combination of
McAfee and Network General will require substantial attention from management.
The anticipated benefits of the Merger will not be achieved unless the
operations of Network General are successfully combined with those of McAfee
in a timely manner. The difficulties of assimilation may be increased by the
need to integrate personnel and to combine different corporate cultures and by
McAfee's limited personnel, management and other resources. The successful
combination of the two companies will also require integration of the
companies' product offerings and the coordination of their research and
development and sales and marketing efforts. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses and
could lead certain customers to defer purchasing decisions. See "--Risks
Associated with Failure to Manage Growth." The diversion of the attention of
management from the day-to-day operations of the Combined Company, or
difficulties encountered in the transition and integration process, could have
a material adverse effect on the business, financial condition and results of
operations of the Combined Company.
Risks Associated with Fixed Exchange Ratio. As a result of the Merger, each
outstanding share of Network General Common Stock will be converted into the
right to receive 0.4167 of a share of McAfee Common Stock. Because the
Exchange Ratio is fixed, it will not increase or decrease due to fluctuations
in the market price of either McAfee Common Stock or Network General Common
Stock. The specific market value of the consideration to be received by
Network General stockholders in the Merger will, therefore, depend on the
market price of the McAfee Common Stock on and after the Effective Time. In
the event that the market price of McAfee Common Stock decreases or increases
prior to the Effective Time, the market value of the McAfee Common Stock to be
received by Network General stockholders in the Merger would correspondingly
decrease or increase. The market prices of McAfee Common Stock and Network
General Common Stock as of a recent date are set forth herein under "Summary--
Market and Price Data," and "Comparative Market Price Data." McAfee and
Network General stockholders are advised to obtain recent market quotations
for McAfee Common Stock and Network General Common Stock. McAfee Common Stock
and Network General Common Stock historically have been subject to substantial
price volatility. No assurance can be given as to the market prices of McAfee
Common Stock or Network General Common Stock at any time before the Effective
Time or as to the market price of the common stock of the Combined Company at
any time thereafter.
Substantial Expenses Resulting from the Merger. The negotiation and
implementation of the Merger will result in significant pre-tax expenses to
McAfee and Network General. Excluding costs associated with combining the
operations of the two companies and costs associated with the proposed name
change of the Combined Company to "Network Associates, Inc." (which costs are
currently unknown), pre-tax expenses are estimated at approximately $15
million, primarily consisting of fees for investment bankers, attorneys,
accountants, financial printing and other related charges. There can be no
assurance as to the aggregate amount
13
<PAGE>
of such expenses or that unanticipated contingencies will not occur that will
substantially increase the costs of combining the operations of the two
companies. In any event, costs associated with the Merger are expected to
negatively impact results of operations in the quarter ending December 31,
1997 and possibly the quarter ending March 31, 1998.
Dependence on Retention and Integration of Key Employees. The success of the
Combined Company is dependent, in part, on the retention and integration of
key management, technical, marketing, sales and customer support personnel of
Network General. Network General has entered into severance arrangements with
certain members of senior management. See "Terms of the Merger--Interests of
Certain Persons." McAfee and Network General believe that the success of the
Combined Company will depend, in part, upon the retention of these executives
during the transitional period following the Merger. There can be no assurance
that such executives will remain with the Combined Company prior to or for any
specified period after the proposed Merger. The loss of such services could
adversely affect the Combined Company's business, financial condition and
results of operations.
RISKS RELATED TO BUSINESS AND OPERATIONS
Variability of Quarterly Operating Results. Each of McAfee's and Network
General's results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and the Combined Company's results of
operations could fluctuate significantly quarter to quarter and year to year
after the Merger. Causes of such fluctuations may include the volume and
timing of new orders and renewals, the introduction of new products,
distributor inventory levels and return rates, inventory levels of the
Combined Company, product upgrades or updates by the Combined Company or its
competitors, changes in product prices, changes in product mix, seasonality,
trends in the computer industry, general economic conditions, extraordinary
events such as acquisitions or litigation and the occurrence of unexpected
events. The operating results of many software companies reflect seasonal
trends, and the Combined Company's business, financial condition and results
of operations may be affected by such trends in the future. Such trends may
include higher net revenue in the fourth quarter as many customers complete
annual budgetary cycles, and lower net revenue in the summer months when many
businesses experience lower sales, particularly in the European market. See
"McAfee Associates, Inc.--McAfee Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Network General
Corporation--Network General Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Combined Company is expected to have an overall lower growth rate than
McAfee's historic growth rate. Network General's business has historically
grown at a lower rate than McAfee's historic growth rate. In addition,
although McAfee has had significant growth in net revenue and net income in
absolute terms, McAfee's growth rate has slowed in recent periods. Because of
the nature of its distribution methods, McAfee generally cannot predict when a
user will license its products. Historically, renewals have accounted for a
significant portion of McAfee's net revenue; however, there can be no
assurance that McAfee or the Combined Company will be able to sustain historic
renewal rates for McAfee products in the future. McAfee has experienced, and
expects that the Combined Company will experience, increased price competition
for its products and expects competition to increase in the near term, which
may result in reduced average selling prices for the Combined Company's
products in the future. Due to these and other factors (such as a maturing
anti-virus market and an increasingly higher base from which to grow), the
historic revenue growth rate from McAfee products will be difficult to sustain
or increase. In addition, although McAfee has historically experienced greater
order growth rates as compared to revenue growth rates in sequential quarters,
McAfee has seen a general convergence of these growth rates. In certain recent
periods, Network General has experienced lower growth rates for its business
due to a number of factors, including lower order growth rates in Europe and
longer sales cycles domestically. To the extent these trends continue, the
Combined Company's results of operations could be materially adversely
affected.
McAfee has historically distributed the majority of its products
electronically, and as a result, its cost of net revenue has been low relative
to other software vendors. In recent periods, McAfee has increased the
percentage
14
<PAGE>
of its products being distributed through traditional channels. Network
General currently distributes its products through traditional distribution
channels. Accordingly, it is expected that the Combined Company's cost of net
revenue will be higher than McAfee's and, accordingly, gross margins will
decrease.
The trading prices of McAfee Common Stock and Network General Common Stock
have historically been subject to wide fluctuations, with factors such as
earnings announcements and litigation developments contributing to this
volatility. Failure to achieve periodic revenue, earnings and other operating
and financial results as forecasted or anticipated by brokerage firms or
industry analysts could result in an immediate and adverse effect on the
market price of the Combined Company's common stock. The Combined Company may
not discover, or be able to confirm, revenue or earnings shortfalls until the
end of a quarter, which could result in a greater immediate and adverse effect
on the common stock of the Combined Company.
Risk of Inclusion of Network Management and Security Functionality in Other
Software. In the future, vendors of operating system software or other
software (such as firewall or electronic mail software) may continue to
enhance their products (including separate products that are bundled together)
to include functionality that is currently provided most often by network
security and management software. This enhancement could be achieved through
the addition of functionality to operating system software or other software
or the bundling of network security and management software with operating
system software or other products. For example, Microsoft Corporation
("Microsoft") introduced limited anti-virus functionality into its MS-DOS
versions in 1993. The widespread inclusion of the functionality of the
Combined Company's products as standard features of operating system software
or other software could render the Combined Company's products obsolete and
unmarketable, particularly if the quality of such functionality were
comparable to that of the Combined Company's products. Furthermore, even if
the network security and/or management functionality provided as standard
features by operating systems or other software is more limited than that of
the Combined Company's products, there can be no assurance that a significant
number of customers would not elect to accept such functionality in lieu of
purchasing additional software. If the Combined Company were unable to develop
new network security and management products to further enhance operating
systems or other software and to replace successfully any obsolete products,
the Combined Company's business, financial condition and results of operations
would be materially adversely affected.
Rapid Technological Change; Risks Associated with Product Development. The
network security and management market is highly fragmented and is
characterized by ongoing technological developments, evolving industry
standards and rapid changes in customer requirements. The Combined Company's
success depends upon its ability to offer a broad range of network security
and management software products, to continue to enhance existing products, to
develop and introduce in a timely manner new products that take advantage of
technological advances and to respond promptly to new customer requirements.
While McAfee and Network General believe that the Combined Company will offer
one of the broadest product lines in the network management and security
market, this market is continuing to evolve and customer requirements are
continuing to change. As the market evolves and competitive pressures
increase, McAfee and Network General believe that the Combined Company will
need to further expand its product offerings. There can be no assurance that
the Combined Company will be successful in developing and marketing, on a
timely basis, enhancements to its existing products or new products, or that
its new products will adequately address the changing needs of the
marketplace. See "McAfee Associates, Inc.--McAfee Business--Product
Development and Acquisition" and "Network General Corporation--Network General
Business--Product Development."
In addition, from time to time, the Combined Company or its competitors may
announce new products with new or additional capabilities or technologies.
Such announcements of new products could have the potential to replace, or
shorten the life cycles of, the Combined Company's existing products and to
cause customers to defer purchasing the Combined Company's existing products.
McAfee and Network General have in the past experienced delays in software
development, and there can be no assurance that McAfee, Network General or the
Combined Company will not experience delays in connection with its current or
future product development activities (including Network General's recently
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announced CyberCop network security program). Software products as complex as
those offered by McAfee and Network General may contain undetected errors or
version compatibility issues, particularly when first introduced or when new
versions are released, resulting in loss of or delay in market acceptance. For
example, McAfee experienced compatibility issues in connection with its recent
NetShield upgrade, and McAfee's anti-virus software products have in the past
falsely detected viruses that did not actually exist. See "--Risk of False
Detection of Viruses." Delays and difficulties associated with new product
introductions, performance or enhancements could have a material adverse
effect on the Combined Company's business, financial condition and results of
operations and the anticipated benefits of the Merger.
The Combined Company's long-term success will depend on its ability to
develop upgrades and updates to its existing product offerings, to modify and
enhance acquired products, and to introduce new products on a timely and cost-
effective basis which meet the needs of their current and future customers.
Future upgrades and updates may, among other things, include additional
functionality, respond to user problems or address issues of compatibility
with changing operating systems and environments. McAfee believes that the
ability to provide these upgrades and updates to users frequently and at a low
cost is key to success. In particular, the proliferation of new and changing
viruses makes it imperative to update anti-virus products frequently in order
for the products to avoid obsolescence. Failure to release such upgrades and
updates on a timely basis could have a material adverse effect on the Combined
Company's business, financial condition and results of operations. There can
be no assurance that the Combined Company will be successful in these efforts.
In addition, future changes in Windows 95, Windows NT, NetWare or other
popular operating systems may result in compatibility problems with the
Combined Company's products. Further, delays in the introduction of future
versions of operating systems or lack of market acceptance of future versions
of operating systems would result in a delay or a reduction in the demand for
the Combined Company's future products and product versions which are designed
to operate with such future versions of operating systems. The Combined
Company's failure to introduce new products in a timely manner that are
compatible with operating systems and environments preferred by desktop
computer users would have a material adverse effect on the Combined Company's
business, financial condition and results of operations.
Dependence on Revenue from Flagship Products. Each of McAfee and Network
General derives the substantial majority of its net revenue from its flagship
products (in the case of McAfee, its anti-virus software products and, in the
case of Network General, its network fault and performance management
products). These products are expected to continue to account for a
significant portion of the Combined Company's net revenue for the foreseeable
future. Because of this concentration of revenue, a decline in demand for, or
in the prices of, these anti-virus and network management products as a result
of competition, technological change, the inclusion of anti-virus or network
management and analysis functionality in operating system or other software or
otherwise, or a maturation in the respective markets for each could have a
material adverse effect on the Combined Company's business, financial
condition and results of operations. See "McAfee Associates, Inc.--McAfee
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Network General Corporation--Network General Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Emergence of Network Management and Network Security
Markets. The markets for McAfee's and Network General's network management and
network security products are evolving, and their growth depends upon broader
market acceptance of network management and network security software,
including help desk software. Although the number of LAN-attached personal
computers ("PCs") has increased dramatically, the network management and
network security markets continue to be emerging markets and there can be no
assurance that such markets will continue to develop or that further market
development will be rapid enough to significantly benefit the Combined
Company. In addition, there are a number of potential approaches to network
management and network security, including management and security tools
incorporated into network operating systems. Therefore, even if network
management and network security tools gain broader market acceptance, there
can be no assurance that the Combined Company's products will be chosen by
organizations which acquire network management and network security tools.
Furthermore, to the extent that either the network management or network
security market does continue to develop, McAfee and Network
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General expect that competition will increase. See "--Competition" and "--Risk
of Inclusion of Network Security and Management Functionality in Other
Software."
Competition. The markets for McAfee's and Network General's products are
intensely competitive and McAfee and Network General expect competition to
increase in the future. McAfee and Network General believe that the principal
competitive factors affecting the markets for their products include
performance, functionality, quality, customer support, breadth of product
line, frequency of upgrades and updates, brand name recognition, company
reputation and price. Certain of the criteria upon which the performance and
quality of McAfee's anti-virus software products compete include the number
and types of viruses detected, the speed at which the products run and ease of
use. Certain of McAfee's and Network General's competitors have been in the
network management market longer than McAfee and Network General, and other
competitors, such as Symantec Corporation ("Symantec"), Intel Corporation
("Intel"), Seagate Technology, Inc. ("Seagate") and Hewlett-Packard Company
("HP"), are larger and have greater name recognition than McAfee and Network
General. The Combined Company will need to develop name recognition for the
name Network Associates, Inc. In addition, certain larger competitors such as
Intel, Microsoft and Novell, Inc. ("Novell") have established relationships
with hardware vendors related to their other product lines. These
relationships may provide them with a competitive advantage in penetrating the
OEM market with their network management products. As is the case in many
segments of the software industry, McAfee and Network General have been
encountering, and expect to further encounter, increasing competition. This
could reduce average selling prices and, therefore, profit margins.
Competitive pressures could result not only in sustained price reductions but
also in a decline in sales volume, which events would materially adversely
affect the Combined Company's business, financial condition and results of
operations. In addition, competitive pressures may make it difficult for the
Combined Company to maintain or increase its growth rate. See "McAfee
Associates, Inc.--McAfee Business--Competition" and "Network General
Corporation--Network General Business--Competition."
The network security and management market is highly fragmented with
products offered by many vendors. McAfee's principal competitor is the Peter
Norton Group of Symantec in the network security market and Intel's LanDesk in
the network management market. McAfee's other competitors include Computer
Associates International, Inc./Cheyenne Software, Inc., Intel, Seagate, the
Dr. Solomon Group and Trend Micro, Inc., as well as numerous smaller companies
and shareware authors that may in the future develop into stronger competitors
or be consolidated into larger competitors. McAfee's principal competitors in
the help desk market are Remedy Corporation and Software Artistry. McAfee also
faces significant competition in the storage management market. Network
General's principal competitor in the software-based network fault and
performance management market is HP. Network General's other competitors
include Azure Technologies Incorporated, Concord Communications, Inc.,
DeskTalk Systems, Inc., Kaspia Systems, Inc., Shomiti Systems, Inc. and Wandel
& Goltermann Technologies, Inc. McAfee and Network General also face
competition in the security market from Cisco Systems, Inc., Security Dynamics
Technologies, Inc., Checkpoint Systems, Inc. and other vendors in the
encryption/firewall market. In addition, McAfee and Network General face
competition from large and established software companies such as Microsoft,
Novell and HP which offer network management products as enhancements to their
network operating systems. As the network management market develops, the
Combined Company may face increased competition from these large companies, as
well as other companies seeking to enter the market. The trend toward
enterprise-wide network management and security solutions may result in a
consolidation of the network management and security market around a smaller
number of vendors who are able to provide the necessary software and support
capabilities. There can be no assurance that the Combined Company will
continue to compete effectively against existing and potential competitors,
many of whom have substantially greater financial, technical, marketing and
support resources and name recognition than McAfee, Network General or the
Combined Company. In addition, there can be no assurance that software vendors
who currently use traditional distribution methods will not in the future
decide to compete more directly with the Combined Company by utilizing
electronic software distribution.
The competitive environment for anti-virus software internationally is
similar to that in North America, although local competitors in specific
foreign markets present stronger competition and shareware authors control a
more significant portion of the European market. The international market for
network management software
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has developed more slowly than the North American market, although larger
competitors such as Intel and Symantec have begun to penetrate European
markets. Asian markets have significantly lagged behind North America and
Europe in their adoption of networking technology. There can be no assurance
that McAfee, Network General or the Combined Company will be able to compete
successfully in international markets.
Risks Associated with Acquisitions. The software industry has experienced
and is expected to continue to experience a significant amount of
consolidation. In addition, it is expected that the Combined Company will grow
both internally and through strategic acquisitions. McAfee and Network General
frequently evaluate potential acquisitions of complementary businesses,
products and technologies. McAfee has consummated a series of acquisitions
since 1995, including acquisition of a controlling interest in FSA Corporation
of Canada in August 1996, Vycor Corporation in February 1996 and Saber
Software Corporation in August 1995. In addition, since 1995 McAfee has
acquired a number of its international distributors, including distributors in
France, England and The Netherlands. Network General has recently completed
two strategic acquisitions, Cinco Networks, Inc. in August 1997 and 3DV
Technology, Inc. in March 1997. Past acquisitions have consisted of, and any
future acquisitions will likely include, acquisitions of businesses, interests
in businesses and assets of businesses. Past acquisitions have presented
challenges to McAfee's management and Network General's management, and any
future acquisitions by the Combined Company will present challenges to the
Combined Company's management, such as integration and incorporation of new
operations, product lines, technologies, personnel and duplicate facilities.
If the Combined Company's management is unable to manage these challenges, the
Combined Company's business, financial condition and results of operations
could be materially adversely affected. Any acquisition, depending on its
size, could result in the use of a significant portion of the Combined
Company's available cash, or if such acquisition is made utilizing the
Combined Company's securities, could result in significant dilution to the
Combined Company's stockholders. Acquisitions by the Combined Company may
result in the incurrence or the assumption of liabilities, including
liabilities that are unknown or not fully known at the time of acquisition,
which could have a material adverse effect on the Combined Company.
Furthermore, there can be no assurance that any products acquired in
connection with such acquisitions will gain acceptance in the Combined
Company's markets. Subject to certain provisions of the Reorganization
Agreement, prior to the consummation of the Merger, McAfee or Network General
may enter into agreements or negotiations with respect to one or more
acquisitions of other businesses, products and/or technologies. See "McAfee
Associates, Inc.--McAfee Business--Product Development and Acquisition" and
"Network General Corporation--Network General Business--Product Development."
Development of Enterprise Account Sales Force; Direct Sales. The Combined
Company intends to offer a suite of network security and management products
targeted at the enterprise computing market. McAfee historically has not had a
large enterprise account sales force. While Network General has greater
experience than McAfee in the enterprise sales channel, it has only recently
developed its direct sales group focused on large enterprise network accounts.
To succeed in the direct sales channel for the enterprise market, the Combined
Company will be required, using primarily Network General's organization as a
base, to build a significant direct sales organization and will be required to
attract and retain qualified personnel, which personnel will require training
about, and knowledge of, product attributes for the Combined Company's suite
of products. There can be no assurance that the Combined Company will be
successful in building the necessary sales organization or in attracting,
retaining or training these individuals. While the development of a direct
sales channel reduces the Combined Company's dependence on distributors, it
may lead to conflicts for the same customers, pressure by current and
prospective customers for price reductions on products and, consequently, in
reductions in the Combined Company's gross margin and operating profit. See
"McAfee Associates, Inc.--McAfee Business--North American Direct Sales" and
"Network General Corporation--Network General Business--Distribution,
Marketing and Customers."
During fiscal 1997, Network General began establishing direct selling
operations in certain countries where it had previously been represented only
by a distributor. The success of those newly established direct sales
organizations is dependent on a number of factors, including the ability to
attract and retain qualified sales personnel, timely and effective training of
the sales force and obtaining access to and penetrating the prospective
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customer base previously addressed only by the distributor. There can be no
assurance that these new direct sales groups will be successful in these
efforts.
Use of Indirect Sales Channels. McAfee and Network General each markets a
significant portion of its products to end-users through distributors. In
particular, Ingram Micro has accounted for 17%, 12% and 12% of McAfee's net
revenue in 1996, 1995 and 1994, respectively. In the quarter ended September
30, 1997, Ingram Micro Devices accounted for 14% of McAfee's net revenue. For
its fiscal year ended March 31, 1997, Network General derived 25% of its U.S.
and Canadian revenue from distributors, resellers and system integrators and a
substantial majority of its international revenues from this indirect channel.
No Network General distributor accounted for more than 10% of its net revenue
in fiscal years 1997, 1996 and 1995 or for the first six months of fiscal year
1998. See "McAfee Associates, Inc.--McAfee Business--International Sales," "--
Channel Sales" and "Network General Corporation--Network General Business--
Distribution, Marketing and Customers."
McAfee's distributors sell other products that are complementary to, or
compete with, those of McAfee. While McAfee encourages its distributors to
focus on products through market and support programs, there can be no
assurance that these distributors will not give greater priority to products
of other suppliers, including competitors.
McAfee's agreements with its distributors provide for a right of return.
This right of return may be triggered by a number of events, including returns
to distributors by end users, inaccurate estimates of end user demand by
distributors, increased purchases by distributors in response to sales
incentives or transitions to new products or versions of products. As a result
of this right of return, McAfee revenue recognized upon sales to distributors
is subject to a reserve for returns. Returns could exceed reserves as a result
of distributors holding excessive McAfee product inventory. Network General's
agreements with its resellers do not provide for a right of return. There can
be no assurance that future reserves established by McAfee or the Combined
Company will be adequate.
As McAfee's help desk, network management and network security products
become more complex and require additional customer support, McAfee will
require distributors, resellers and system integrators to provide a portion of
this increasing level of support. There can be no assurance that such third
parties will be able or willing to provide additional services. Moreover,
increased reliance on these third parties will reduce McAfee's and the
Combined Company's control over the provision of support services for its
products and place a greater burden on these third parties, which, in turn,
could harm McAfee's and the Combined Company's relationships or reputation
with such third parties or the end users of its products and result in
decreased sales of, or prices for, its products. Network General typically
retains the right and obligation to provide support service to the end users
purchasing products through the indirect sales channel. If end user support is
shifted to distributors following the Merger, there can be no assurance that
any or all of the Network General distributors will be able or wish to provide
such support.
In addition to its direct sales force, Network General currently distributes
its network fault and performance management software products through
distributors and other resellers. These resellers remarket certain Network
General products without change and through systems integrators or original
equipment manufacturers that add other products to the Network General
products to provide a larger solution to the targeted end user. The Combined
Company intends to offer suites of network security and management products
combining technologies of McAfee and Network General. For this strategy to
succeed, any Network General distributor or reseller granted the right to sell
these suites must be knowledgeable of, and be trained about, the product
attributes of the Combined Company's suite of products. There can be no
assurance that the Combined Company will be successful in these efforts, that
it will be able to market its suite of products through Network General's
existing resellers or that it will be able to retain Network General's
resellers who are requested to market the Combined Company's suite of
products.
Network General generally has only a single distributor in any particular
country for its products. The failure of the distributor to perform its sales
generation and support obligations under its distribution agreement could
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adversely affect Network General's or the Combined Company's revenue from, and
reputation with, customers in the territory. In addition, to the extent that
Network General has an exclusive distributor relationship in a particular
country, it could limit the Combined Company's ability to sell its suite of
network security and management products in that country. Furthermore, because
Network General's previous relationships have been with only one distributor
in a particular country, additional distributor conflicts could also arise in
a particular country, even if Network General's distributor relationship is
non-exclusive. Any such limitations or conflicts could affect adversely the
Combined Company and the anticipated benefits of the Merger.
Reliance on Microsoft. Microsoft's Windows operating system has gained
widespread market acceptance and is currently the dominant computer operating
system. While McAfee's and Network General's current product offerings serve
multiple operating environments, the Combined Company expects to emphasize the
compatibility of its future product offerings with Windows, Windows 95 or
Windows NT. Network General's flagship Sniffer Network Analyzer and
Distributed Sniffer System products do not operate under the Windows
environment; however, Network General sells the NetXRay Windows-based network
analyzer developed by Cinco Networks, Inc., a wholly-owned subsidiary of
Network General acquired in August 1997. In addition, Network General intends
that its next generation of Sniffer products will operate in the Windows
environment. Network General's ability to offer future network management
products running under Windows, Windows 95 or Windows NT will be dependent on
its ability to develop and expand its expertise in these operating systems.
Because certain of the Combined Company's current and future Windows-based
products are expected to account for a significant portion of license revenue
for the foreseeable future, sales of the Combined Company's products would be
materially and adversely affected by market developments which are adverse to
the Windows operating environments, including the failure of users and
application developers to accept Windows NT. In addition, the Combined
Company's ability to develop products using the Windows operating environments
is substantially dependent on its ability to gain timely access to, and to
develop expertise in, current and future developments by Microsoft, of which
there can be no assurance.
Risks Associated with Failure to Manage Growth. The growth of McAfee has
placed, and any further expansion would continue to place, a significant
strain on McAfee's limited personnel, management and other resources. In the
future, the Combined Company's ability to manage any growth, particularly with
the anticipated expansion of the Combined Company's international business and
growth in indirect channel business, will require it to attract, train,
motivate and manage new employees successfully, to effectively integrate new
employees into its operations and to continue to improve its operational,
financial, management and information systems and controls. The failure to
effectively manage any further growth could have a material adverse effect on
the Combined Company's business, financial condition and results of operations
and on the benefits anticipated from the Merger.
Proprietary Technology and Rights. McAfee's and Network General's success
is, and the Combined Company's success will be, heavily dependent upon
proprietary software technology. McAfee and Network General rely on a
combination of contractual rights, trademarks, trade secrets and copyrights to
establish and protect proprietary rights in their software. There can be no
assurance these protections will be adequate or that competitors will not
independently develop technologies or products that are substantially
equivalent or superior to McAfee's, Network General's or the Combined
Company's products. See "McAfee Associates, Inc.--McAfee Business--Proprietary
Technology" and "Network General Corporation--Network General Business--
Proprietary Rights and Licenses."
Subject to McAfee stockholder approval and consummation of the Merger, the
Combined Company will be called "Network Associates, Inc." Based on a
preliminary review, McAfee believes that there are a number of other companies
with similar names. There can be no assurance that the Combined Company will
be able to enforce rights in that name, that it will be free to use the name
in all jurisdictions or that there will be no challenges to the use of that
name.
McAfee does not typically obtain signed license agreements from its
corporate, government and institutional customers who license products
directly from McAfee. McAfee includes an electronic version of a "shrink-
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wrap" license in all of its electronically distributed software and a printed
license in the box for its products distributed through traditional
distribution channels in order to protect its copyrights and trade secrets in
those products. Network General typically enters into signed license
agreements with respect to larger accounts and relies on a "shrink-wrap"
license with respect to other accounts. Since many of these licenses are not
signed by the licensee, many authorities believe that such licenses may not be
enforceable under many state laws and the laws of many foreign jurisdictions.
In addition, the laws of some foreign countries either do not protect
proprietary rights or offer only limited protection for those rights. There
can be no assurance that the steps taken by McAfee, Network General or the
Combined Company to protect the Combined Company's proprietary software
technology will be adequate to deter misappropriation of this technology. For
example, McAfee is aware that a substantial number of users of its anti-virus
products have not paid any registration or license fees to McAfee. Changing
legal interpretations of liability for unauthorized use of the Combined
Company's software, or lessened sensitivity by corporate, government or
institutional users to avoiding copyright infringement, could have a material
adverse effect on the Combined Company's business, financial condition and
results of operations.
There has also been substantial industry litigation regarding intellectual
property rights of technology companies. Each of McAfee and Network General
have in the past been, and McAfee currently is, subject to litigation related
to its intellectual property. In addition, from time to time, each of McAfee
and Network General receive claims that it has infringed the intellectual
property rights of others. There can be no assurance that infringement claims
will not be asserted against McAfee, Network General or the Combined Company
or that the outcome of any such claims would not have a material adverse
effect on McAfee's, Network General's or the Combined Company's business,
financial condition and results of operation. In April 1997, Symantec filed a
complaint alleging copyright infringement and unfair competition by McAfee.
Symantec alleged that McAfee's computer software program called "PC Medic
1997" copied portions of Symantec's computer software program entitled
"CrashGuard", and by amendment of the complaint, Symantec expanded the
allegations to McAfee's software program "VirusScan". On October 6, 1997, the
United States District Court, Northern District of California, San Jose
Division (the "Court") issued an order granting Symantec's motion to amend its
complaint and enjoining McAfee from shipping any product containing either an
approximately 30-line routine found in one Symantec product or an
approximately 100-line routine found in a Symantec Dynamic Link Library. Trial
is set for September, 1998. In addition, on May 13, 1997, Trend Micro, Inc.
("Trend") filed suit in United States District Court for the Northern District
of California against both McAfee and Symantec. Trend alleges that McAfee's
"WebShield" and "GroupShield" products infringe a Trend patent which issued on
April 22, 1997. Trend's complaint seeks injunctive relief and unspecified
money damages. On June 6, 1997, McAfee filed its answer denying any
infringement. McAfee also filed a counterclaim accusing Trend of unfair
competition, false advertising, trade libel, and interference with prospective
economic advantage. The case is in the initial stages of discovery. A patent
claim interpretation hearing before the Court is set for April 28, 1998. The
Court has not yet set a date for trial. McAfee is also subject to two other
claims for patent infringement. There can be no assurance that there will be
no developments arising out of the foregoing matters which could have a
material adverse effect on McAfee's business, financial condition and results
of operation. In addition, as McAfee, Network General or the Combined Company
may acquire a portion of software included in their products from third
parties, their exposure to infringement actions may increase because they must
rely upon such third parties as to the origin and ownership of any software
being acquired. Similarly, exposure to infringement claims exists and will
increase to the extent that McAfee, Network General or the Combined Company
employ or hire additional software engineers previously employed by
competitors, notwithstanding measures taken by them to prevent usage by such
software engineers of intellectual property used or developed by them while
employed by a competitor. In the future, litigation may be necessary to
enforce and protect trade secrets and other intellectual property rights owned
by the Combined Company. The Combined Company may also be subject to
litigation to defend it against claimed infringement of the rights of others
or to determine the scope and validity of the proprietary rights of others.
Any such litigation could be costly and cause diversion of management's
attention, either of which could have a material adverse effect on the
Combined Company's business, financial condition and results of operations.
Adverse determinations in such litigation could result in the loss of the
Combined Company's proprietary rights, subject the Combined Company to
significant liabilities, require the Combined
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Company to seek licenses from third parties or prevent the Combined Company
from manufacturing or selling its products, any one of which could have a
material adverse effect on the Combined Company's business, financial
condition and results of operations and on the benefits anticipated from the
Merger. Furthermore, there can be no assurance that any necessary licenses
will be available on reasonable terms, or at all.
Risks Related to International Revenue. In calendar 1994, 1995 and 1996 net
revenue from international licenses (license revenue from outside the United
States and Canada) represented approximately 23%, 29% and 19%, respectively,
of McAfee's net revenue. In the nine months ended September 30, 1997, net
revenue from international licenses represented approximately 28% of McAfee's
net revenue. In fiscal 1995, 1996 and 1997 international revenue (revenue from
outside the United States) represented approximately 22%, 24% and 27%,
respectively, of Network General's total revenue. In the six months ended
September 30, 1997, international revenue represented approximately 26% of
Network General's total revenue. McAfee and Network General expect that net
revenue from international activities will account for a significant portion
of net revenue of the Combined Company and that a significant portion of such
international revenue will be denominated in local currencies. To minimize the
impact of foreign currency fluctuations, McAfee recently began using non-
leveraged forward currency contracts and Network General maintains a hedging
program to cover foreign currency-based transaction exposures. However, there
can be no assurance that the Combined Company's future results of operations
will not be adversely affected by such fluctuations or by costs associated
with currency risk management strategies. Other risks inherent in
international revenue generally include the impact of longer payment cycles,
greater difficulty in accounts receivable collection, unexpected changes in
regulatory requirements, seasonality due to the slowdown in European business
activity during the third quarter, tariffs and other trade barriers,
uncertainties relative to regional economic circumstances, political
instability in emerging markets and difficulties staffing and managing foreign
operations. There can be no assurance that these factors will not have a
material adverse effect on the Combined Company's future international license
revenue. Further, in countries with a high incidence of software piracy, the
Combined Company may experience a higher rate of piracy of its products. See
"McAfee Associates, Inc.--McAfee Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Network General
Corporation--Network General Managements's Discussion and Analysis of
Financial Condition and Results of Operations."
In addition, a portion of the Combined Company's international revenue is
expected to be generated through independent agents. Since these agents will
not be employees of the Combined Company and will not be required to offer the
Combined Company's products exclusively, there can be no assurance that they
will continue to market the Combined Company's products. Also, the Combined
Company is likely to have limited control over its agents, limited access to
the names of the customers to whom the agents sell the Combined Company's
products and limited knowledge of the information provided by, or
representations made by, these agents to its customers.
Risk of Sabotage. Given McAfee's high profile in the anti-virus software
market, McAfee has been a target of computer "hackers" who have created
viruses to sabotage McAfee's products. While to date these viruses have been
discovered quickly and their dissemination has been limited, there can be no
assurance that similar viruses will not be created in the future, that they
will not cause damage to users' computer systems and that demand for McAfee's
software products will not suffer as a result. In addition, since McAfee does
not control, and the Combined Company will not control, diskette duplication
by distributors or its independent agents, there can be no assurance that
diskettes containing the Combined Company's software will not be infected.
Risk of False Detection of Viruses. McAfee's anti-virus software products
have in the past and may at times in the future falsely detect viruses that do
not actually exist. Such "false alarms," while typical in the industry, may
impair the perceived reliability of McAfee's products and may therefore
adversely impact market acceptance of McAfee's products. In addition, McAfee
has in the past been subject to litigation claiming damages related to a false
alarm, and there can be no assurance that similar claims will not be made in
the future.
Product Liability. McAfee's anti-virus software products and network
management products and Network General's network management products are used
to protect and manage computer systems and networks that
22
<PAGE>
may be critical to organizations and, as a result, the sale and support of
these products by McAfee or Network General may entail the risk of product
liability and related claims. McAfee's or Network General's license agreement
with its customers typically contain provisions designed to limit McAfee's or
Network General's exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in
these license agreements may not be effective under the laws of certain
jurisdictions, particularly given McAfee's reliance on unsigned licenses. A
product liability claim brought against the Combined Company could have a
material adverse effect on the Combined Company's business, financial
condition and results of operations.
Dependence upon Key Personnel. The Combined Company's success will depend to
a significant extent upon a number of key technical and management employees.
While McAfee's and Network General's employees are required to sign standard
agreements concerning confidentiality and ownership of inventions, the
employees are generally not otherwise subject to employment agreements or to
noncompetition covenants. The loss of the services of any key employees could
have a material adverse effect on the Combined Company's business, financial
condition and results of operations and on the benefits anticipated from the
Merger. Neither McAfee nor Network General maintains life insurance policies
on its key employees. The Combined Company's ability to achieve its revenue
and operating performance objectives will depend in large part on its ability
to attract and retain technically qualified and highly skilled sales,
consulting, technical, marketing and management personnel. Competition for
such personnel is intense and is expected to remain so for the foreseeable
future. There can be no assurance that McAfee, Network General or the Combined
Company will be successful in retaining their existing key personnel and in
attracting and retaining the personnel they require. See "Terms of the
Merger--Interests of Certain Persons." Failure of the Combined Company to
retain and grow its key employee population could adversely affect the
Combined Company's business and operating results. See "McAfee Associates,
Inc.--McAfee Business--Employees" and "Network General Corporation--Network
General Business-- Employees."
Customer Purchase Decisions. The products to be offered by the Combined
Company may be considered to be capital purchases by certain customers or
prospective customers. Capital purchases are often considered discretionary
and, therefore, are canceled or delayed if the customer experiences a downturn
in its business or prospects or as a result of economic conditions in general.
Any such cancellation or delay could adversely affect the Combined Company's
results of operations.
Supplier Dependence. Certain of Network General's products contain critical
components supplied by a single or a limited number of third parties. Network
General has been required to purchase and inventory certain of the computer
platforms around which it designs its products so as to ensure an available
supply of the product for its customers. Any significant shortage of these
platforms or other components or the failure of the third party supplier to
maintain or enhance these products could lead to cancellations of customer
orders or delays in placement of orders which could materially adversely
affect the Combined Company's results of operations. If the Combined Company's
purchase of such components or platforms exceeds demand, the Combined Company
could incur losses or other charges in disposing of excess inventory, which
could also materially adversely affect the Combined Company's results of
operations. See "Network General Corporation--Network General Business--
Manufacturing and Suppliers."
Volatility of Stock Price. The trading prices of McAfee Common Stock and
Network General Common Stock have historically been, and after the Merger the
trading price of the common stock of the Combined Company is expected to be,
subject to wide fluctuations in response to quarterly variations in financial
performance, shortfalls in revenue or earnings from levels forecast by
securities analysts, changes in estimates by such analysts, market conditions
in the computer software or hardware industries, product introductions by the
Combined Company or its competitors, announcements of extraordinary events
such as acquisitions or litigation or general economic conditions. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. These fluctuations have had a substantial effect on the
market prices for many high technology and emerging growth companies, often
unrelated to the operating performance of the specific companies. On several
occasions during 1995, 1996 and 1997, the closing sales prices for McAfee
Common Stock
23
<PAGE>
on successive days fluctuated in excess of 10%. There can be no assurance that
such fluctuations in price of the common stock of the Combined Company will
not continue in the future. See "Comparative Market Price Data."
Effect of Certain Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The board of directors of the Combined
Company (the "Combined Company Board") will have the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by its stockholders. The rights of
the holders of the common stock of the Combined Company will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock.
Further, certain provisions of Delaware law and the Combined Company's
Certificate of Incorporation and Bylaws, such as a classified board, could
delay or make more difficult a merger, tender offer or proxy contest involving
the Combined Company. While such provisions are intended to enable the
Combined Company Board to maximize stockholder value, they may have the effect
of discouraging takeovers which could be in the best interest of certain
stockholders. There is no assurance that such provisions will not have an
adverse effect on the market value of the common stock of the Combined
Company. See "Comparison of Capital Stock."
24
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of McAfee
and Network General and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a pooling of interests basis of
accounting, assuming that 0.4167 of a share of McAfee Common Stock is issued
in exchange for one share of Network General Common Stock in the Merger. This
data should be read in conjunction with selected historical financial data,
the unaudited pro forma combined financial information, and the separate
historical financial statements of McAfee and Network General and notes
thereto (which are included elsewhere in this Joint Proxy
Statement/Prospectus). The pro forma combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented
and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
HISTORICAL--MCAFEE
Net income per share.................... $0.06 $0.30 $0.73 $1.26
Book value per share(1)................. $0.84 $1.38 $3.07 $5.35
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
HISTORICAL--NETWORK GENERAL
Net income (loss) per share............. $0.57 $0.60 $0.55 $(0.36)
Book value per share(1)................. $3.73 $3.91 $4.15 $ 3.62
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED NET INCOME PER
SHARE(2)
Per McAfee share........................ $0.43 $0.62 $0.89 $0.72
Equivalent Network General share(3)..... $0.18 $0.26 $0.37 $0.30
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(4)
Per McAfee share..................................... $4.81 $6.07
Equivalent Network General share..................... $2.00 $2.53
</TABLE>
- --------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and preferred stock, on an
as if converted basis, outstanding at the end of each period.
(2) The pro forma combined net income per share for the years ended December
31, 1994, 1995 and 1996 include Network General's net income per share for
the years ended March 31, 1995, 1996 and 1997, respectively. The pro forma
combined net income per share for the nine months ended September 30, 1997
includes Network General's income per share for the quarter ended March
31, 1997, which has also been included in the pro forma combined net
income per share for the year ended December 31, 1996.
(3) The Network General equivalent pro forma combined per share amounts are
calculated by multiplying the combined pro forma per share amounts by the
Exchange Ratio of 0.4167 of a share of McAfee Common Stock for each share
of Network General Common Stock.
(4) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common
stock outstanding at the end of each period.
25
<PAGE>
COMPARATIVE MARKET PRICE DATA
The table below sets forth, for the calendar quarters indicated, the
reported high and low closing prices of McAfee Common Stock and Network
General Common Stock as reported on Nasdaq.
<TABLE>
<CAPTION>
MCAFEE NETWORK GENERAL
COMMON STOCK(1) COMMON STOCK(2)(3)
--------------- ------------------
HIGH LOW HIGH LOW
--------------- --------- ---------
<S> <C> <C> <C> <C>
1995 CALENDAR YEAR
First Quarter........................... $ 8.85 $ 4.48 $ 15.00 $ 11.75
Second Quarter.......................... 9.96 8.08 14.28 11.53
Third Quarter........................... 16.37 8.41 21.87 12.81
Fourth Quarter.......................... 22.89 12.67 22.12 16.31
1996 CALENDAR YEAR
First Quarter........................... 28.50 14.33 22.00 15.06
Second Quarter.......................... 35.00 23.78 27.00 18.19
Third Quarter........................... 46.92 30.83 26.31 16.06
Fourth Quarter.......................... 52.50 41.75 30.25 22.19
1997 CALENDAR YEAR
First Quarter........................... 64.50 38.50 29.75 19.63
Second Quarter.......................... 68.50 42.25 21.88 13.75
Third Quarter........................... 77.75 49.50 19.50 13.13
Fourth Quarter (through October 30,
1997).................................. 66.37 48.50 24.31 19.00
</TABLE>
- --------
(1) Per share amounts for McAfee Common Stock have been restated to give
effect retroactively to three separate stock dividends, which each
effected a three-for-two stock split, in October 1995, April 1996 and
October 1996.
(2) Per share amounts for Network General Common Stock have been restated to
give effect retroactively to a stock dividend, which effected a two-for-
one stock split, in May 1996.
(3) Network General's fiscal year ends March 31 of each year. The information
set forth above is presented based on calendar year quarters.
On October 13, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement,
the closing prices on Nasdaq were $66.375 per share of McAfee Common Stock and
$23.375 per share of Network General Common Stock. On October 30, 1997, the
closing prices on Nasdaq were $49.375 per share of McAfee Common Stock and
$19.875 per share of Network General Common Stock.
Because the Exchange Ratio is fixed, changes in the market price of McAfee
Common Stock will affect the market value of the McAfee Common Stock to be
received by stockholders of Network General in the Merger. McAfee stockholders
and Network General stockholders are urged to obtain current market quotations
for McAfee Common Stock and Network General Common Stock prior to the McAfee
Special Meeting and Network General Special Meeting, respectively.
Neither McAfee nor Network General has paid cash dividends. McAfee and
Network General currently intend that the Combined Company will retain
earnings for development of its business and not distribute earnings to
stockholders as dividends for the foreseeable future. The declaration and
payment by the Combined Company of any future dividends and the amount thereof
will depend upon the Combined Company's results of operations, financial
condition, cash requirements, future prospects, limitations imposed by credit
agreements or senior securities and other factors deemed relevant by the
Combined Company Board.
26
<PAGE>
MCAFEE SPECIAL MEETING
DATE, TIME AND PLACE OF MCAFEE SPECIAL MEETING
The McAfee Special Meeting will be held at the Westin Hotel, 5101 Great
America Parkway, Santa Clara, California 95054, on December 1, 1997 at 8:00
a.m., local time.
PURPOSE
The purpose of the McAfee Special Meeting is to consider and vote upon
proposals to approve (i) the issuance of shares of McAfee Common Stock to the
stockholders of Network General pursuant to the Reorganization Agreement
("Proposal One"); (ii) an amendment to the Certificate to change the corporate
name of McAfee to "Network Associates, Inc.," contingent upon consummation of
the Merger ("Proposal Two"); (iii) an amendment to the Certificate to increase
the authorized shares of McAfee Common Stock by 200 million shares to 300
million shares ("Proposal Three") (which, if approved, will be effective
whether or not the Merger is consummated) and (iv) amendments to McAfee's 1997
Stock Incentive Plan to (a) increase the number of shares of McAfee Common
Stock authorized thereunder by 3.4 million shares to 5.85 million shares and
(b) eliminate the ability to grant options with an exercise price less than
the fair market value of McAfee Common Stock on the date of grant, each
amendment contingent upon consummation of the Merger ("Proposal Four"). See
"Terms of the Merger" and "Additional Matters Being Submitted to a Vote of
Only McAfee Stockholders--Proposal Two--Amendment to Second Restated
Certificate of Incorporation--Name Change," "--Proposal Three--Amendment to
Second Restated Certificate of Incorporation--Increase to Authorized Common
Stock" and "--Proposal Four--Amendment to 1997 Stock Incentive Plan--Increase
in Number of Shares Eligible for Grant and Elimination of Ability to Make
Certain Option Grants."
RECORD DATE AND OUTSTANDING SHARES
Only McAfee stockholders of record on the McAfee Record Date are entitled to
notice of and to vote at the McAfee Special Meeting. As of the McAfee Record
Date, there were approximately 375 stockholders of record of McAfee Common
Stock holding an aggregate of approximately 51,403,965 shares of McAfee Common
Stock. As of the McAfee Record Date, there was one share of McAfee Series A
Preferred Stock outstanding, with such share entitled to vote with the McAfee
Common Stock and having 325,062 votes.
On or about October 31, 1997, a notice meeting the requirements of Delaware
law was mailed to stockholders of record as of the McAfee Record Date.
VOTE REQUIRED
Under Delaware law, the charter documents of McAfee and Nasdaq rules,
approval of (i) each of the amendments to the Certificate requires the
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of McAfee securities (including McAfee Common Stock and
other securities entitled to vote together with McAfee Common Stock) and (ii)
the issuance of shares of McAfee Common Stock pursuant to the Reorganization
Agreement and the amendments to McAfee's 1997 Stock Incentive Plan require the
affirmative vote of a majority of the total votes cast in person or by proxy
regarding such proposal. Each stockholder of record of McAfee Common Stock on
the McAfee Record Date is entitled to cast one vote per share, exercisable in
person or by properly executed proxy, on each matter properly submitted for
the vote of the stockholders of McAfee at the McAfee Special Meeting. The
stockholder of record of the one share of McAfee Series A Preferred Stock is
entitled to cast 325,062 votes, exercisable in person or by properly executed
proxy, on each matter properly submitted for the vote of the stockholders of
McAfee at the McAfee Special Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of McAfee Common Stock entitled to vote at
the McAfee Special Meeting (including shares entitled to vote together with
the McAfee Common Stock) shall constitute a quorum. Broker non-votes and
shares held by persons abstaining will be counted in determining whether a
quorum is present at the McAfee Special Meeting.
27
<PAGE>
For Proposals Two and Three, the effect of an abstention or broker non-vote is
the same as a vote against such proposals. For purposes of Proposals One and
Four, abstentions are counted as votes cast and accordingly have the same
effect as votes against the proposal, whereas broker non-votes are not counted
as votes cast and therefore once a quorum is present, will have no effect on
the proposal.
As of the McAfee Record Date, the executive officers and directors of McAfee
owned less than 1% of the outstanding shares of McAfee Common Stock,
representing less than 1% of the votes entitled to be cast by holders of
McAfee securities entitled to vote together with McAfee Common Stock issued
and outstanding as of the McAfee Record Date. Each of these executive officers
and directors has entered into a Voting Agreement with Network General
obligating such officer and director, among other things, to vote his or her
shares of McAfee Common Stock in favor of approval of the issuance of McAfee
Common Stock pursuant to the Reorganization Agreement. See "Terms of the
Merger--Voting Agreements" and "--Conditions to the Merger."
PROXIES
Each of the persons named in the proxy is an officer of McAfee. All shares
of McAfee Common Stock (including shares entitled to vote together with the
McAfee Common Stock) that are entitled to vote and are represented at the
McAfee Special Meeting either in person or by properly executed proxies
received prior to or at the McAfee Special Meeting and not duly and timely
revoked will be voted at the McAfee Special Meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such proxies will be voted for the approval of the issuance of shares of
McAfee Common Stock pursuant to the Reorganization Agreement, the amendments
to the Certificate and the amendment to McAfee's 1997 Stock Incentive Plan.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of McAfee at or before the taking of the vote at the McAfee
Special Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of McAfee before the taking of the vote at the
McAfee Special Meeting; or (iii) attending the McAfee Special Meeting and
voting in person (although attendance at the McAfee Special Meeting will not
in and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to McAfee
at 2805 Bowers Avenue, Santa Clara, California 95051, Attention: Secretary, or
hand delivered to the Secretary of McAfee, in each case at or before the
taking of the vote at the McAfee Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of McAfee stockholders will be borne by McAfee.
In addition, McAfee may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Proxies may also be
solicited by certain McAfee directors, officers and regular employees
personally or by telephone, telegram, letter or facsimile. Such persons will
not receive additional compensation, but may be reimbursed for reasonable out-
of-pocket expenses incurred in connection with such solicitation. In addition,
McAfee has retained MacKenzie Partners, Inc. to assist in the solicitation of
proxies from brokers, nominees, institutions and individuals at an estimated
fee of $10,000 plus reimbursement of reasonable expenses. Arrangements will
also be made with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and McAfee will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
RECOMMENDATIONS OF MCAFEE BOARD OF DIRECTORS
The McAfee Board by unanimous vote of the directors present and voting at
the special meeting of the McAfee Board on October 13, 1997 (which included
all directors except Mr. Denend, who did not participate in this or any other
McAfee Board meetings with respect to the Merger due to his status as
President, Chief Executive Officer and a director of Network General) approved
the Reorganization Agreement and the
28
<PAGE>
transactions contemplated thereby and determined that the Merger is fair to,
and in the best interests of, McAfee and its stockholders. After careful
consideration, the McAfee Board unanimously (other than Mr. Denend with
respect to the issuance of McAfee Common Stock pursuant to the Reorganization
Agreement) recommends a vote in favor of (i) the issuance of shares of McAfee
Common Stock pursuant to the Reorganization Agreement; (ii) an amendment of
the Certificate to change the corporate name of McAfee to "Network Associates,
Inc.," contingent upon consummation of the Merger; (iii) an amendment to the
Certificate to increase the number of authorized shares of McAfee Common Stock
by 200 million shares to 300 million shares (which, if approved, will be
effective whether or not the Merger is consummated); and (iv) amendments to
McAfee's 1997 Stock Incentive Plan to (a) increase the number of shares of
McAfee Common Stock authorized thereunder by 3.4 million shares to
5.85 million shares and (b) eliminate the ability to grant options thereunder
with an exercise price less than the fair market value of McAfee Common Stock
on the date of grant, each amendment contingent upon consummation of the
Merger.
NETWORK GENERAL SPECIAL MEETING
DATE, TIME AND PLACE OF NETWORK GENERAL SPECIAL MEETING
The Network General Special Meeting will be held at Hotel Sofitel, 223 Twin
Dolphin Drive, Redwood City, California 94065, on December 1, 1997 at 8:00
a.m., local time.
PURPOSE
The purpose of the Network General Special Meeting is to consider and vote
upon a proposal to approve and adopt the Reorganization Agreement and to
approve the Merger.
RECORD DATE AND OUTSTANDING SHARES
Only stockholders of record of Network General Common Stock on the Network
General Record Date are entitled to notice of, and to vote at, the Network
General Special Meeting. As of the Network General Record Date, there were
approximately 420 stockholders of record holding an aggregate of approximately
42,631,354 shares of Network General Common Stock.
On or about October 31, 1997, a notice meeting the requirements of Delaware
law was mailed to stockholders of record as of the Network General Record
Date.
VOTE REQUIRED
Under Delaware law, the charter documents of Network General and Nasdaq
rules, the affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of Network General Common Stock outstanding as
of the Network General Record Date is required to approve and adopt the
Reorganization Agreement and to approve the Merger. Each stockholder of record
of Network General Common Stock on the Network General Record Date will be
entitled to cast one vote per share on each matter to be acted upon at the
Network General Special Meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of Network General Common Stock entitled to vote at the
Network General Special Meeting is necessary to constitute a quorum for the
transaction of business. For purposes of obtaining the required vote of a
majority of the outstanding shares of Network General Common Stock for
approval and adoption of the Reorganization Agreement and approval of the
Merger, the effect of an abstention or a broker non-vote is the same as that
of a vote against the proposal.
As of the Network General Record Date, the executive officers and directors
of Network General owned approximately 4.4% of the issued and outstanding
shares of Network General Common Stock as of the Network
29
<PAGE>
General Record Date. Each of these executive officers and directors has
entered into a Voting Agreement with McAfee obligating such officer and
director, among other things, to vote his or her shares of Network General
Common Stock in favor of approval of the Reorganization Agreement and the
Merger. See "Terms of the Merger--Voting Agreements" and "--Conditions to the
Merger."
PROXIES
Each of the persons named in the proxy is an officer of Network General. All
shares of Network General Common Stock that are entitled to vote and are
represented at the Network General Special Meeting either in person or by
properly executed proxies received prior to or at the Network General Special
Meeting and not duly and timely revoked will be voted at the Network General
Special Meeting in accordance with the instructions indicated on such proxies.
If no such instructions are indicated, such proxies will be voted to approve
and adopt the Reorganization Agreement and to approve the Merger.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Network General at or before the taking of the vote at
the Network General Special Meeting, a written notice of revocation bearing a
later date than the proxy; (ii) duly executing a later-dated proxy relating to
the same shares and delivering it to the Secretary of Network General before
the taking of the vote at the Network General Special Meeting; or (iii)
attending the Network General Special Meeting and voting in person (although
attendance at the Network General Special Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to Network General at
4200 Bohannon Drive, Menlo Park, California 94025, Attention: Secretary, or
hand-delivered to the Secretary of Network General, in each case at or before
the taking of the vote at the Network General Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
All costs of solicitation of proxies will be borne by Network General.
Brokers, custodians and fiduciaries will be requested to forward proxy
soliciting materials to the owners of stock held in their names, and Network
General will reimburse them for their reasonable out-of-pocket costs. In
addition, proxies may also be solicited by certain directors, officers and
employees of Network General personally or by mail, telephone or telegraph
following the original solicitation. Such persons will not receive additional
compensation for such solicitation. Network General has retained Georgeson &
Company, Inc., an independent proxy solicitation firm, to assist in soliciting
proxies at an estimated fee of $7,500 plus reimbursement of reasonable
expenses.
NO APPRAISAL RIGHTS
In connection with the Merger, Network General stockholders are not entitled
to appraisal rights under the DGCL. See "Approval of the Merger and Related
Transactions--No Appraisal Rights." Accordingly, Network General stockholders
who do not wish to receive shares of McAfee Common Stock in exchange for their
shares of Network General Common Stock must liquidate their investment by
selling their Network General Common Stock prior to the consummation of the
Merger.
RECOMMENDATIONS OF NETWORK GENERAL BOARD OF DIRECTORS
The Network General Board, by unanimous vote of the directors present and
voting at the special meeting of the Network General Board on October 13, 1997
(which included all directors except Mr. Denend, who recused himself from all
deliberations and votes regarding the Merger due to his status as a director
of McAfee, and Mr. Gallo, who participated in all other meetings regarding the
Merger and in the first portion of the October 13, 1997 meeting and expressed
his support for the Merger, but was not present for the Board's formal vote)
approved the Reorganization Agreement and the transactions contemplated
thereby and determined that the Merger is fair to, and in the best interests
of, Network General and its stockholders. After careful consideration, the
Network General Board unanimously (other than Mr. Denend) recommends a vote in
favor of approval and adoption of the Reorganization Agreement and in favor of
approval of the Merger.
30
<PAGE>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
The following discussion summarizes the proposed Merger and related
transactions. The following is not, however, a complete statement of all
provisions of the Reorganization Agreement and related agreements. Detailed
terms of and conditions to the Merger and certain related transactions are
contained in the Reorganization Agreement, a conformed copy of which is
attached to this Joint Proxy Statement/Prospectus as Annex A. Reference is
also made to the other Annexes hereto. Statements made in this Joint Proxy
Statement/Prospectus with respect to the terms of the Merger and such related
transactions are qualified in their respective entireties by reference to the
more detailed information set forth in the Reorganization Agreement and the
other Annexes hereto. Other than statements of historical facts, statements
made in this section including statements as to the benefits expected to
result from the Merger and as to the future financial performance and the
analyses performed by the financial advisors of McAfee and Network General are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Joint Proxy Statement/Prospectus.
JOINT REASONS FOR THE MERGER
The Boards of Directors of McAfee and Network General have each determined
that, compared to their respective companies on a stand-alone basis, the
Combined Company would have the potential to realize improved long-term
operating and financial results and a stronger competitive position. With the
growth of internal networks and the Internet, the need for assured network
performance, availability and security has increased and network security and
management has become one of the most rapidly growing and critical areas of
the computer industry. McAfee is a leading provider of enterprise anti-virus,
security and help desk automation software while Network General is a leading
provider of network fault and performance management solutions. The Combined
Company will be one of the largest companies catering primarily to network
security and management markets, and will offer a broad suite of products to
protect, manage and monitor corporate networks. McAfee and Network General
believe that this suite of product offerings, together with their combined and
expanded sales and support personnel and products under development, will
establish the Combined Company as a leading partner for enterprise customers
seeking to leverage the benefits of a secure, reliable network computing
architecture.
Each of the Boards of Directors of McAfee and Network General has identified
a number of additional potential mutual benefits of the Merger that they
believe will contribute to the success of the Combined Company. These
potential benefits include principally the following:
. With its comprehensive product offerings, the Combined Company is
expected to increase its market penetration with larger, Fortune 500
enterprise accounts who frequently seek to secure total integrated
management and security solutions from a limited number of suppliers;
. The Combined Company should be able to utilize its leadership position
and brand recognition in the anti-virus market (with McAfee's widely
recognized VirusScan product) and network management (with Network
General's widely recognized Sniffer products) to support the Combined
Company's efforts to gain greater market penetration in additional
network security and management markets;
. The Combined Company will have complementary product offerings,
addressing similar network security and management requirements and
focused on similar enterprise customers with limited overlap in
functionality, providing the opportunity to increase average sales per
customer due to an increased ability to service the enterprise market
with a suite of products offering an integrated solution;
. The Combined Company will be a leading software provider for
Microsoft/Intel-based personal computers and server computers
(including Microsoft's NT platform). The Combined Company will attempt
to leverage this position as Microsoft and Intel gain greater
penetration in the enterprise computing market;
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. Additional sales opportunities are expected to develop as the Combined
Company utilizes McAfee's expertise in electronic software distribution
through the Internet to distribute its products and as the Combined
Company utilizes Network General's access to customer managers with
broader purchasing authority;
. Increased international sales are expected through the combination of
McAfee's and Network General's non-U.S. sales offices;
. The creation of a larger sales and service organization, a higher
market profile and greater financial strength are expected to create
greater opportunities for marketing the products of the Combined
Company both in the United States and internationally; and
. The combined experience, financial resources, size and breadth of
product offerings of the Combined Company are expected to allow the
Combined Company to respond more quickly and effectively to
technological change, increased competition and market demands in an
industry experiencing rapid innovation and change.
McAfee and Network General have each identified additional reasons for the
Merger. However, each Board of Directors recognizes that the potential
benefits of the Merger may not be realized. See "Risk Factors."
MCAFEE'S REASONS FOR THE MERGER
The McAfee Board considered the proposed Merger at board meetings on
September 12, 20 and 30 and October 9, 12 and 13 and by unanimous vote of the
directors present and voting at the special meeting of October 13, 1997 (which
included all directors except Mr. Denend, who did not participate in this or
any other McAfee Board meeting with respect to the Merger due to his status as
President, Chief Executive Officer and a director of Network General) approved
the Reorganization Agreement and the transactions contemplated thereby and
determined that the Merger is fair to, and in the best interests of, McAfee
and its stockholders.
In addition to the anticipated joint benefits described above, the McAfee
Board believes that the following are additional reasons the Merger will be
beneficial to McAfee and for stockholders of McAfee to vote FOR the issuance
of the shares of McAfee Common Stock pursuant to the Reorganization Agreement.
. Given the complementary nature of the product lines of McAfee and
Network General, the Merger will enhance the opportunity for the
potential realization of McAfee's strategic objective of being a
preeminent provider of network security and management solutions;
. The Merger is expected to provide an efficient opportunity for expanded
distribution of McAfee's products to current Network General customers
and Network General's products to McAfee customers. In many instances,
the decision maker for purchasing McAfee and Network General products
is the same person;
. The Merger is expected to improve McAfee's revenue prospects with the
addition of new customers and the ability to obtain greater revenue
from existing customers;
. The Merger is expected to better position McAfee to provide
professional services to its customers in order to help them configure,
install and calibrate products purchased from McAfee; and
. As a result of the Merger, McAfee stockholders will benefit from owning
part of a larger and financially stronger enterprise.
The McAfee Board considered a number of factors relating to the Merger,
including, but not limited to, the following: (i) the strategic benefits of
the Merger; (ii) historical information concerning McAfee's and Network
General's respective businesses, prospects, financial performance and
condition, operations, technology, management and competitive position,
including public reports concerning results of operations during the most
recent fiscal year and fiscal quarter for each company filed with the SEC;
(iii) McAfee management's view of the financial condition, results of
operations and businesses of McAfee and Network General before and after
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giving effect to the Merger and the McAfee Board's assessment of their effect
on stockholder value; (iv) current financial market conditions and historical
market prices, volatility and trading information with respect to McAfee
Common Stock and Network General Common Stock; (v) the consideration to be
received by Network General stockholders in the Merger and the relationship
between the market value of McAfee Common Stock to be issued in exchange for
each share of Network General Common Stock and a comparison of comparable
merger transactions; (vi) the belief that the terms of the Reorganization
Agreement, including the parties' representations, warranties and covenants,
and the conditions to their respective obligations, are reasonable; (vii) the
potential for other third parties to enter into strategic relationships with
or to acquire Network General; (viii) McAfee management's view of the
prospects of McAfee as a stand-alone entity; (ix) the impact of the Merger on
McAfee's customers and employees; and (x) reports from management, legal,
financial and accounting advisors as to the results of the due diligence
investigation of Network General concerning the business, technology,
products, operations, properties, assets, financial condition, operating
results and prospects of Network General as well as trends in Network General
business and financial results. The McAfee Board also considered the terms of
the Reorganization Agreement regarding McAfee's and Network General's
respective rights to consider and negotiate other acquisition proposals in
certain circumstances, the possible effects of the provisions regarding
termination fees and Network General's representation on the Combined Company
Board. In addition, the McAfee Board noted that the Merger is expected to be
accounted for as a pooling of interests and that no goodwill is expected to be
created on the books of the Combined Company as a result thereof. The McAfee
Board also considered financial presentations by Morgan Stanley, including the
opinion of Morgan Stanley that as of October 13, 1997, and subject to the
assumptions set forth therein, the Exchange Ratio pursuant to the
Reorganization Agreement was fair from a financial point of view to McAfee.
The McAfee Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to: (i) the risk that the potential benefits sought in the Merger
might not be fully realized; (ii) the risk that the issuance of McAfee Common
Stock in the Merger could be dilutive to McAfee stockholders if anticipated
synergies are not realized; (iii) the possibility that the Merger might not be
consummated and the effect of public announcement of the Merger on (a)
McAfee's sales and operating results, (b) McAfee's ability to attract and
retain key management, marketing and technical personnel and (c) progress of
certain development projects; (iv) the significant risks related to
integrating the two companies, including risks related to duplicate facilities
and personnel; (v) the substantial charges to be incurred in connection with
the Merger, including the costs of integrating the businesses and transaction
expenses arising from the Merger; (vi) the risk that despite the efforts of
the Combined Company, key technical, sales, support and management personnel
might not remain employed by the Combined Company; and (vii) the risks
identified under "Risk Factors."
The McAfee Board believed that certain of these risks were unlikely to occur
or unlikely to have a material impact on the Combined Company, while others
could be avoided or mitigated by McAfee or by the Combined Company, and that,
overall, the risks associated with the Merger were outweighed by the potential
benefits of the Merger.
The foregoing discussions of the information and factors considered by the
McAfee Board is not intended to be exhaustive but is believed to include all
material factors considered by the McAfee Board. In view of the variety of
factors considered in connection with its evaluation of the Merger, the McAfee
Board did not find it practicable to, and did not, quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the McAfee Board may have
given different weight to different factors.
NETWORK GENERAL'S REASONS FOR THE MERGER
The Network General Board considered the proposed Merger at board meetings
on September 9, 12, 16 and 26 and October 1, 5, 9, 10, 12 and 13 and, by
unanimous vote of the directors present and voting at its special meeting on
October 13, 1997 (which included all directors except Mr. Denend, who recused
himself from all deliberations and votes pertaining to the Merger due to his
status as a director of McAfee, and Mr. Gallo, who
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was present at all other meetings regarding the Merger and for part of the
October 13, 1997 meeting, participated in the beginning of this meeting and
expressed his support for the Merger but was not present during the Board's
formal vote), approved the Reorganization Agreement and the Merger. The
Network General Board believes that the Merger is fair to, and in the best
interests of, Network General and its stockholders. In arriving at its
decision to approve the Reorganization Agreement and the Merger, the Network
General Board considered a number of factors, in addition to the reasons set
forth under "--Joint Reasons for the Merger." In particular, the Network
General Board considered, among other things, the following factors:
. the strategic benefits expected from the Merger and, the effect of the
Merger on long-term stockholder value, in light of the financial
condition and prospects of Network General and McAfee, the current
economic and industry environment, and other strategic alternatives
reasonably available to Network General, taking into account the risks
and uncertainties associated with such alternatives;
. the fact that the Exchange Ratio represented a premium to Network
General stockholders based on the closing prices of McAfee Common Stock
and Network General Common Stock on October 13, 1997 and based on the
average closing prices of McAfee and Network General Common Stock in
certain recent historical periods;
. the potential for reduced stockholder risk after the Merger as a result
of the diversification of product lines and revenue bases;
. the opportunity for Network General stockholders to participate in a
Combined Company with the potential for a higher blended growth rate
than Network General as a stand-alone company;
. the opportunities that may result from the bundling of network software
and tools into a unified sales strategy;
. the potential positive impact of the Merger on emerging opportunities
in areas such as systems management, analysis software and security;
. the complementary characteristics of the respective business and
management philosophies and corporate cultures of Network General and
McAfee;
. the potential benefits of the Merger to Network General's customers,
suppliers and employees;
. the fairness to Network General of the terms and conditions of the
Reorganization Agreement, which were the product of extensive arm's
length negotiations;
. the opinion of Hambrecht & Quist that the consideration to be received
by the holders of Network General Common Stock, as of the date of such
opinion, was fair to such holders from a financial point of view;
. the fact that the Merger is expected to qualify as a tax-free
reorganization (enabling Network General stockholders to exchange their
stock in Network General for stock of the Combined Company); and
. the expectation that the Merger will be accounted for as a pooling of
interests (and is conditioned on the receipt of letters from the two
companies' independent public accountants supporting such treatment)
and that no goodwill will be created on the books of the Combined
Company as a result of the Merger.
In assessing the Merger, the Network General Board considered a number of
sources of information, including (i) historical information concerning the
respective businesses, financial performance, condition, operations and
results of operations, technology, management style, competitive position,
trends and prospects of McAfee and Network General and the Network General
Board's assessment of that information; (ii) SEC filings by McAfee; (iii)
current and historical market prices, volatility and trading data for the two
companies; (iv) reports on the results of due diligence investigations by
members of Network General's Board and management and Network General's legal,
financial and accounting advisors concerning the business, technology,
products, operations, properties, assets, financial condition, operating
results and prospects of
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McAfee as well as trends in McAfee's business and financial results; (v)
reports from Hambrecht & Quist on comparable transactions to the Merger,
comparable companies to McAfee and other financial analyses performed by
Hambrecht & Quist; (vi) reports from management relating to the prospects for
successful integration of the two companies; and (vii) reports by Gray Cary
Ware & Freidenrich, A Professional Corporation ("GCW&F"), Network General's
outside corporate legal counsel, on terms of other recent technology company
mergers and acquisitions.
The Network General Board also identified and considered a number of
uncertainties and potentially negative factors in its deliberations concerning
the Merger, including, but not limited to: (i) the risk that the potential
benefits sought in the Merger might not be fully realized, if at all; (ii) the
possibility that the Merger would not be consummated and the effect of the
public announcement of the Merger on (a) Network General's sales, customer
relations and operating results and (b) Network General's ability to attract
and retain key management, marketing and technical personnel; (iii) the risk
that despite the efforts of the Combined Company, key technical, marketing and
management personnel might not choose to remain employed by the Combined
Company; (iv) the risk of market confusion and potential delay or reduction in
product orders; (v) the risk of loss of current product brand awareness before
the Combined Company gains market acceptance; (vi) the cost and the risk of an
adverse outcome in litigation pending against McAfee, the risk that such
litigation might materially adversely affect the Combined Company and the
possibility of additional litigation in the future; and (vii) the other risks
associated with the businesses of Network General, McAfee and the Combined
Company and the Merger described under "Risk Factors" herein.
The Network General Board believed that certain of these risks were unlikely
to occur or unlikely to have a material impact on the Combined Company, while
others could be avoided or mitigated by Network General or by the Combined
Company, and that, overall, the risks associated with the Merger were
outweighed by the potential benefits of the Merger.
The foregoing discussion of the information and factors considered by the
Network General Board is not intended to be exhaustive but is believed to
include all material factors considered by the Network General Board. In view
of the variety of factors considered in connection with its evaluation of the
Merger, the Network General Board did not find it practicable to and did not
quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination. In addition, individual members of
the Network General Board may have given different weight to different
factors.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
McAfee and Network General have been generally familiar with each others'
products for a number of years, as both companies sell products to many of the
same customers. McAfee and Network General have recently developed a strategic
relationship pursuant to which Network General's distributed Sniffer product
was incorporated into one of McAfee's product offerings. In addition, Mr.
Denend, President and Chief Executive Officer of Network General and a member
of the Network General Board, is a director of McAfee. (Because of these
positions, Mr. Denend did not participate in the deliberations or vote of
either company's Board with respect to the Merger, or in the negotiation of
the terms of the Merger other than certain limited discussions concerning
certain post-Merger management and operational matters.)
On September 2, 1997, Mr. Larson, Chief Executive Officer and Chairman of
the Board of McAfee, met with Mr. Denend. At this meeting, Mr. Larson proposed
that McAfee and Network General explore a possible business combination
transaction. Following the meeting, Mr. Larson consulted with members of the
Network General Board and management and with representatives of Hambrecht &
Quist.
On September 6, 1997, Mr. Larson met with Dr. Saal, Chairman of the Board of
Network General. At this meeting, Mr. Larson and Dr. Saal discussed on a
preliminary basis a possible business combination between McAfee and Network
General.
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On September 9, 1997, the Network General Board held a special meeting at
which representatives of Hambrecht & Quist and GCW&F were also present. During
this meeting, Mr. Denend briefed the Network General Board on his discussions
with Mr. Larson regarding a potential combination of McAfee and Network
General. Due to his status as President and Chief Executive Officer of Network
General and a director of both Network General and McAfee, Mr. Denend recused
himself from participation in Network General Board deliberations regarding a
possible combination of Network General and McAfee and from negotiation of the
terms of the possible combination except with respect to certain post-Merger
management and operational matters. Also on September 9, 1997, Network General
retained Hambrecht & Quist as its financial advisor in connection with a
possible strategic business combination with McAfee.
On September 9, 1997, McAfee retained Morgan Stanley as its financial
advisor in connection with a possible strategic business combination with
Network General.
On September 11, 1997, Mr. Larson and Prabhat K. Goyal, McAfee's Chief
Financial Officer, met with David M. Carver, Network General's Chief Operating
Officer, and James T. Richardson, Network General's Chief Financial Officer.
Representatives of Morgan Stanley and Hambrecht & Quist were also present.
These discussions focused primarily on the advisability and feasibility of a
possible business combination between McAfee and Network General. These
discussions were inconclusive.
On September 12, 1997, McAfee and Network General executed a confidentiality
agreement in connection with the exchange of confidential information.
On September 12, 1997, the McAfee Board held a special meeting at which
representatives of Morgan Stanley and Wilson Sonsini Goodrich & Rosati,
Professional Corporation ("WSGR"), McAfee's legal counsel, also were present.
Given his status as both a McAfee director and President and Chief Executive
Officer and a director of Network General, Mr. Denend did not participate in
this or any subsequent McAfee Board meetings concerning any proposed business
combination between McAfee and Network General. During this meeting,
Mr. Larson updated the McAfee Board on the conversations to date with Network
General and its representatives. The McAfee Board authorized McAfee's
management to continue discussions with Network General.
On September 12, 1997, the Network General Board held a special meeting at
which representatives of Hambrecht & Quist and GCW&F were also present. During
this meeting, Network General management updated the Network General Board on
the discussions to date and the potential benefits of the proposed combination
with McAfee. Representatives of GCW&F briefed the Network General Board on its
fiduciary duties in connection with the Merger. The Network General Board
reviewed the potential benefits of the Merger to Network General and its
stockholders and the potential effect of the Merger on stockholder value, in
light of the financial condition and prospects of Network General and McAfee
and the current economic and industry environment, and other possible
strategic alternatives reasonably available to Network General, including
continued stand-alone operations. At the request of the Network General Board,
Hambrecht & Quist made a presentation with respect to a potential business
combination with McAfee. During this presentation, Hambrecht & Quist reviewed,
among other things, certain comparative financial information concerning
Network General and McAfee based on historical financial results and publicly
available industry analyst estimates, McAfee's products and business, McAfee's
historic stock performance, certain financial analyses and strategic
considerations concerning a possible business combination with McAfee. The
Network General Board appointed director Laurence R. Hootnick as Network
General's primary negotiator with McAfee, and appointed Mr. Gallo, who is a
member of GCW&F but was not acting in this capacity, as his alternate and
backup.
During the period from September 12, 1997 through October 13, 1997, McAfee
and Network General exchanged information and the two companies' management
and legal and financial advisors conducted financial and legal due diligence.
On September 16, 1997, Mr. Goyal, Evan Collins, McAfee's Corporate Controller,
and representatives of Morgan Stanley met with Mr. Richardson, Michael M.
Cully, Network General's Vice President and Controller, Michelle Wieber,
Network General's Director of Financial Planning and Reporting, and
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representatives of Hambrecht & Quist. At this meeting the parties discussed,
among other things, the companies' accounting and other policies, operational
issues associated with a potential business combination and opportunities for
the combined companies.
On September 16, 1997, the Network General Board held a telephonic special
meeting at which representatives of Hambrecht & Quist and GCW&F were also
present. During this meeting, Mr. Richardson and representatives of Hambrecht
& Quist provided further financial information with respect to McAfee, and
Messrs. Hootnick and Gallo updated the Network General Board on the status of
discussions with McAfee.
On September 20, 1997, the McAfee Board held a special meeting at which
representatives of Morgan Stanley and WSGR were present. During this meeting,
Mr. Larson updated the McAfee Board on the commercial and strategic rationale
for the proposed business combination, many of which are discussed above in
"--Joint Reasons for the Merger" and "--McAfee's Reasons for the Merger."
By letter dated September 22, 1997, Network General formalized the
engagement of Hambrecht & Quist as its financial advisor in connection with
the possible strategic business combination with McAfee.
Additionally, on September 22, 1997, Mr. Larson, Mr. Goyal and
representatives of Morgan Stanley met with Mr. Hootnick, Mr. Richardson and
representatives of Hambrecht & Quist. Discussions broke off, with the parties
unable to reach agreement as to, among other things, a mutually acceptable
exchange ratio for the proposed Merger.
On September 23, 1997, a telephone conversation was held between
representatives of Morgan Stanley and WSGR and Scott C. Neely, Network
General's Vice President, General Counsel and Secretary, Mr. Richardson, and
representatives of Hambrecht & Quist and GCW&F. The conversation dealt with
the non-price terms of a proposed transaction, including the nature and
details of the deal protection mechanisms proposed by McAfee. The discussion
ended without agreement on a number of key terms.
On September 26, 1997, the Network General Board held a telephonic special
meeting at which representatives of Hambrecht & Quist and GCW&F were also
present. Messrs. Hootnick and Gallo and representatives of Hambrecht & Quist
updated the Network General Board on the status of discussions regarding the
exchange ratio and certain related financial information that had been
provided by McAfee. In addition, representatives of Network General management
briefed the Network General Board on certain financial and legal information
regarding McAfee.
On September 30, 1997, the McAfee Board held a special meeting at which
representatives of Morgan Stanley and WSGR were also present. During this
meeting, Mr. Larson and representatives of Morgan Stanley updated the McAfee
Board on the status of discussions with Network General. In addition, at the
request of the McAfee Board, Morgan Stanley made a presentation with respect
to a potential business combination with Network General. During this
presentation, Morgan Stanley, among other things, reviewed certain comparative
financial information concerning Network General and McAfee based on
historical financial results and publicly available industry analyst
estimates, Network General's products and business, Network General's historic
stock performance, certain financial analyses and strategic considerations
concerning a possible business combination with Network General. The Board
reviewed the potential benefits of the Merger to McAfee and its stockholders
in light of the financial condition and prospects of McAfee and Network
General and the current economic and industry environment, and other possible
strategic alternatives for McAfee.
On October 1, 1997, the Network General Board held a telephonic special
meeting at which representatives of Hambrecht & Quist and GCW&F were also
present. Network General management presented a preliminary report on the
financial results of Network General's second fiscal quarter. Messrs. Larson
and Goyal of McAfee then joined the meeting and Mr. Larson made a presentation
to the Network General Board on the business rationale for and mutual benefits
of the proposed Merger.
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During the period from October 3 through October 5, 1997, representatives of
McAfee and Network General and their respective advisors conducted further
financial due diligence and exchanged information relating to the companies'
quarterly results and financial performance.
On October 5, 1997, representatives of McAfee and Network General met to
conduct further due diligence with respect to financial information concerning
McAfee. Later that day, the Network General Board held a telephonic special
meeting at which representatives of Hambrecht & Quist and GCW&F were also
present. Network General's management reported further on the preliminary
quarterly results for Network General's second fiscal quarter. In addition,
Mr. Richardson reported to the Network General Board the results of a meeting
earlier that day with representatives of McAfee regarding financial due
diligence issues with respect to McAfee. The Board directed Mr. Hootnick and
Hambrecht & Quist to communicate certain issues and concerns to McAfee and its
financial advisor and to discontinue discussions in the absence of further
information that might allay these issues and concerns.
On October 6, 1997, representatives of McAfee and Network General and their
respective advisors held further discussions regarding financial due diligence
and the issues and concerns identified by the Network General Board. These
discussions allayed the issues and concerns expressed by the Network General
Board.
On October 7, 1997, Mr. Larson, Peter Watkins, Vice President and General
Manager of Security of McAfee, and representatives of Morgan Stanley met with
Messrs. Hootnick and Richardson of Network General and representatives of
Hambrecht & Quist. At this meeting, the parties discussed issues related to
the proposed Merger, including the proposed exchange ratio, potential board
structures for the Combined Company, McAfee's proposed break-up fee, no-shop
restrictions and other deal protection mechanisms, and critical path items to
the consummation of any proposed transaction.
On October 8, 1997, WSGR delivered to GCW&F a draft of a proposed
Reorganization Agreement and related documents. Several conversations took
place that day and the next day between representatives of WSGR and GCW&F
concerning the proposed terms and conditions contained in the draft documents.
On October 9, 1997, the McAfee Board held a special meeting at which
representatives of Morgan Stanley and WSGR were also present. During this
meeting, Mr. Larson and representatives of Morgan Stanley updated the McAfee
Board on the status of discussions with Network General. In addition,
representatives of WSGR reviewed with the McAfee Board the principal terms of
the draft Reorganization Agreement and related documentation. In addition to
discussions concerning the proposed exchange ratio, matters discussed included
Network General's requests that following the closing of the Merger the McAfee
Board have at least two Network General representatives (including Mr.
Denend), that certain McAfee acquisition activities be limited pending
consummation of the Merger, proposed no-shop restrictions on McAfee and that
McAfee be required to pay a break-up fee to Network General under certain
circumstances.
On October 9, 1997, the Network General Board held a special meeting at
which representatives of Hambrecht & Quist and GCW&F were also present.
Representatives of Hambrecht & Quist updated the Network General Board on the
status of discussions and due diligence. In addition, representatives of GCW&F
reviewed with the Network General Board the principal terms of the draft
Reorganization Agreement.
On October 10, 1997, the Network General Board held a telephonic special
meeting at which representatives of Hambrecht & Quist and GCW&F were also
present. The Network General Board reviewed the status of four intellectual
property litigations pending against McAfee. In addition, the Network General
Board was briefed on the status of discussions relating to the principal terms
of the draft Reorganization Agreement and related documentation and discussed
proposed negotiating strategies.
On October 10, 1997, McAfee's and Network General's legal counsel, financial
advisors and certain executive officers met to negotiate the terms of the
Reorganization Agreement and related documents, including
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the termination rights relating to the Reorganization Agreement, the
conditions upon which any breakup fees would be payable and the amount of such
fees, and the representations, warranties and covenants to be made.
On the morning of October 12, 1997, the Network General Board held a special
meeting at which representatives of Hambrecht & Quist and GCW&F were present.
Additionally, representatives of Arthur Andersen LLP ("Arthur Andersen"),
Network General's independent public accountants, were also present for part
of the meeting. Mr. Denend reviewed the results of his preliminary discussions
with Mr. Larson regarding the proposed management structure of the Combined
Company. Mr. Denend then left the meeting. The Network General Board then
discussed the proposed management arrangements and their potential effect on
the successful integration of the companies. The Network General Board
identified Mr. Denend (given his leadership role at Network General and his
previous working relationship with Mr. Larson) as the best person to discuss
post-Merger management and operational matters with Mr. Larson and determined
that the companies had reached an appropriate point in the negotiations for
further discussions to occur between Messrs. Larson and Denend. The Network
General Board then directed Mr. Denend to hold further discussions with
Mr. Larson solely to explore alternative organizational and management
arrangements for the Combined Company and to attempt to formulate acceptable
post-Merger transition and integration arrangements. Mr. Denend was not
authorized to agree to any such arrangements but was directed to report the
results of these discussions to the Network General Board for further
consideration. Representatives of GCW&F then updated the Network General Board
on the results of GCW&F's legal due diligence, including the status of pending
intellectual property litigation against McAfee, and briefed the Network
General Board on its fiduciary duties in connection with the Merger and the
proposed Reorganization Agreement, including the provisions of the
Reorganization Agreement on breakup fees, no-shop restrictions and other
proposed deal protection mechanisms. Representatives of Hambrecht & Quist
reviewed its financial analyses with respect to the companies and the proposed
Merger and advised the Network General Board that it was prepared to deliver a
fairness opinion in connection with the Merger. Representatives of Arthur
Andersen reported on the results of their due diligence investigation of
McAfee.
During the afternoon of October 12, 1997, McAfee's and Network General's
legal counsel met to negotiate terms of the Reorganization Agreement and
related documents. In addition, Messrs. Larson and Denend met to further
discuss potential transition and integration arrangements and organizational
and management structures and arrangements for the Combined Company.
On the evening of October 12, 1997, a special meeting of the McAfee Board
was held, at which representatives of Morgan Stanley and WSGR were also
present, to review the status of the merger negotiations. Representatives of
WSGR reviewed the proposed terms of the Reorganization Agreement (including
the proposed exchange ratio) and identified certain open issues, including
proposed covenants that would limit certain acquisition activities of McAfee.
McAfee management and representatives of WSGR also reported on the results of
their due diligence investigation over the previous weeks and responded to
questions regarding various aspects of the Merger. Representatives of Morgan
Stanley made formal presentations to the McAfee Board regarding the proposed
transaction, including the delivery of an oral opinion (which opinion was
later confirmed in writing) regarding the fairness of the proposed exchange
ratio from a financial point of view to McAfee, and reviewed detailed
financial analyses and pro forma and similar information with respect to the
companies. See "--Opinion of McAfee's Financial Advisor."
During the evening of October 12, 1997, Messrs. Larson and Hootnick
discussed the parties' positions on certain interim restrictions on operations
and transactions between announcement and completion of the Merger, and a
possible compromise to present to the two companies' Boards to resolve the
parties' differences.
During the morning of October 13, 1997, McAfee's and Network General's
management and legal counsel negotiated the remaining terms of the
Reorganization Agreement. On the afternoon of October 13, 1997, the Network
General Board held a telephonic special meeting at which representatives of
Hambrecht & Quist and GCW&F were also present. Mr. Denend reviewed the results
of his further discussions with Mr. Larson regarding the proposed management
structure of the Combined Company. Representatives of GCW&F reported on the
results of final negotiations regarding the Reorganization Agreement.
Hambrecht & Quist delivered its opinion
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that the consideration to be received by holders of Network General Common
Stock was fair from a financial point of view as of such date. The Network
General Board concluded, by a unanimous vote of the directors present and
voting, that the Merger was fair to, and in the best interests of, Network
General and its stockholders and approved the Reorganization Agreement. Mr.
Denend did not participate in the deliberations or vote because of his status
as a director of McAfee. Mr. Gallo, who had participated in all previous
meetings regarding the Merger, participated in the beginning of this meeting
and expressed his support for the Merger but was not present for the formal
vote of the Network General Board.
On the afternoon of October 13, 1997, the McAfee Board held a telephonic
special meeting at which representatives of Morgan Stanley and WSGR were
present. Representatives of WSGR reported on the final negotiations regarding
the Reorganization Agreement. The McAfee Board then by unanimous vote of the
directors present and voting (which included all directors except Mr. Denend,
who did not participate in this or any other McAfee Board meetings with
respect to the Merger due to his status as President, Chief Executive Officer
and a director of Network General) approved the Reorganization Agreement and
the transactions contemplated thereby and determined that the Merger was fair
to, and in the best interests of, McAfee and its stockholders.
Following the approval of both Boards, the Reorganization Agreement was
executed by both companies and the Merger Sub, and McAfee and Network General
issued a joint press release announcing the execution of the Reorganization
Agreement.
OPINION OF MCAFEE'S FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of September 9, 1997 (the
"Engagement Letter"), Morgan Stanley was engaged to provide financial advisory
services including the provision of a financial fairness opinion in connection
with the Merger. Morgan Stanley was selected by the McAfee Board to act as its
financial advisor based on Morgan Stanley's qualifications, expertise and
reputation and its knowledge of the business and affairs of McAfee. At the
meeting of the McAfee Board on October 12, 1997, Morgan Stanley rendered its
oral opinion, subsequently confirmed in writing on October 13, 1997, that, as
of such date, based upon and subject to the various considerations set forth
in the opinion, the Exchange Ratio pursuant to the Reorganization Agreement
was fair from a financial point of view to McAfee.
The full text of the written opinion of Morgan Stanley dated October 13,
1997, which sets forth, among other things, assumptions made, procedures
followed, matters considered and limitations on the scope of the review
undertaken by Morgan Stanley in rendering its opinion, is attached as Annex B
to this Joint Proxy Statement/Prospectus. McAfee stockholders are urged to,
and should, read the opinion carefully and in its entirety. Morgan Stanley's
opinion is directed to the McAfee Board and addresses only the fairness of the
Exchange Ratio pursuant to the Reorganization Agreement from a financial point
of view as of the date of the opinion, and does not constitute a
recommendation to any holder of McAfee Common Stock as to how to vote at the
McAfee Special Meeting. The summary of the opinion of Morgan Stanley set forth
in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In rendering its opinion, Morgan Stanley, among other things: (i) reviewed
certain publicly available financial statements and other information of
McAfee and Network General; (ii) reviewed certain internal financial
statements and other financial and operating data concerning McAfee and
Network General prepared by the managements of McAfee and Network General;
(iii) discussed the past and current operations and financial condition and
the prospects of McAfee, including information relating to certain strategic,
financial and operational benefits anticipated from the Merger, with senior
executives of McAfee; (iv) discussed the past and current operations and
financial condition and the prospects of Network General, including
information relating to certain strategic, financial and operational benefits
anticipated from the Merger, with senior executives of Network General; (v)
reviewed the pro forma impact of the Merger on the earnings per share of
McAfee and Network General; (vi) reviewed the reported prices and trading
activity for the McAfee Common Stock and the Network General Common Stock;
(vii) compared the financial performance of McAfee and Network General
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and the prices and trading activity of the McAfee Common Stock and the Network
General Common Stock with that of certain publicly-traded companies and their
securities; (viii) reviewed the financial terms, to the extent publicly
available, of certain comparable acquisition transactions; (ix) reviewed and
discussed with the senior managements of McAfee and Network General the
strategic rationale for the Merger and certain alternatives to the Merger; (x)
participated in discussions and negotiations among representatives of McAfee
and Network General and their financial and legal advisors; (xi) reviewed the
Reorganization Agreement and certain related agreements; and (xii) performed
such other analyses and considered such other factors as it deemed
appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the
purposes of its opinion. With respect to the internal financial statements and
other financial and operating data and information relating to the strategic,
financial and operational benefits anticipated from the Merger provided by
McAfee and Network General, Morgan Stanley assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the prospects of McAfee and Network General, respectively. Morgan
Stanley relied upon the assessment by the managements of McAfee and Network
General of their ability to retain key employees of both McAfee and Network
General. Morgan Stanley also relied upon, without independent verification,
the assessment by the managements of McAfee and Network General of McAfee's
and Network General's technologies and products, the timing and risks
associated with the integration of McAfee with Network General, and the
validity of, and risks associated with, McAfee's and Network General's
existing and future products and technologies. Morgan Stanley did not make any
independent valuation or appraisal of the assets, liabilities or technology of
McAfee or Network General, respectively, nor was Morgan Stanley furnished with
any such appraisals. Morgan Stanley assumed that the Merger would be accounted
for as a pooling of interests business combination in accordance with
U.S. generally accepted accounting principles, would be treated as a tax-free
reorganization and/or exchange pursuant to the Internal Revenue Code of 1986,
as amended, and would be consummated in accordance with the terms set forth in
the Reorganization Agreement. Morgan Stanley's opinion was necessarily based
on economic, market and other conditions as in effect on, and the information
made available to it as of, the date of the opinion.
The following is a brief summary of the analysis performed by Morgan Stanley
in connection with its oral opinion and the preparation of its opinion letter
dated October 13, 1997.
Certain analyses performed by Morgan Stanley utilized earnings per share
estimates for McAfee and Network General. Such estimates were based on
estimates published by securities research analysts in the investment
community.
Comparative Stock Price Performance
As part of its analysis, Morgan Stanley reviewed the recent stock price
performance of McAfee and Network General and compared such performance with
that of a group of software companies, including Tekelec, Dynatech Corp.,
Objective Systems Integrators, Inc., Retix, TCSI Corporation, Applied Digital
Access, Inc., and Wandel & Goltermann Technologies, Inc. (collectively, the
"Broad Network Management Companies"). Morgan Stanley observed that over the
period from October 9, 1996 to October 10, 1997, the market price of McAfee
Common Stock appreciated 33.0%, compared with a depreciation of 16.5% for
Network General, an appreciation of 21.3% for an index of the Broad Network
Management Companies and 48.3% for the Morgan Stanley High Technology Index.
Peer Group Comparison
Morgan Stanley compared certain financial information of McAfee and Network
General with that of a group of software companies including Tekelec, Dynatech
Corp., TCSI Corporation, Applied Digital Access, Inc., and Wandel & Goltermann
Technologies, Inc. (collectively the "Network Management Companies") and that
of a group of software companies including Computer Associates International,
Inc., BMC Software, Inc., Platinum Technology, Inc., Security Dynamics
Technologies, Inc., Symantec Corporation, Check Point Software Technologies
Ltd, Remedy Corporation, and Legato Systems, Inc., (collectively the
"Enterprise Applications and Utilities Companies"). Such financial information
included, among other things, market valuation, stock price as
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a multiple of earnings per share, and the ratio of calendar year 1998 price
earnings multiple to projected growth rate. In particular, such analysis
showed that as of October 10, 1997, based on earnings per share and growth
rate projections by securities research analysts, McAfee traded at a multiple
of 37.6 times forecasted earnings per share for the calendar year 1997 and a
multiple of 26.5 times forecasted earnings per share for the calendar year
1998 (representing a median multiple of 0.66 times its forecasted growth
rate), compared to multiples of 25.9 times and 21.7 times (representing a
multiple of 0.87 times its forecasted growth rate) for Network General, a
median of 27.7 times and 43.1 times (representing a median multiple of 1.51
times forecasted growth rates) for the Network Management Companies and a
median of 40.7 times and 27.2 times (representing a median multiple of 0.95
times forecasted growth rates) for the Enterprise Applications and Utilities
Companies based on a compilation of securities research analyst forecasts.
Such analysis also showed growth rate projections of 40.0% for McAfee, 25.0%
for Network General and medians of 25.0% for the Network Management Companies
and 35.0% for the Enterprise Applications and Utilities Companies based on a
compilation of securities research analyst forecasts. No company used in the
peer group comparison is identical to McAfee or Network General.
Analysis of Selected Precedent Transactions
As part of its analysis, Morgan Stanley reviewed ten large software
transactions: The Continuum Company, Inc./Computer Sciences Corporation,
Cheyenne Software, Inc./Computer Associates International, Inc., Davidson &
Associates, Inc./CUC International, Inc., Pure Atria Corporation/Rational
Software Corporation, Tivoli Systems, Inc./International Business Machines
Corporation, Frame Technology Corporation/Adobe Systems, Inc., Landmark
Graphics Corporation/Halliburton Company, WordPerfect Corporation/Novell,
Inc., Powersoft Corporation/Sybase, Inc., and Sierra On-Line, Inc./CUC
International, Inc. (collectively, the "Premium Software Transaction
Universe"). Morgan Stanley compared certain statistics for the Premium
Software Transaction Universe to the relevant financial statistics for Network
General based on the value of Network General assuming the closing price for
McAfee Common Stock as of October 10, 1997 and the Exchange Ratio. The
analysis showed multiples of revenue ranging from 1.9 times to 15.3 times
latest twelve months revenues, multiples of earnings ranging from 29.0 times
to 101.1 times one year forward earnings and premiums/(discounts) paid to
closing stock prices ranging from 18.5% to 72.3% for one day prior to
transaction announcement and 14.5% to 137.1% for one month prior to
transaction announcement. These compared to multiples of 4.6 times latest
twelve months revenues, 27.7 times one year forward earnings and premiums to
closing stock prices of 28.5% for one day prior to transaction announcement
and 55.5% for one month prior to transaction announcement. No transaction used
in the analysis of selected precedent transactions is identical to the Merger.
Discounted Equity Value
Morgan Stanley performed an analysis of the present value per share of
McAfee's and Network General's respective future trading prices based on a
range of earnings per share estimates for McAfee and Network General for
calendar years 1999 and 2000, multiples of earnings per share ranging from
22.0 times to 30.0 times next calendar year's earnings per share for McAfee
and 21.0 times to 26.0 times next calendar year's earnings per share for
Network General and a discount rate of 17.0% based on Morgan Stanley estimates
of the theoretical return required by stockholders to hold shares of McAfee
and Network General, respectively. Based on this analysis, Morgan Stanley
estimated a present value of the potential future trading price per share
ranging from $48.90 to $116.27 for the McAfee Common Stock and $17.79 to
$31.83 for the Network General Common Stock. Additionally, Morgan Stanley
compared the present value per share of McAfee to the pro forma present value
per share assuming consummation of the Merger. This analysis showed values
ranging from $58.46 to $87.88 for McAfee on a stand-alone basis based on
McAfee's current multiple of next calendar year's earnings per share of 26.3
times, an annual earnings per share growth rate of 30%, and the aforesaid
discount rate of 17.0% and values ranging from $57.77 to $86.84 for McAfee
assuming consummation of the Merger excluding synergies and $61.83 to $92.94
for McAfee assuming consummation of the Merger and certain assumed annual pre-
tax synergies. This analysis suggested that, based on the aforementioned
earnings per share estimates, multiples of earnings and discount rates, the
range of present values of the potential future trading price per share for
the Combined Company could be higher than for McAfee as a stand-alone entity.
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Relative Contribution Analysis
Morgan Stanley analyzed the pro forma contribution of each of McAfee and
Network General to the Combined Company assuming consummation of the Merger
and based on securities research analyst forecasts. This analysis, among other
things, showed that in terms of revenue, operating income and net income,
McAfee would contribute 52.7%, 66.7% and 62.6%, respectively, in the twelve
month period ending June 30, 1997 and would contribute 57.4%, 73.2% and 71.0%,
respectively, in calendar year 1997 and 62.2%, 77.4% and 76.8%, respectively,
in calendar year 1998. These figures, adjusted to reflect each company's
respective capital structure, were compared to the pro forma ownership of the
Combined Company by McAfee stockholders of 74.1% on a fully converted basis
based on the Exchange Ratio.
Exchange Ratio Analysis
Morgan Stanley compared the exchange ratios implied by average historical
exchange ratios to the Exchange Ratio. Morgan Stanley reviewed the ratios of
the closing stock prices of Network General to McAfee over various periods
during the twelve month period ended October 10, 1997 and computed the
premiums represented by the Exchange Ratio over the averages of these daily
ratios over various periods. The averages of these daily ratios of the closing
prices of Network General and McAfee were 0.347 for the previous 10 trading
days, 0.346 for the previous 20 trading days, 0.291 for the previous 60
trading days and 0.381 for the latest twelve month period ended October 10,
1997. The Exchange Ratio represented premiums of 19.9%, 20.4%, 43.4% and 9.5%,
respectively, over the aforementioned average ratios of the Network General
and McAfee stock prices.
Pro Forma Analysis of the Merger
Morgan Stanley analyzed the pro forma impact of the Merger on McAfee's
estimated earnings per share for the calendar year 1998. Such analysis was
based on earnings estimates for McAfee and Network General based on securities
research analyst forecasts for the corresponding periods. Morgan Stanley
observed that, assuming that the Merger was treated as a pooling of interests
for accounting purposes and before taking into account any one-time
restructuring charges or any synergies resulting from the combination, the
Merger would result in earnings per share dilution for McAfee stockholders of
1.2% for calendar year 1998 based on the Exchange Ratio.
In connection with the review of the Merger by the McAfee Board, Morgan
Stanley performed a variety of financial and comparative analyses for purposes
of its opinion given in connection therewith. While the foregoing summary
describes the analyses and factors reviewed by Morgan Stanley in connection
with its opinion, it does not purport to be a complete description of all the
analyses performed by Morgan Stanley in arriving at its opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors, and
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of
the actual value of McAfee or Network General. In performing its analyses,
Morgan Stanley made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of McAfee or Network General. Any estimates contained
herein are not necessarily indicative of future results or actual values,
which may be significantly more or less favorable than those suggested by such
estimates. The analyses performed were prepared solely as part of Morgan
Stanley's analysis of the fairness of the Exchange Ratio pursuant to the
Reorganization Agreement from a financial point of view to McAfee and were
conducted in connection with the delivery of Morgan Stanley's opinion. The
analyses do not purport to be appraisals or to reflect the prices at which
McAfee or Network General might actually be sold. The Exchange Ratio pursuant
to
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the Merger was determined through arm's-length negotiations between McAfee and
Network General and was approved by the McAfee Board. Morgan Stanley did not
recommend any specific exchange ratio to McAfee or that any specific exchange
ratio constituted the only appropriate exchange ratio for the Merger.
The McAfee Board retained Morgan Stanley based upon Morgan Stanley's
qualifications, experience and expertise. Morgan Stanley is an internationally
recognized investment banking and advisory firm. Morgan Stanley, as part of
its investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for
corporate and other purposes. In the past, Morgan Stanley and its affiliates
have provided financial advisory and financing services for McAfee and Network
General and have received fees for the rendering of these services. Recent
services rendered to Network General include a share repurchase program
assignment in February 1997. In the ordinary course of Morgan Stanley's
trading and brokerage activities, Morgan Stanley or its affiliates may at any
time hold long or short positions, may trade or otherwise effect transactions,
for its own account or for the account of customers in the equity securities
of McAfee or Network General. As of October 30, 1997, Morgan Stanley and its
affiliates owned a net of 55,000 shares of Network General Common Stock and
owned a net of 39,000 shares of McAfee Common Stock.
Pursuant to the Engagement Letter, Morgan Stanley provided advisory services
and a financial opinion in connection with the Merger and McAfee has agreed to
pay a customary fee based on approximately 0.5% of the aggregate value of the
transaction to Morgan Stanley if the Merger is consummated. In addition,
McAfee has also agreed to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, related to Morgan Stanley's engagement.
OPINION OF NETWORK GENERAL'S FINANCIAL ADVISOR
Pursuant to a letter agreement dated September 22, 1997, Network General
confirmed its engagement of Hambrecht & Quist to act as its financial advisor
in connection with the exploration of a possible business combination with
McAfee and to render an opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Network General Common Stock
of the consideration to be received by such holders in the Merger. Hambrecht &
Quist was selected by the Network General Board based on Hambrecht & Quist's
qualifications, expertise and reputation, as well as Hambrecht & Quist's
historic investment banking relationship and familiarity with Network General.
Hambrecht & Quist rendered its oral opinion (subsequently confirmed in
writing) on October 13, 1997 to the Network General Board that, as of such
date, the consideration to be received by the holders of Network General
Common Stock in the Merger was fair to such holders from a financial point of
view. A copy of Hambrecht & Quist's written opinion dated October 13, 1997,
which sets forth the assumptions made, matters considered, the scope and
limitations of the review undertaken and the procedures followed by Hambrecht
& Quist is attached as Annex C to this Joint Proxy Statement/Prospectus.
Network General stockholders are advised to read the opinion in its entirety.
No limitations were placed on Hambrecht & Quist by the Network General Board
with respect to the investigation made or the procedures followed in preparing
and rendering its opinion.
In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things: (i) reviewed the publicly available financial
statements of McAfee for recent years and interim periods to date and certain
other relevant financial and operating data of McAfee made available to
Hambrecht & Quist from published sources; (ii) discussed the business,
financial condition and prospects of McAfee with certain of its officers;
(iii) reviewed the publicly available financial statements of Network General
for recent years and interim periods to date and certain other relevant
financial and operating data of Network General made available to Hambrecht &
Quist from published sources; (iv) discussed the business, financial condition
and prospects of Network General with certain of its officers; (v) reviewed
and discussed with management of McAfee and Network General the strategic
rationale for the Merger; (vi) reviewed the recent reported prices and trading
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activity for the Common Stocks of McAfee and Network General and compared such
information and certain financial information for McAfee and Network General
with similar information for certain other companies engaged in businesses
Hambrecht & Quist considered comparable; (vii) reviewed the financial terms,
to the extent publicly available, of certain comparable merger and acquisition
transactions; (viii) reviewed the Reorganization Agreement; and (ix) performed
such other analyses and examinations and considered such other information,
financial studies, analyses and investigations and financial, economic and
market data as Hambrecht & Quist deemed relevant.
Hambrecht & Quist did not independently verify any of the information
concerning Network General or McAfee considered in connection with its review
of the Merger and, for purposes of its opinion, Hambrecht & Quist assumed and
relied upon the accuracy and completeness of all such information. In
connection with its opinion, Hambrecht & Quist did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of
Network General or McAfee, nor did it conduct a physical inspection of the
properties and facilities of Network General or McAfee. In connection with its
analysis, Hambrecht & Quist utilized certain financial forecasts and
projections published by securities research analysts in the investment
community. Hambrecht & Quist assumed that such financial forecasts and
projections reflected the best publicly available estimates and judgments of
the expected future financial performance of McAfee and Network General.
Hambrecht & Quist also assumed that neither Network General nor McAfee was a
party to any pending transactions, including external financings,
recapitalizations or merger discussions, other than the Merger and those in
the ordinary course of conducting their respective businesses. For purposes of
their opinion, Hambrecht & Quist assumed that the Merger will qualify as a
tax-free reorganization under the Code for the stockholders of Network General
and that the Merger will be accounted for as a pooling of interests. Hambrecht
& Quist's opinion is based upon market, economic, financial and other
conditions as they existed and can be evaluated as of the date of the opinion
and any subsequent change in such conditions would require a reevaluation of
such opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
summary of the Hambrecht & Quist analyses set forth below does not purport to
be a complete description of the presentation by Hambrecht & Quist to the
Network General Board. In arriving at its opinion, Hambrecht & Quist did not
attribute any particular weight to any analyses or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Hambrecht & Quist believes that its
analyses and the summary set forth below must be considered as a whole and
that selecting portions of its analyses, without considering all analyses, or
of the following summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the analyses set forth
in the Hambrecht & Quist presentation to the Network General Board of
Directors and its opinion. In performing its analyses, Hambrecht & Quist made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the
control of Network General and McAfee. The analyses performed by Hambrecht &
Quist (and summarized below) are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable
than suggested by such analyses. Additionally, analyses relating to the values
of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be acquired.
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to the
Network General Board on October 13, 1997:
Contribution Analysis
Hambrecht & Quist analyzed the contribution of each of Network General and
McAfee to certain financial statement categories of the pro forma Combined
Company with no revenue or expense adjustments, including revenue, gross
profit, operating income, net income, cash, and book value. This contribution
analysis was then compared to the pro forma ownership percentage of Network
General and McAfee stockholders in the pro forma post-Merger Combined Company.
Hambrecht & Quist observed that, calculated on a fully-diluted basis based on
the treasury stock method, Network General stockholders are expected to own
approximately 25% of the
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Combined Company equity at the close of the Merger and McAfee stockholders are
expected to own approximately 75% of the Combined Company equity at the close
of the Merger. At the close of the Merger, it was estimated that Network
General and McAfee would have contributed approximately 42% and
58%, respectively, of the combined cash and approximately 43% and 57%,
respectively, of the book value of the Combined Company. Hambrecht & Quist
examined the expected contributions to the Combined Company's revenues, gross
profit, operating income, and pro forma net income by Network General for
calendar years 1997 and 1998 (i.e., the four quarters ending December 31),
derived from Wall Street's consensus estimates, and by McAfee for calendar
years 1997 and 1998 (i.e., the four quarters ending December 31), derived from
Wall Street's consensus estimates. In calendar 1997, assuming no revenue or
expense adjustment to the Combined Company, it was estimated that Network
General and McAfee would have contributed approximately 43% and 57%,
respectively, of the combined revenues; approximately 37% and 63%,
respectively, of the combined gross profit; approximately 26% and 74%,
respectively, of the combined operating income; and approximately 29% and 71%,
respectively, of the combined pro forma net income. With respect to calendar
1998 financial performance, assuming no revenue or expense adjustment to the
Combined Company, it was estimated that Network General and McAfee would have
contributed approximately 38% and 62%, respectively, of the combined revenues;
approximately 32% and 68%, respectively, of the combined gross profit;
approximately 22% and 78%, respectively, of the combined operating income; and
approximately 23% and 77%, respectively, of the combined pro forma net income.
Pro Forma Merger Analysis
Hambrecht & Quist analyzed the pro forma impact of the Merger, assuming no
revenue or expense adjustments to the Combined Company, using Wall Street's
consensus estimates of earnings per share ("EPS") for McAfee of $2.44 in
calendar year 1998 and for Network General of $0.97 in calendar year 1998. The
analysis indicated that EPS for the pro forma Combined Company without any
synergies resulting from the combination would result in dilution of
approximately 1.4% versus McAfee as a stand-alone company. The actual results
achieved by the Combined Company resulting from the Merger may vary from the
projected results and variations may be material.
Premium Analysis
Hambrecht & Quist compared the implied price per share of the offer as of
October 10, 1997 to the last sale price of Network General Common Stock on
both October 9, 1997 and September 12, 1997 (the twentieth trading day
preceding the analysis based on the close on October 10, 1997) to similar
premiums for certain technology transactions announced since 1994. Hambrecht &
Quist analyzed over 30 such technology transactions in the software and
network communications sectors. Hambrecht & Quist observed that the average
one-day premium and 20 trading-day premium paid in the selected public company
technology transactions were 39% and 56%, respectively. This compared with the
proposed acquisition in which, as of October 10, 1997, the premium offered
over the October 9, 1997 closing price for Network General Common Stock was
27% and the premium offered over the closing price for Network General Common
Stock on September 12, 1997 was 60%, and it compared with the proposed
acquisition in which, as of October 10, 1997, the premium offered over the
October 10, 1997 closing price for Network General Common Stock was 29%.
Hambrecht & Quist also analyzed the implied premiums at average historical
prices using the Exchange Ratio. Hambrecht & Quist reviewed the implied
exchange ratios of the closing stock prices of Network General to McAfee over
various periods ending October 10, 1997. The average of the closing prices of
Network General and McAfee at the Exchange Ratio represented premiums of 29%
for the one day, 20% for the previous 10 trading days, 20% for the previous 20
trading days, 26% for the previous 30 trading days, 43% for the previous 60
trading days and 57% for the previous 90 trading days.
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Discounted Cash Flow Analysis
Hambrecht & Quist performed a discounted cash flow analysis for Network
General. The analysis aggregated (a) the present value of the projected free
cash flow (defined as earning before interest and taxes taxed at 34%, less
increases in working capital, plus depreciation and amortization and less
capital expenditures) through 2001 and (b) the present value of a range of
terminal values for the year 2001.
The terminal values for Network General were determined by applying
multiples ranging from 2.0 times to 3.0 times Network General's estimated
revenue for 2001. Network General's free cash flow streams and terminal values
were discounted to present values using discount rates ranging from 12% to
32%. Such analysis indicated a range of implied equity values for Network
General of between $590 million and $1,225 million. This compared with an
implied equity value of approximately $1,226 million for Network General in
the Merger, based on the closing price of McAfee Common Stock on October 10,
1997.
Analysis of Publicly Traded Comparable Companies
Hambrecht & Quist compared selected historical and projected financial
information of Network General to publicly traded companies Hambrecht & Quist
deemed to be comparable to Network General. Such data and ratios included the
ratio of market value to historical net income, market value to historical
book value, and price per share to projected earnings per share. Hambrecht &
Quist also examined the ratio of the enterprise value (market value plus debt
less cash and marketable securities) to historical revenue, historical
earnings before interest and taxes ("EBIT"), historical earnings before
interest, taxes, depreciation and amortization ("EBITDA"), and projected
revenues. Companies used as comparables included selected network management
companies and also network equipment companies such as 3Com, Bay Networks,
Cabletron, Cisco Systems, Concord Communications and Wandel & Goltermann
Technologies. The foregoing multiples were applied to historical financial
results of Network General for the last twelve month ("LTM") period ended June
30, 1997 and projected financial results of Network General derived from Wall
Street's consensus estimates, Hambrecht & Quist determined for the comparable
companies that (i) the average multiple of LTM revenues was 4.7, (ii) the
average multiple of LTM EBITDA was 17.5, (iii) the average multiple of LTM
EBIT was 25.8, (iv) the average multiple of LTM net income was 38.9, (v) the
average multiple for calendar 1997 revenues was 3.9, (vi) the average multiple
for calendar 1998 revenues was 2.8, (vii) the average multiple for calendar
1997 net income was 36.8, (viii) the average multiple for calendar 1998 net
income was 23.7, and (ix) the average multiple of LTM book value was 7.1.
Based on the analysis of comparable publicly traded companies, Network
General's implied equity value using historical financial results of Network
General for the LTM period ended June 30, 1997 and projected financial results
of Network General derived from Wall Street's consensus estimates, as adjusted
by Hambrecht & Quist, ranged from approximately $978 million to approximately
$1,668 million. This compared with an implied equity value of approximately
$1,226 million of Network General in the Merger, based on the closing price of
McAfee Common Stock on October 10, 1997.
Analysis of Selected Merger and Acquisition Transactions
Hambrecht & Quist compared the proposed Merger with selected comparable
merger and acquisition transactions. This analysis included over 30 such
technology transactions in the software and communications sectors. In
examining these transactions, Hambrecht & Quist analyzed certain income
statement and balance sheet parameters of the acquired company relative to the
consideration offered. The foregoing multiples were applied to historical
financial results of Network General for the twelve-month period ended June
30, 1997. Multiples analyzed included consideration offered to LTM revenues,
EBIT, EBITDA and earnings, as well as premiums applied to recent share prices.
Selected software and communications transactions analyzed included, but were
not limited to, International Business Machines Corporation/Unison Software,
Inc., Compaq Computer Corporation/Tandem Computers Incorporated, Ascend
Communications, Inc./Cascade Communications Corp., 3Com Corporation/U.S.
Robotics, Inc., Computer Associates International, Inc./Cheyenne Software,
Inc., CUC International, Inc./Davidson & Associates, Inc., International
Business Machines Corporation/Tivoli Systems, Inc., and McAfee Associates,
Inc./Saber Software Corporation. The consideration offered in the
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transactions was an average multiple of 4.5 times revenue, 22.1 times EBITDA,
27.9 times EBIT, and 37.3 times earnings. Based on the analysis of selected
merger and acquisition transactions, Network General implied equity value
ranged from approximately $1,232 million to $1,659 million. This compared with
an implied value of approximately $1,226 million of Network General in the
Merger, based on the closing price of McAfee Common Stock on October 10, 1997.
No company or transaction used in the above analyses is identical to Network
General or McAfee or the Merger. Accordingly, an analysis of the results of
the foregoing is not mathematical; rather it involves complex considerations
and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading values of the companies or company to which they are compared.
The foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of such opinion which is attached as
Annex C to this Joint Proxy Statement/Prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, strategic alliances,
negotiated underwriting, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. Hambrecht & Quist is familiar with Network General, having acted as
a co-managing underwriter in its initial public offering in 1989, as a co-
managing underwriter in a follow-on offering made by Network General in 1989
and as the lead-managing underwriter in a follow-on offering made by Network
General in 1992. Hambrecht & Quist also acted as financial advisor in
connection with Network General's acquisition of ProTools, Inc. in 1994 and
with its acquisition of Cinco Networks, Inc. in 1997. Hambrecht & Quist
received customary compensation in connection with such transactions. In the
ordinary course of business, Hambrecht & Quist acts as a market maker and
broker in the publicly traded securities of Network General and receives
customary compensation in connection therewith, and also provides research
coverage for Network General. In the ordinary course of business, Hambrecht &
Quist actively trades in the equity and derivative securities of Network
General for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Hambrecht & Quist may in the future provide additional investment banking or
other financial advisory services to McAfee.
Pursuant to an engagement letter dated September 22, 1997, Network General
has agreed to pay Hambrecht & Quist a fee (a "Fairness Opinion Fee") of
$2,000,000 in connection with the delivery of a fairness opinion. Network
General has also agreed to pay Hambrecht & Quist, in connection with its
services as financial advisor to Network General in connection with the
Merger, an additional fee payable upon the closing of the Merger (the
"Transaction Fee") equal to 0.55% of all consideration received by the Network
General stockholders and option holders in the Merger. The Fairness Opinion
Fee shall be credited against the total Transaction Fee. Network General also
has agreed to reimburse Hambrecht & Quist for its reasonable out-of-pocket
expenses and to indemnify Hambrecht & Quist against certain liabilities,
including liabilities under the federal securities laws or relating to or
arising out of Hambrecht & Quist's engagement as financial advisor.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Network General Common Stock. This discussion does not deal with all income
tax considerations that may be relevant to particular Network General
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, foreign persons, stockholders who acquired
their shares in connection with previous mergers involving Network General or
an affiliate, or stockholders who acquired their shares in connection with
stock option or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger), including without limitation
transactions in which shares of Network General Common Stock were or are
acquired or shares of McAfee Common Stock were or are disposed of.
Furthermore, no foreign, state or local
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tax considerations are addressed herein. ACCORDINGLY, NETWORK GENERAL
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The following discussion is based upon the interpretation of the Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date hereof. The Internal Revenue Service (the
"IRS") is not precluded from adopting a contrary position. In addition, there
can be no assurance that future legislative, judicial or administrative
changes or interpretations will not adversely affect the accuracy of the
statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Merger to McAfee, Merger Sub, Network General and/or
Network General stockholders.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code, with each of McAfee, Merger Sub and Network
General intended to qualify as a "party to the reorganization" under Section
368(b) of the Code, in which case the following tax consequences will result
(subject to the limitations and qualifications referred to herein):
(a) No gain or loss will be recognized by holders of Network General
Common Stock solely upon their receipt of McAfee Common Stock in the Merger
in exchange therefor;
(b) The aggregate tax basis of the McAfee Common Stock received in the
Merger by a Network General stockholder will be the same as the aggregate
tax basis of Network General Common Stock surrendered in exchange therefor;
(c) The holding period of the McAfee Common Stock received in the Merger
by a Network General stockholder will include the period during which the
stockholder held the Network General Common Stock surrendered in exchange
therefor, provided that the Network General Common Stock is held as a
capital asset at the time of the Merger;
(d) Cash payments received by holders of Network General Common Stock in
lieu of a fractional share will be treated as if a fractional share of
McAfee Common Stock has been issued in the Merger and then redeemed by
McAfee. A stockholder of Network General receiving such cash will generally
recognize gain or loss upon such payment, equal to the difference (if any)
between such stockholder's basis in the fractional share and the amount of
cash received; and
(e) None of McAfee, Merger Sub or Network General will recognize gain or
loss solely as a result of the Merger.
The parties are not requesting a ruling from the IRS in connection with the
Merger. As a condition to the consummation of the Merger, McAfee and Network
General will each have received an opinion from their respective legal
counsel, WSGR, and GCW&F, respectively, to the effect that, for federal income
tax purposes, the Merger will qualify as a "reorganization" within the meaning
of Section 368(a) of the Code. These opinions, which are collectively referred
to herein as the "Tax Opinions," neither bind the IRS nor preclude the IRS
from adopting a contrary position. In addition, the Tax Opinions are subject
to certain assumptions and qualifications and are based on the truth and
accuracy of certain representations made by McAfee, Merger Sub and Network
General and certain Network General stockholders, including representations in
certificates delivered to counsel by the respective managements of McAfee,
Merger Sub and Network General. Of particular importance are those assumptions
and representations relating to the "continuity of interest" requirement.
To satisfy the continuity of interest requirement, Network General
stockholders must not, pursuant to a plan or intent existing at or prior to
the Merger, dispose of or transfer so much of either (i) their Network General
Common Stock in anticipation of the Merger or (ii) the McAfee Common Stock
received in the Merger (collectively, "Planned Dispositions"), such that the
Network General stockholders, as a group, would no longer have a substantial
proprietary interest in the Network General business being conducted by the
Combined
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Company after the Merger. Network General stockholders will generally be
regarded as having retained a substantial proprietary interest as long as the
McAfee Common Stock received in the Merger (after reduction for any Planned
Dispositions), in the aggregate, represents a substantial portion of the
entire consideration received by the Network General stockholders in the
Merger. If the continuity of interest requirement were not satisfied, the
Merger would not be treated as a reorganization.
A successful IRS challenge to the reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in a Network General stockholder recognizing gain or loss with
respect to each share of Network General Common Stock surrendered equal to the
difference between the stockholder's basis in such share and the fair market
value, as of the Effective Time of the Merger, of the McAfee Common Stock
received in exchange therefor. In such event, a stockholder's aggregate basis
in the McAfee Common Stock so received would equal such fair market value and
his holding period for such stock would begin the day after the Merger.
Even if the Merger qualifies as a reorganization, a Network General
stockholder would recognize gain to the extent the stockholder received
(directly or indirectly) consideration other than McAfee Common Stock in
exchange for the stockholder's Network General Common Stock or to the extent
that the McAfee Common Stock was considered to be received in exchange for
services or property other than solely for Network General Common Stock. All
or a portion of such gain may be taxable as ordinary income.
Network General stockholders will be required to attach a statement to their
tax returns for the year of the Merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the stockholder's Network General Common Stock and
a description of the McAfee Common Stock received.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given and certain
information has been furnished to the FTC or the Antitrust Division and the
specified waiting period has been satisfied. Consummation of the Merger is
subject to compliance with the HSR Act. On October 28, 1997, McAfee and
Network General filed the notifications required under the HSR Act, as well as
certain information required to be furnished to the FTC and the Antitrust
Division. In addition, all material filings, if any, required under foreign
anti-trust laws in connection with the consummation of the Merger will be made
by McAfee and Network General. At any time before or after consummation of the
Merger, and notwithstanding that the HSR Act waiting period has expired, the
Antitrust Division, the FTC or any state or foreign governmental authority
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Merger or seeking divestiture of Network General or
businesses of McAfee or Network General by McAfee. Private parties may also
seek to take legal action under the antitrust laws under certain
circumstances.
Based on information available to them, McAfee and Network General believe
that the Merger will be effected in compliance with all material federal,
state and foreign antitrust laws. However, there can be no assurance that a
challenge to the consummation of the Merger on antitrust grounds will not be
made or that, if such a challenge were made, McAfee and Network General would
prevail.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon receipt at the
closing of the Merger by McAfee and Network General of letters from Coopers &
Lybrand, McAfee's independent public accountants, and Arthur Andersen, Network
General's independent public accountants, respectively, regarding the
respective accounting firms' concurrence with McAfee's management's and
Network
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General's management's conclusions, respectively, as to the appropriateness of
pooling of interests accounting for the Merger under APB No. 16, if
consummated in accordance with the Reorganization Agreement.
NO APPRAISAL RIGHTS
Section 262 of the DGCL provides appraisal rights (sometimes referred to as
"dissenters' rights") to stockholders of Delaware corporations in certain
situations. However, Section 262 appraisal rights are not available to
stockholders of a corporation, such as Network General, (a) whose securities
are listed on a national securities exchange or are designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. ("NASD") and (b) whose stockholders
are not required to accept in exchange for their stock anything other than
stock of another corporation listed on a national securities exchange or on an
interdealer quotation system by the NASD and cash in lieu of fractional
shares. Because Network General's Common Stock is traded on such a system,
Nasdaq, and because the Network General stockholders are being offered stock
of McAfee, which is also traded on Nasdaq, and cash in lieu of fraction
shares, stockholders of Network General will not have appraisal rights with
respect to the Merger. The DGCL does not provide appraisal rights to
stockholders of a corporation, such as McAfee, which issues shares in
connection with a merger but is not itself a constituent corporation in the
Merger.
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TERMS OF THE MERGER
The following is a brief summary of the material provisions of the
Reorganization Agreement, a copy of which is attached as Annex A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. This
summary is qualified in its entirety by reference to the full and complete
text of the Reorganization Agreement.
EFFECTIVE TIME
Subject to the provisions of the Reorganization Agreement, McAfee, Network
General and Merger Sub shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law as soon as practicable
on or after the Closing Date. The closing of the Merger (the "Closing") shall
take place at the offices of WSGR , at a time and date to be specified by the
parties, which shall be no later than the second business day after the
satisfaction or waiver of the conditions set forth in the Reorganization
Agreement, or at such other time, date and location as the parties agree in
writing. The Closing is anticipated to occur on or about December 1, 1997.
MANNER AND BASIS OF CONVERTING SECURITIES
At the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, Network General or the holders of any of the following
securities:
(a) each share of Network General Common Stock (including, with respect
to each such share, the associated Rights (as defined in that certain
Rights Agreement (the "Network General Rights Plan") dated as of June 26,
1992, between Network General and Chemical Trust of California, as Rights
Agent, as amended)) issued and outstanding immediately prior to the
Effective Time, other than any shares of Network General Common Stock to be
canceled pursuant to the Reorganization Agreement, will be canceled and
extinguished and automatically converted into the right to receive 0.4167
of a share (the "Exchange Ratio") of McAfee Common Stock upon surrender of
the certificate representing such share of Network General Common Stock;
(b) each share of Network General Common Stock held by Network General or
owned by Merger Sub, McAfee or any direct or indirect wholly-owned
subsidiary of Network General or of McAfee immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof;
(c) all options to purchase Network General Common Stock then outstanding
under Network General's 1989 Stock Option Plan (the "ISO Plan"), Network
General's 1989 Outside Directors Stock Option Plan (the "Directors' Plan"),
the Cinco Networks, Inc. 1997 Stock Incentive Plan (the "Cinco Plan"), and
options granted by ProTools, Inc. and assumed by Network General (the
"ProTools Options" and together with the ISO Plan, the Directors' Plan and
the Cinco Plan, the "Network General Stock Option Plans") shall be assumed
by McAfee in accordance with the Reorganization Agreement; and
(d) each share of Common Stock, $0.001 par value per share, of Merger Sub
(the "Merger Sub Common Stock") issued and outstanding immediately prior to
the Effective Time shall be converted into one validly issued, fully paid
and nonassessable share of Common Stock, $0.001 par value per share, of the
surviving corporation.
Subject to the consummation of the Merger, Network General's 1989 Employee
Stock Purchase Plan (the "ESPP") will be terminated effective as of
immediately prior to the Effective Time, and the participants thereunder will
purchase shares of Network General Common Stock with the proceeds contained in
their respective accounts.
The Exchange Ratio shall be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend
or distribution of securities convertible into McAfee Common Stock
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or Network General Common Stock), reorganization, recapitalization,
reclassification or other like change with respect to McAfee Common Stock or
Network General Common Stock occurring on or after October 13, 1997 and prior
to the Effective Time.
No fraction of a share of McAfee Common Stock will be issued by virtue of
the Merger, but in lieu thereof each holder of shares of Network General
Common Stock who would otherwise be entitled to a fraction of a share of
McAfee Common Stock (after aggregating all fractional shares of McAfee Common
Stock that otherwise would be received by such holder) shall receive from
McAfee an amount of cash (rounded to the nearest whole cent) equal to the
product of (i) such fraction, multiplied by (ii) the average closing price of
one share of McAfee Common Stock for the five most recent days that McAfee
Common Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on Nasdaq.
Promptly after the Effective Time, McAfee shall make available to the
Exchange Agent for exchange the shares of McAfee Common Stock issuable
pursuant to the Reorganization Agreement in exchange for outstanding shares of
Network General Common Stock, and cash in an amount sufficient for payment in
lieu of fractional shares pursuant to the Reorganization Agreement and any
dividends or distributions to which holders of shares of Network General
Common Stock may be entitled pursuant to the Reorganization Agreement.
At or promptly after the Effective Time, McAfee, acting through the Exchange
Agent, will deliver to each Network General stockholder of record as of such
date a letter of transmittal with instructions to be used by such stockholder
in surrendering certificates which, prior to the Merger, represented shares of
Network General Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE
HOLDERS OF NETWORK GENERAL COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of Network General Common Stock outstanding
as of October 28, 1997, an aggregate of approximately 17,764,485 shares of
McAfee Common Stock will be issued to Network General stockholders in the
Merger, and McAfee will assume Network General options in exchange for options
to purchase up to approximately 3,281,876 additional shares of McAfee Common
Stock. Based upon the number of shares of McAfee Common Stock issued and
outstanding as of October 28, 1997, and after giving effect to the issuance of
McAfee Common Stock as described in the previous sentence, the Network General
Common Stock outstanding immediately prior to the Merger would be converted
into, and have voting power with respect to, approximately 25.7% of the
Combined Company's total issue and outstanding shares, the holders of former
Network General options would hold options exercisable for approximately 4.5%
of the Combined Company's total issued and outstanding shares (assuming the
exercise of only such former Network General options). The foregoing numbers
of shares and percentages are subject to change in the event that the
capitalization of either McAfee or Network General changes subsequent to
October 28, 1997 and prior to the Effective Time, and there can be no
assurance as to the actual capitalization of McAfee or Network General at the
Effective Time or of the Combined Company at any time following the Effective
Time.
CONDUCT FOLLOWING THE MERGER
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and all of the business, assets, liabilities and obligations of
Merger Sub will be merged with and into Network General with Network General
remaining as the surviving corporation.
Pursuant to the Reorganization Agreement, the Certificate of Incorporation
of Merger Sub in effect immediately prior to the Effective Time will become
the Certificate of Incorporation of the surviving corporation and the Bylaws
of Merger Sub in effect immediately prior to the Effective Time will become
the Bylaws of the surviving corporation. The Board of Directors of the
surviving corporation will consist of the directors who are serving as
directors of Merger Sub immediately prior to the Effective Time. The officers
of Merger Sub
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immediately prior to the Effective Time will remain as officers of the
surviving corporation, until their successors are duly elected or appointed or
qualified.
Pursuant to the Reorganization Agreement, the McAfee Board will take all
actions within its power to cause the McAfee Board, effective no later than
one day following the Effective Time, to consist of six persons, one of whom
will be Mr. Denend (who shall retain his present position as a Class II
director), one of whom will be Dr. Saal (who shall be offered a position as a
Class II director) and the remaining four of whom shall have served on the
Board of Directors of McAfee immediately prior to the Effective Time. If,
prior to the Effective Time, any of the foregoing designees shall decline or
be unable to serve as a director, Network General (if such person is Mr.
Denend or Dr. Saal) or McAfee (in all other cases) shall designate another
person to serve in such person's stead, which person shall be reasonably
acceptable to the other party; provided, however, that the McAfee Board will
take all actions within its power to cause the McAfee Board to be reduced to
five directors in the event any director (other than the foregoing Network
General designees) shall decline or be unable to serve as a director. Mr.
Bolger will be leaving the Combined Company Board effective April 30, 1998, at
which time the size of the Combined Company Board will be reduced to five
members.
CONDUCT OF NETWORK GENERAL'S AND MCAFEE'S BUSINESS PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, Network General (and each of its subsidiaries) shall, except
to the extent that McAfee shall otherwise consent in writing, carry on its
business, in all material respects, in the usual, regular and ordinary course,
in substantially the same manner as heretofore conducted and in compliance in
all material respects with all applicable laws and regulations, pay its debts
and taxes when due subject to good faith disputes over such debts or taxes,
pay or perform other material obligations when due, and use its commercially
reasonable efforts consistent with past practices and policies to (i) preserve
intact its present business organization, (ii) keep available the services of
its present officers and employees and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with
which it has business dealings. In addition, Network General will promptly
notify McAfee of any material event involving its business or operations.
In addition, except as permitted by the terms of the Reorganization
Agreement, and except as provided in Network General's disclosure schedule,
without the prior written consent of McAfee, during the period from the date
of the Reorganization Agreement and continuing until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, Network General shall not do any of the following and shall
not permit its subsidiaries to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of
such plans;
(b) Grant any severance or termination pay to any officer or employee
except pursuant to written agreements outstanding, or policies existing, on
October 13, 1997 and as previously disclosed in writing or made available
to McAfee, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to certain Network
General intellectual property, or enter into grants to future patent
rights, other than non-exclusive licenses in the ordinary course of
business and consistent with past practice;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Network General or its subsidiaries, except
repurchases of unvested shares at cost in connection with the
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termination of the employment relationship with any employee, consultant or
director pursuant to stock option or purchase agreements in effect on
October 13, 1997;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber, or
propose any of the foregoing, any shares of capital stock or any securities
convertible into shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any
securities convertible into shares of capital stock, or enter into other
agreements or commitments of any character obligating it to issue any such
shares or convertible securities, other than the issuance, delivery and/or
sale of (i) options pursuant to any of the Network General Stock Option
Plans with strike prices equal to fair market value at the time of grant in
the ordinary course of business, consistent with past practice, and subject
to and in compliance with certain restrictions set forth in the
Reorganization Agreement, (ii) shares of Network General Common Stock
pursuant to the exercise of stock options therefor outstanding as of the
date of the Reorganization Agreement and (iii) shares of Network General
Common Stock issuable to participants in the ESPP consistent with the terms
thereof;
(g) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its material subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Network General or
enter into any material joint ventures, strategic partnerships or
alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Network General, except sales of product and inventory in the
ordinary course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
options, warrants, calls or other rights to acquire any debt securities of
Network General, enter into any "keep well" or other agreement to maintain
any financial statement condition or enter into any arrangement having the
economic effect of any of the foregoing other than (i) in connection with
the financing of ordinary course trade payables consistent with past
practice or (ii) pursuant to existing credit facilities in the ordinary
course of business;
(k) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter
agreements entered into in the ordinary course of business consistent with
past practice with employees who are terminable "at will"), pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates or fringe benefits (including rights to severance or
indemnification) of its directors, officers, employees or consultants other
than in the ordinary course of business, consistent with past practice, or
change in any material respect any management policies or procedures;
(l) Make any payments outside of the ordinary course of business in
excess of $1 million;
(m) Except in the ordinary course of business, modify, amend or terminate
any material contract or agreement to which Network General or any
subsidiary thereof is a party or waive, release or assign any material
rights or claims thereunder;
(n) Enter into any contracts, agreements, or obligations relating to the
distribution, sale, license or marketing by third parties of Network
General's products or products licensed by Network General other than in
the ordinary course of business consistent with past practice;
(o) Revalue any of its material assets or, except as required by
generally accepted accounting principles, make any change in accounting
methods, principles or practices;
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(p) Take any action that would be reasonably likely to interfere with
McAfee's ability to account for the Merger as a pooling of interests; or
(q) Agree in writing or otherwise to take any of the actions described in
paragraphs (a) through (p) above.
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, (i) McAfee shall consult with Network General prior to taking
any material action outside of the ordinary course of business and (ii) McAfee
shall consult with and seek the advice of Messrs. Denend, Gallo and Hootnick
and Dr. Saal (to the extent such persons continue as directors of Network
General and are reasonably available for such consultation), regarding its
intention to effect any material acquisition described in paragraph (c) below
(and will share the material terms of such acquisition with such persons)
prior to the earlier of the public announcement of such acquisition, the
consummation thereof or the execution by McAfee of a definitive written
agreement obligating McAfee (subject to customary conditions) to consummate
such acquisition. In addition, during the period from the date of the
Reorganization Agreement and continuing until the earlier of the termination
of the Reorganization Agreement pursuant to its terms or the Effective Time,
except as permitted by the terms of the Reorganization Agreement and except as
provided in the McAfee disclosure schedule, without the prior written consent
of Network General, during the period from the date of the Reorganization
Agreement and continuing until the earlier of the termination of the
Reorganization Agreement pursuant to its terms or the Effective Time, McAfee
shall not do any of the following:
(a) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any capital stock;
(b) Take any action that would be reasonably likely to interfere with
McAfee's ability to account for the Merger as a pooling of interests;
(c) Acquire or enter into any agreement to acquire a majority of the
voting securities or all or substantially all of the assets of any
corporation or other business entity (other than Network General), whether
by merger, consolidation, stock tender or otherwise, unless the Board of
Directors of McAfee determines in good faith that consummation of such
transaction and subsequent integration of the business proposed to be
acquired, when considered in light of the integration of operations of
McAfee and Network General following the Merger, would be in the best
interests of McAfee and the stockholders of McAfee following the Merger;
(d) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents; or
(e) Agree in writing or otherwise to take any of the actions described in
paragraphs (a) through (d) above.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains representations and warranties by
McAfee, Merger Sub and Network General relating to a number of matters,
including: (i) the due organization of McAfee, Network General and their
respective subsidiaries; (ii) the capital structure of McAfee and Network
General; (iii) the obligations with respect to capital stock of McAfee and
Network General; (iv) the authorization, execution, delivery and
enforceability of the Reorganization Agreement and related matters; (v) the
filing of documents and financial statements by McAfee and Network General
with the SEC and the accuracy of information contained therein; (vi) the
absence of undisclosed liabilities which in the aggregate would be material
and the absence of certain material adverse changes or events; (vii) taxes,
tax returns and tax deficiencies; (viii) the possession of leasehold interests
in real properties necessary for the conduct of business; (ix) intellectual
property rights; (x) compliance with laws; (xi) material litigation; (xii)
brokers' and finders' fees; (xiii) the ability to account for
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the Merger as a pooling of interests; (xiv) the accuracy of information
provided for this Joint Proxy Statement/Prospectus; and (xv) other matters.
In addition, the Reorganization Agreement contains representations and
warranties by Network General relating to a number of additional matters,
including; (i) employee benefit plans; (ii) environmental matters including
hazardous materials, hazardous materials activities and environmental permits;
(iii) agreements, contracts and commitments; (iv) change of control payments;
(v) the non-applicability of Section 203 of the DGCL and Network General's
Rights Plan to the transactions contemplated by the Merger; and (vi) customs
and tariffs.
The Reorganization Agreement also contains representations and warranties by
McAfee relating to a number of matters, including; (i) the valid issuance of
McAfee Common Stock pursuant to the Reorganization Agreement; and (ii) the
non-ownership of Network General Common Stock by McAfee.
NO SOLICITATION
Pursuant to the Reorganization Agreement, until the earlier of the Effective
Time or termination of the Reorganization Agreement pursuant to its terms,
Network General and its subsidiaries will not, nor will they authorize or
permit any of their respective officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by any
of them to, directly or indirectly, (i) solicit, initiate or encourage the
submission of any Alternative Proposal (as hereinafter defined) or (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or
would reasonably be expected to lead to, any Alternative Proposal; provided,
however, that if, at any time prior to obtaining the approval of the
stockholders of Network General of the Reorganization Agreement and the Merger
by the requisite vote under applicable law (the "Stockholder Approval"), the
Network General Board determines in good faith, after consultation with
outside legal counsel, that it is necessary to do so in order to comply with
its fiduciary duties to Network General's stockholders under applicable law,
Network General may, in response to an Alternative Proposal that was
unsolicited or that did not otherwise result from a breach of the
Reorganization Agreement, and subject to compliance with the Reorganization
Agreement, furnish information with respect to Network General and participate
in negotiations regarding such Alternative Proposal. The Reorganization
Agreement provides that Network General and its subsidiaries shall immediately
cease any and all existing activities, discussions or negotiations with any
parties conducted theretofore with respect to any Alternative Proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding two sentences by any officer, director
or employee of Network General or any of its subsidiaries or any investment
banker, attorney or other advisor or representative of Network General or any
of its subsidiaries shall be deemed to be a breach of the Reorganization
Agreement by Network General. An "Alternative Proposal" means any inquiry,
proposal or offer from any person or "group" (as defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) relating to any
direct or indirect acquisition or purchase of a substantial amount of assets
of Network General or any of its subsidiaries (other than the purchase of
Network General's products in the ordinary course of business) or more than a
10% interest in the total outstanding voting securities of Network General or
any of its subsidiaries or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder)
beneficially owning 10% or more of the total outstanding voting securities of
Network General or any of its subsidiaries or any merger, consolidation,
business combination, sale of substantially all the assets, recapitalization,
liquidation, dissolution or similar transaction involving Network General or
any of its subsidiaries, other than the transactions contemplated by the
Reorganization Agreement.
Pursuant to the Reorganization Agreement, neither the Network General Board
nor any committee thereof may (i) withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse to McAfee or Merger Sub, the approval
or recommendation by such Board of Directors or any such committee of the
Reorganization Agreement or the Merger or (ii) cause Network General to enter
into any letter of intent, agreement in principle, acquisition agreement or
other similar agreement (an "Acquisition Agreement") with
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respect to any Alternative Proposal. In addition, subject to the other
provisions of the Reorganization Agreement, from and after the date of the
Reorganization Agreement until the earlier of the Effective Time and
termination of the Reorganization Agreement pursuant to its terms, Network
General and its subsidiaries will not, nor will they authorize or permit any
of their respective officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by any of them to,
directly or indirectly, make or authorize any public statement, recommendation
or solicitation in support of any Alternative Proposal. Notwithstanding the
foregoing or anything else contained in the Reorganization Agreement, prior to
obtaining the Stockholder Approval, the Board of Directors of Network General,
to the extent it determines in good faith, after consultation with outside
legal counsel, that it is necessary to do so in order to comply with its
fiduciary duties to Network General's stockholders under applicable law, may
withdraw or modify its approval or recommendation of the Reorganization
Agreement or the Merger (and, to the extent it does so, Network General may
refrain from soliciting proxies to secure the vote of its stockholders or
approve or recommend any Superior Proposal (as hereinafter defined)), in each
case at any time after the third business day following McAfee's receipt of
bona fide written notice (a "Notice of Superior Proposal") advising McAfee
that the Board of Directors of Network General has received a Superior
Proposal, specifying the material terms and conditions of the Superior
Proposal and identifying the person making such Superior Proposal (it being
understood that any amendment to the price or material terms of a Superior
Proposal shall require an additional Notice of Superior Proposal and an
additional three business day period thereafter to the extent permitted under
applicable law); provided, that unless the Reorganization Agreement is
terminated pursuant to its terms, nothing contained in the section of the
Reorganization Agreement summarized here shall limit Network General's
obligation to hold and convene the Network General Special Meeting (regardless
of whether the recommendation of the Board of Directors of Network General
shall have been withdrawn, modified or not yet made) or to provide Network
General stockholders with material information relating to such meeting. For
purposes of the Reorganization Agreement, a "Superior Proposal" means any bona
fide proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more than
50% of the voting power of Network General Common Stock or all or
substantially all the assets of Network General and otherwise on terms which
the Board of Directors of Network General determines in its good faith
judgment (after consultation with a financial advisor of nationally recognized
reputation) to be more favorable to Network General's stockholders than the
Merger and for which financing, to the extent required, is then committed or
which, in the good faith judgment of the Board of Directors of Network
General, is capable of being obtained by such third party.
In addition, pursuant to the Reorganization Agreement, Network General is
required to advise McAfee as promptly as practicable, orally and in writing of
any request for non-public information which Network General reasonably
believes would lead to an Alternative Proposal or of any Alternative Proposal,
the material terms and conditions of such request or Alternative Proposal, and
the identity of the person making any such request, Alternative Proposal or
inquiry. Network General will keep McAfee informed in all material respects of
the status and details (including material amendments) of any such request or
Alternative Proposal.
Nothing contained in the Reorganization Agreement shall prohibit Network
General from (i) taking and disclosing to its stockholders a position
contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or
(ii) making any disclosure to Network General's stockholders if, in the good
faith judgment of the majority of the members of the Board of Directors of
Network General, after consultation with independent legal counsel, failure to
so disclose would be inconsistent with applicable laws; provided that none of
Network General nor its Board of Directors nor any committee thereof shall,
except in accordance with the Reorganization Agreement, withdraw or modify, or
publicly propose to withdraw or modify, its position with respect to the
Reorganization Agreement or the Merger or approve or recommend, or propose to
approve or recommend, an Alternative Proposal.
Notwithstanding anything to the contrary in the Reorganization Agreement,
Network General will not provide any non-public information to a third party
unless: (i) Network General provides such non-public
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information pursuant to a nondisclosure agreement with terms regarding the
protection of confidential information at least as restrictive as such terms
in the Confidentiality Agreement; and (ii) such non-public information has
been previously or is contemporaneously delivered to McAfee.
From and after the date of the Reorganization Agreement until the earlier of
the Effective Time or termination of the Reorganization Agreement pursuant to
its terms, McAfee and its subsidiaries will not, nor will they authorize or
permit any of their respective officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by any
of them to, directly or indirectly, (i) solicit, initiate or encourage the
submission of any McAfee Proposal (as hereinafter defined) or (ii) participate
in any discussions or negotiations regarding, or furnish to any person any
non-public information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes or would
reasonably be expected to lead to, any McAfee Proposal; provided, however,
that if the Board of Directors of McAfee determines in good faith, after
consultation with outside legal counsel, that it is necessary to do so in
order to comply with its fiduciary duties to McAfee's stockholders under
applicable law, McAfee may, in response to a McAfee Proposal that was
unsolicited or that did not otherwise result from a breach of the
Reorganization Agreement, furnish information with respect to McAfee and
participate in negotiations regarding such McAfee Proposal. The Reorganization
Agreement provides that McAfee and its subsidiaries will immediately cease any
and all existing activities, discussions or negotiations with any parties
conducted theretofore with respect to any McAfee Proposal. In addition,
nothing contained in the Reorganization Agreement shall prohibit McAfee from
(i) taking and disclosing to its stockholders a position contemplated by Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or (ii) making any
disclosure to McAfee's stockholders if, in the good faith judgment of the
majority of the members of the Board of Directors of McAfee, after
consultation with independent legal counsel, failure to so disclose would be
inconsistent with applicable laws. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the first two
sentences of this section by any officer, director or employee of McAfee or
any of its subsidiaries or any investment banker, attorney or other advisor or
representative of McAfee or any of its subsidiaries shall be deemed to be a
breach of the Reorganization Agreement by McAfee. "McAfee Proposal" means any
proposal made by a third party to consummate any of the following transactions
or series of related transactions (other than the Merger): (i) a merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving McAfee pursuant to which the
stockholders of McAfee immediately preceding such transaction or series of
related transactions hold less than 60% of the equity interests in the
surviving or resulting entity of such transaction or transactions (without
respect to any overlap in the companies' stockholder bases); (ii) a sale or
other disposition by McAfee of assets (excluding inventory and used equipment
sold in the ordinary course of business) representing in excess of 40% of the
fair market value of McAfee's business immediately prior to such sale; or
(iii) the acquisition by any person or group (including by way of a tender
offer or an exchange offer or issuance by McAfee), directly or indirectly, of
beneficial ownership or a right to acquire beneficial ownership of 40% or more
of the then outstanding shares of capital stock of McAfee.
BREAK UP FEES
In the event that the Reorganization Agreement is terminated by McAfee under
certain circumstances, Network General shall promptly, but in no event later
than two days after the date of such termination, pay McAfee a fee equal to
$30 million in immediately available funds (the "Network General Termination
Fee"). If the Reorganization Agreement is terminated by either McAfee or
Network General under certain other conditions, and prior to such termination
an Alternative Proposal shall have been publicly announced or otherwise
publicly disclosed, and prior to the date 12 months following the date of the
termination of the Reorganization Agreement either (i) a Network General
Acquisition (as hereinafter defined) shall be consummated or (ii) Network
General shall enter into an Acquisition Agreement providing for a Network
General Acquisition, then Network General shall pay to McAfee the Network
General Termination Fee, in the case of clause (i), concurrently with the
consummation of such Network General Acquisition or, in the case of clause
(ii), one-half of the Network General Termination Fee concurrently with the
execution of such Acquisition Agreement and the remaining half upon the
consummation of any Network General Acquisition occurring with
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twelve months following such execution. "Network General Acquisition" means
any of the following transactions or series of related transactions: (i) a
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving Network General pursuant to which
the stockholders of Network General immediately preceding such transaction or
series of related transactions hold less than 60% of the equity interests in
the surviving or resulting entity of such transaction or transactions (without
respect to any overlap in the companies' stockholder bases) (other than the
transactions contemplated by the Reorganization Agreement); (ii) a sale or
other disposition by Network General of assets (excluding inventory and used
equipment sold in the ordinary course of business) representing in excess of
40% of the fair market value of Network General's business immediately prior
to such sale; or (iii) the acquisition by any person or group (including by
way of a tender offer or an exchange offer or issuance by Network General),
directly or indirectly, of beneficial ownership or a right to acquire
beneficial ownership of 40% or more of the then outstanding shares of capital
stock of Network General.
In the event that the Reorganization Agreement is terminated by Network
General under certain circumstances, McAfee shall promptly, but in no event
later than two days after the date of such termination, pay Network General a
fee equal to $30 million in immediately available funds (the "McAfee
Termination Fee"). If the Reorganization Agreement shall be terminated by
either McAfee or Network General under certain other conditions, and prior to
the time of the occurrence of the event entitling such party to terminate the
Reorganization Agreement pursuant to such provision a McAfee Contingent
Proposal (as hereinafter defined) shall have been publicly announced or
otherwise publicly disclosed, and prior to the date 12 months following the
date of the termination of the Reorganization Agreement either (i) the
transaction contemplated by such McAfee Contingent Proposal shall be
consummated or (ii) McAfee shall enter into a written agreement providing for
the consummation of the transaction contemplated by such McAfee Contingent
Proposal, then McAfee shall pay to Network General the McAfee Termination Fee,
in the case of clause (i), concurrently with the consummation of the
transaction contemplated by such McAfee Contingent Proposal or, in the case of
clause (ii), one-half of the McAfee Termination Fee concurrently with the
execution of such agreement and the remaining half upon the consummation of
the transaction contemplated by such agreement. "McAfee Contingent Proposal"
means a McAfee Proposal, which proposal is, and is publicly disclosed to be,
contingent upon the issuance of shares of McAfee Common Stock pursuant to the
Merger not being approved by the stockholders of McAfee or the Merger
otherwise not being consummated.
Payment of the fees described in the preceding two paragraphs shall not be
in lieu of damages incurred in the event of material and willful breach of the
Reorganization Agreement.
STOCK OPTIONS AND EMPLOYEE BENEFITS
At the Effective Time, each outstanding option to purchase shares of Network
General Common Stock (each a "Network General Stock Option") under the Network
General Stock Option Plans, whether or not exercisable, will be assumed by
McAfee. Each Network General Stock Option so assumed by McAfee under the
Reorganization Agreement will continue to have, and be subject to, the same
terms and conditions set forth in the applicable Network General Stock Option
Plan immediately prior to the Effective Time (including, without limitation,
any repurchase rights or vesting provisions), except that (i) each Network
General Stock Option will be exercisable (or will become exercisable in
accordance with its terms) for that number of whole shares of McAfee Common
Stock equal to the product of the number of shares of Network General Common
Stock that were issuable upon exercise of such Network General Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of McAfee Common Stock, and
(ii) the per share exercise price for the shares of McAfee Common Stock
issuable upon exercise of such assumed Network General Stock Option will be
equal to the quotient determined by dividing the exercise price per share of
Network General Common Stock at which such Network General Stock Option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded up to the nearest whole cent.
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It is intended that Network General Stock Options assumed by McAfee shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Network General Stock Options qualified
as incentive stock options immediately prior to the Effective Time.
Subject to the consummation of the Merger, the ESPP will be terminated
effective as of immediately prior to the Effective Time, and the participants
thereunder will purchase shares of Network General Common Stock with the
proceeds contained in their respective accounts.
McAfee will file a registration statement on Form S-8 registering the shares
of McAfee Common Stock issuable with respect to assumed Network General Stock
Options within five days after the Effective Time and shall use its
commercially reasonable efforts to maintain the effectiveness of such
registration statement thereafter for as long as any of such options or other
rights remain outstanding.
INTERESTS OF CERTAIN PERSONS
Network General Outside Director Options
The number of shares exercisable pursuant to options issued under the
Network General Outside Directors Stock Option Plan is subject, pursuant to
the terms of such plan and option agreements issued pursuant thereto, to
acceleration as a result of the Merger. Assuming the Merger is consummated on
December 1, 1997 and based on options outstanding as of the Network General
Record Date, the outside directors of Network General would be entitled to
exercise options in respect of an additional 194,169 shares of Network General
Common Stock as a result of the Merger.
Change of Control Agreements
Network General has employment agreements with the following executive
officers: Messrs. Denend, Carver, Richardson and Stringer. These employment
agreements provide that if the employee is terminated under certain
circumstances within two years of the Merger or if McAfee fails to expressly
assume the employment agreements, or if the employee resigns following a
constructive termination, such employee will receive (i) all benefits earned;
(ii) such employee's current salary plus an amount equal to the entire target
bonus or commission plan in effect over a one-year period (or, in the case of
Mr. Denend, a two-year period); and (iii) accelerated vesting and immediate
exercisability of all stock options granted by Network General to such
employee to the extent such options remain outstanding and unexercised.
McAfee, Network General and the affected executive officers have agreed that
the new position that each such executive officer will hold with the Combined
Company results in "constructive termination" of his employment under his
employment agreement. Each of the officers has indicated his current
willingness to become employed by the Combined Company at least long enough to
effectively manage the transition. However, there can be no assurances that
after the Merger the Combined Company will be able to retain the services of
such Network General executive officers.
Indemnification
From and after the Effective Time, McAfee will fulfill and honor and will
cause the surviving corporation to fulfill and honor in all respects the
obligations of Network General pursuant to any indemnification agreements
between Network General and its directors and officers as of the Effective
Time (the "Indemnified Parties") and any indemnification provisions under
Network General's Third Restated Certificate of Incorporation (the "Network
General Certificate") or Bylaws as in effect on October 13, 1997. The
Certificate of Incorporation and Bylaws of the surviving corporation will
contain provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Network General Certificate and Bylaws of Network General as in effect on the
date of the Reorganization Agreement, which provisions will not be amended,
repealed or otherwise modified for a period of six years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of Network General, unless such modification is
required by law.
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For a period of six years after the Effective Time, McAfee will maintain or
cause the surviving corporation to maintain in effect, if available,
directors' and officers' liability insurance covering those persons who are
currently covered by Network General's directors' and officers' liability
insurance policy on terms comparable to those applicable to the current
directors and officers of Network General; provided, however, that in no event
will McAfee or the surviving corporation be required to expend in excess of
150% of the annual premium currently paid by Network General for such coverage
(or such coverage as is available for such 150% of such annual premium).
Other
Mr. Denend, who is President, Chief Executive Officer and a director of
Network General, as of October 28, 1997, beneficially owns 13,278 shares of
Network General Common Stock and options exercisable within 60 days of such
date to purchase 412,499 additional shares of Network General Common Stock.
Mr. Denend is also a director of McAfee and, as of October 28, 1997,
beneficially owns no shares of McAfee Common Stock but holds options
exercisable within 60 days of such date to purchase 3,750 shares of McAfee
Common Stock. Mr. Denend, in his capacities as a director of each of Network
General and McAfee, recused himself from participating in the negotiation of
the Reorganization Agreement other than certain limited discussions concerning
certain post-Merger management and operational matters, from the deliberations
and votes of the Network General Board and the McAfee Board regarding the
Reorganization Agreement and from voting on the Merger.
For transition purposes, it is expected that the current directors of
Network General will, after the Effective Time, continue to serve as directors
of the surviving corporation for 180 days or more following the Effective
Time.
Pursuant to the Reorganization Agreement, the Network General Board intends
to authorize compensation in the amounts of $100,000 and $50,000 to Mr.
Hootnick and Mr. Gallo, respectively, for their efforts in negotiating the
Merger. See "Approval of the Merger and Related Transactions--Material
Contacts and Board Deliberations."
AFFILIATE AGREEMENTS
Each executive officer and director of McAfee (collectively, the "McAfee
Affiliates") has entered into an agreement restricting sales, dispositions or
other transactions reducing their risk of investment in respect of the shares
of McAfee Common Stock held by them to help ensure that the Merger will be
treated as a pooling of interests for accounting and financial reporting
purposes. Each executive officer and director of Network General
(collectively, the "Network General Affiliates") has entered into an agreement
restricting sales, dispositions or other transactions reducing their risk of
investment in respect of the shares of Network General Common Stock held by
them prior to the Merger and the shares of McAfee Common Stock received by
them in the Merger so as to comply with the requirements of applicable federal
securities and tax laws and to help ensure that the Merger will be treated as
a pooling of interests for accounting and financial reporting purposes.
VOTING AGREEMENTS
Each executive officer and director of McAfee (all of whom in the aggregate
own 2,853 shares of McAfee Common Stock as of the McAfee Record Date and
options exercisable within 60 days of the McAfee Record Date to purchase
586,056 shares of McAfee Common Stock, representing less than 1% of the votes
entitled to be cast by holders of shares of McAfee Common Stock issued and
outstanding as of the McAfee Record Date and less than 1% of such votes
assuming exercise of all vested options held by all such persons) has entered
into a McAfee Voting Agreement with Network General. Pursuant to the McAfee
Voting Agreements, which are irrevocable, the foregoing persons have agreed to
vote all shares of McAfee Common Stock they have beneficial ownership of and
any McAfee Common Stock they acquire beneficial ownership of prior to the
termination of the McAfee Voting Agreements in favor of approval of the
issuance of shares of McAfee Common Stock by virtue of the Merger. In
addition, such persons have granted irrevocable proxies to the Network General
Board
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to vote such persons' McAfee Common Stock in favor of approval of the issuance
of shares of McAfee Common Stock pursuant to the Reorganization Agreement and
the Merger.
Each executive officer and director of Network General (all of whom in the
aggregate own 1,865,678 shares of Network General Common Stock as of the
Network General Record Date and options exercisable within 60 days of the
Network General Record Date to purchase 870,681 shares of Network General
Common Stock, representing approximately 4.4% of the votes entitled to be cast
by holders of Network General Common Stock issued and outstanding as of the
Network General Record Date, and 6.3% of such votes assuming exercise of all
vested options held by all such persons) has entered into a Network General
Voting Agreement with McAfee. Pursuant to the Network General Voting
Agreements, which are irrevocable, the foregoing persons have agreed to vote
all shares of Network General Common Stock they have beneficial ownership of
and any Network General Common Stock they acquire beneficial ownership of
prior to the termination of the Network General Voting Agreements in favor of
approval of the Reorganization Agreement and the Merger. In addition, such
persons have granted irrevocable proxies to the McAfee Board to vote such
persons' Network General Common Stock in favor of approval of the
Reorganization Agreement and the Merger.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Reorganization Agreement to
effect the Merger are subject to the satisfaction at or prior to the Closing
Date of the following conditions: (i) certain approvals by the stockholders of
McAfee and Network General shall have been obtained; (ii) the SEC shall have
declared the Registration Statement effective and no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of the Joint Proxy Statement/Prospectus shall have been initiated or
threatened in writing by the SEC; (iii) no Governmental Entity shall have
enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has the
effect of making the Merger illegal or otherwise prohibiting consummation of
the Merger, and all waiting periods, if any, under the HSR Act relating to the
transactions contemplated hereby will have expired or terminated early, and
all material foreign antitrust approvals required to be obtained prior to the
Merger in connection with the transactions contemplated hereby shall have been
obtained; (iv) McAfee and Network General shall each have received written
opinions from their respective tax counsel (WSGR and GCW&F, respectively), in
form and substance reasonably satisfactory to them, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code and such opinions shall not have been withdrawn; provided,
however, that if counsel to either McAfee or Network General does not render
such opinion, this condition shall nonetheless be deemed to be satisfied with
respect to such party if counsel to the other party renders such opinion to
such party, and McAfee and Network General agree to make and use their
commercially reasonable efforts to cause their stockholders to make such
reasonable representations as requested by such counsel for the purpose of
rendering such opinions; (v) each of McAfee and Network General shall have
received letters from each of Coopers & Lybrand and Arthur Andersen,
respectively, dated within two business days prior to the Effective Time,
regarding each firm's respective concurrence with McAfee's management's and
Network General's management's conclusions as to the appropriateness of
pooling of interest accounting for the Merger under APB No. 16, if the Merger
is consummated in accordance with the Reorganization Agreement; and (vi) the
shares of McAfee Common Stock to be issued to Network General stockholders
pursuant to the Merger shall have been approved for listing on Nasdaq upon
notice of issuance.
In addition, the obligation of Network General to consummate and effect the
Merger shall be subject to the satisfaction at or prior to the Closing Date of
each of the following conditions, any of which may be waived, in writing,
exclusively by Network General: (i) the representations and warranties of
McAfee and Merger Sub contained in the Reorganization Agreement shall have
been true and correct in all material respects as of the date of the
Reorganization Agreement and shall be true and correct in all material
respects on and as of the Closing Date except for changes contemplated by the
Reorganization Agreement and except for those
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<PAGE>
representations and warranties which address matters only as of a particular
date (which shall have been true and correct as of such particular date), with
the same force and effect as if made on and as of the Closing Date, except in
certain cases where the failure to be so true and correct would not have or be
reasonably likely to have a Material Adverse Effect (as defined in the
Reorganization Agreement) on McAfee. Network General shall have received a
certificate with respect to the foregoing signed on behalf of McAfee by an
authorized officer of McAfee; (ii) McAfee and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants
required by the Reorganization Agreement to be performed or complied with by
them on or prior to the Closing Date, and Network General shall have received
a certificate to such effect signed on behalf of McAfee by an authorized
officer of McAfee; (iii) no Material Adverse Effect with respect to McAfee
shall have occurred since the date of the Reorganization Agreement or be
reasonably likely to occur; (iv) each of the McAfee Affiliates shall have
entered into the McAfee Affiliate Agreement and each of such agreements will
be in full force and effect as of the Effective Time; (v) the Board of
Directors of McAfee shall have complied in all material respects with the
provisions of the Reorganization Agreement; and (vi) McAfee shall have
obtained all consents, waivers and approvals required in connection with the
consummation of the transactions contemplated hereby in connection with the
agreements, contracts, licenses or leases set forth on the disclosure
schedules delivered by Network General to McAfee in connection with the
Reorganization Agreement.
Further, the obligations of McAfee and Merger Sub to consummate and effect
the Merger shall be subject to the satisfaction at or prior to the Closing
Date of each of the following conditions, any of which may be waived, in
writing, exclusively by McAfee: (i) the representations and warranties of
Network General contained in the Reorganization Agreement shall have been true
and correct in all material respects as of the date of the Reorganization
Agreement and shall be true and correct in all material respects on and as of
the Closing Date except for changes contemplated by the Reorganization
Agreement and except for those representations and warranties which address
matters only as of a particular date (which shall have been true and correct
as of such particular date), with the same force and effect as if made on and
as of the Closing Date, except in certain cases where the failure to be so
true and correct would not have or be reasonably likely to have a Material
Adverse Effect on Network General. McAfee shall have received a certificate
with respect to the foregoing signed on behalf of Network General by an
authorized officer of Network General; (ii) Network General shall have
performed or complied in all material respects with all agreements and
covenants required by the Reorganization Agreement to be performed or complied
with by it at or prior to the Closing Date, and McAfee shall have received a
certificate to such effect signed on behalf of Network General by the Chief
Executive Officer and the Chief Financial Officer of Network General; (iii) no
Material Adverse Effect with respect to Network General shall have occurred
since the date of the Reorganization Agreement or be reasonably likely to
occur; (iv) each of the Network General Affiliates shall have entered into the
Network General Affiliate Agreement and each of such agreements will be in
full force and effect as of the Effective Time; and (v) Network General shall
have obtained all consents, waivers and approvals required in connection with
the consummation of the transactions contemplated hereby in connection with
the contracts, licenses or leases set forth in McAfee's disclosure schedule.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approvals of the
stockholders of Network General or McAfee: (i) by mutual written consent duly
authorized by the Boards of Directors of McAfee and Network General; (ii) by
either Network General or McAfee if the Merger shall not have been consummated
by March 31, 1998 for any reason; provided, however, that this right to
terminate the Reorganization Agreement shall not be available to any party
whose action or failure to act has been a principal cause of or resulted in
the failure of the Merger to occur on or before such date and such action or
failure to act constitutes a breach of the Reorganization Agreement; (iii) by
either Network General or McAfee if a governmental entity shall have issued an
order, decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action is final and
nonappealable; (iv) by either Network General or McAfee if the required
approvals of the stockholders of Network General contemplated by the
Reorganization
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<PAGE>
Agreement shall not have been obtained by reason of the failure to obtain the
required vote at a meeting of Network General stockholders duly convened
therefor or at any adjournment thereof (provided that this right to terminate
the Reorganization Agreement shall not be available to Network General where
the failure to obtain Network General stockholder approval shall have been
caused by the action or failure to act of Network General and such action or
failure to act constitutes a breach by Network General of the Reorganization
Agreement); (v) by either Network General or McAfee if the required approval
of the stockholders of McAfee contemplated by the Reorganization Agreement
shall not have been obtained by reason of the failure to obtain the required
vote at a meeting of McAfee stockholders duly convened therefor or at any
adjournment thereof (provided that this right to terminate the Reorganization
Agreement shall not be available to McAfee where the failure to obtain McAfee
stockholder approval shall have been caused by the action or failure to act of
McAfee and such action or failure to act constitutes a material breach by
McAfee of the Reorganization Agreement); (vi) by McAfee if (a) the Board of
Directors of Network General or any committee thereof shall have withdrawn or
modified in a manner adverse to McAfee its approval or recommendation of the
Merger or the Reorganization Agreement, (b) Network General shall have failed
to include in the Joint Proxy Statement/Prospectus the recommendation of the
Board of Directors of Network General in favor of approval of the Merger and
the Reorganization Agreement, (c) the Board of Directors of Network General
shall have failed to reconfirm such recommendation within ten business days
after a written request to do so at any time following the public announcement
or disclosure of an Alternative Proposal, (d) the Board of Directors of
Network General or any committee thereof shall have recommended any
Alternative Proposal, or (e) the Board of Directors of Network General or any
committee thereof shall have resolved to do any of the foregoing; (vii) by
Network General if (a) the Board of Directors of McAfee or any committee
thereof shall have withdrawn or modified in a manner adverse to Network
General its recommendation of approval of the issuance of shares of McAfee
Common Stock pursuant to the Merger, (b) McAfee shall have failed to include
in the Joint Proxy Statement/Prospectus the recommendation of the Board of
Directors of McAfee in favor of approval of the issuance of shares of McAfee
Common Stock pursuant to the Merger, (c) the Board of Directors of McAfee
shall have failed to reconfirm such recommendation within ten business days
after a written request to do so at any time following the public announcement
or disclosure of a McAfee Contingent Proposal or (d) the Board of Directors of
McAfee or any committee thereof shall have resolved to do any of the
foregoing; (viii) by Network General at any time prior to the approval of the
Merger by Network General's stockholders and following the earlier of (a)
three days following the date the Registration Statement is declared effective
pursuant to the Securities Act by the SEC or (b) sixty days following the date
of the Reorganization Agreement, if the Board of Directors of Network General
recommends a Superior Proposal to the stockholders of Network General; (ix) by
Network General, upon a breach of any representation, warranty, covenant or
agreement on the part of McAfee set forth in the Reorganization Agreement, or
if any representation or warranty of McAfee shall have become untrue, in
either case such that the conditions set forth in the Reorganization Agreement
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that Network
General may not terminate the Reorganization Agreement pursuant to this
provision if such inaccuracy in McAfee's representations and warranties or
breach by McAfee is curable by McAfee through the exercise of its commercially
reasonable efforts prior to March 31, 1998, provided McAfee continues to
exercise commercially reasonable efforts to cure such breach (it being
understood that Network General may so not terminate the Reorganization
Agreement if it shall have materially breached the Reorganization Agreement or
if such breach by McAfee is cured prior to March 31, 1998); or (x) by McAfee,
upon a breach of any representation, warranty, covenant or agreement on the
part of Network General set forth in the Reorganization Agreement, or if any
representation or warranty of Network General shall have become untrue, in
either case such that the conditions set forth in the Reorganization Agreement
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that McAfee may
not terminate the Reorganization Agreement pursuant to this provision if such
inaccuracy in Network General's representations and warranties or breach by
Network General is curable by Network General through the exercise of its
commercially reasonable efforts prior to March 31, 1998, provided Network
General continues to exercise commercially reasonable efforts to cure such
breach (it being understood that McAfee may not so terminate the
Reorganization Agreement if it shall have materially breached the
Reorganization Agreement or if such breach by Network General is cured prior
to March 31, 1998).
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF MCAFEE CAPITAL STOCK
The authorized capital stock of McAfee consists of 100,000,000 shares of
Common Stock, $0.01 par value per share, and 5,000,000 shares of Preferred
Stock, $0.01 par value per share. At the McAfee Special Meeting, stockholders
will be asked to consider and vote upon a proposal to approve an amendment to
McAfee's Second Restated Certificate of Incorporation to increase the
authorized capital stock of McAfee by 200 million to 300 million. See
"Additional Matters Being Submitted to a Vote of Only McAfee Stockholders--
Proposal Three--Amendment to Second Restated Certificate of Incorporation--
Increase of Authorized Common Stock."
McAfee Common Stock
As of the McAfee Record Date, there were 51,403,965 shares of McAfee Common
Stock outstanding. McAfee Common Stock is listed on Nasdaq under the symbol
MCAF. As of the McAfee Record Date, the outstanding McAfee Common Stock was
held of record by approximately 375 stockholders. The holders of McAfee Common
Stock are entitled to one vote per share on all matters to be voted upon by
the stockholders. The stockholders do not have a right to take action by
written consent nor may they cumulate votes in connection with the election of
directors. The holders of McAfee Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the McAfee
Board out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of McAfee, the holders of McAfee Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to the rights of holders of Preferred Stock that may be
then outstanding. The McAfee Common Stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the McAfee Common Stock. All outstanding shares of
McAfee Common Stock are fully paid and non-assessable, and the shares of
McAfee Common Stock to be outstanding upon completion of the Merger will be
fully paid and non-assessable.
McAfee Preferred Stock
McAfee has 5,000,000 shares of Preferred Stock authorized, of which one
share has been designated Series A Preferred Stock and as of the McAfee Record
Date, one share of Series A Preferred Stock is outstanding. The share of
Series A Preferred Stock was issued in connection with McAfee's acquisition of
FSA Corporation in September 1996. The share of Series A Preferred Stock has
no preferential rights other than the right to cast a number of votes equal to
the number of shares of McAfee Common Stock issuable in exchange for certain
exchangeable non-voting shares of FSA Corporation. As of the McAfee Record
Date, such exchangeable shares of FSA Corporation were exchangeable for
325,062 shares of McAfee Common Stock.
The McAfee Board has the authority to issue shares of Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued and undesignated shares of Preferred
Stock and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. Although it presently has no intention to do so, the McAfee
Board, without stockholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power or other
rights of the holders of McAfee Common Stock. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of McAfee.
Transfer Agent and Registrar
The Transfer Agent and Registrar of the McAfee Common Stock is Boston
EquiServe and its telephone number is (617) 575-2000.
DESCRIPTION OF NETWORK GENERAL CAPITAL STOCK
The authorized capital stock of Network General consists of 100,000,000
shares of Common Stock, $0.01 par value per share, and 2,000,000 shares of
Preferred Stock, $0.01 par value per share.
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<PAGE>
Network General Common Stock
As of the Network General Record Date, there were 42,631,354 shares of
Network General Common Stock outstanding held of record by approximately 420
stockholders. Network General Common Stock is listed on Nasdaq under the
symbol NETG. Holders of Network General Common Stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. Pursuant to the
Network General Third Restated Certificate of Incorporation, the stockholders
do not have a right to take action by written consent nor may they cumulate
votes in connection with the election of Directors. The holders of Network
General Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Network General, the holders of Network General Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to the rights of holders of Preferred Stock that may be
then outstanding. The Network General Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Network General Common Stock. All
outstanding shares of Network General Common Stock are fully paid and non-
assessable, and the shares of Combined Company Common Stock which are received
in exchange for the Network General Common Stock to be outstanding upon
completion of the Merger will be fully paid and non-assessable.
Network General Preferred Stock
Network General has 2,000,000 shares of Preferred Stock authorized, of which
1,000,000 shares are designated Series A Preferred Stock and, as of the
Network General Record Date, no shares of Preferred Stock are outstanding. The
Board of Directors has the authority to issue the undesignated shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued and
undesignated shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series, without any
further vote or action by the stockholders. Although it presently has no
intention to do so, the Network General Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power or other rights of the
holders of Network General Common Stock and the issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of Network General.
Network General Rights Agreement
On June 26, 1992, Network General adopted the Rights Agreement between
Network General and Chemical Trust Company of California, as Rights Agent, as
amended (the "Network General Rights Agreement," and each right under the
Network General Rights Agreement, a "Right") for each share of Network General
Common Stock outstanding on July 14, 1992. When exercisable, each Right
initially entitles the holder to purchase one-hundredth of a share of Series A
Preferred Stock of Network General at the specified price. The Rights become
exercisable on the earlier of: (i) the first date of public announcement by
Network General or any person or group (an "Acquiring Person") that such
person or group has acquired, without approval of the Board of Directors,
beneficial ownership of 20% or more of Network General's outstanding Common
Stock, or (ii) the tenth day following the commencement, or announcement of an
intention to commence, by any person or group of a tender offer which would
result in such person owning 20% or more of the outstanding Common Stock of
Network General (the earlier of such dates is referred to as the "Distribution
Date"). The Rights expire on July 13, 2002.
The Rights Agreement was designed to protect and maximize the value of the
outstanding equity interests in Network General in the event of an unsolicited
attempt by an acquiror to take over Network General in a manner or on terms
not approved by the Network General Board of Directors. Pursuant to the
Reorganization Agreement, Network General has taken all necessary actions so
that the Reorganization Agreement and the consummation of the Merger will not
cause any change, effect or result under the Network General Rights Agreement
which is adverse to the interests of McAfee. McAfee does not have a rights
plan.
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Transfer Agent and Registrar
The Transfer Agent and Registrar of the Network General Common Stock is
Boston EquiServe and its telephone number is (617) 575-2000.
COMPARISON OF RIGHTS OF NETWORK GENERAL AND MCAFEE STOCKHOLDERS
After consummation of the Merger, the holders of Network General Common
Stock who receive McAfee Common Stock under the terms of the Reorganization
Agreement will become stockholders of the Combined Company. As stockholders of
Network General, their rights are presently governed by Delaware law and by
the Network General Third Restated Certificate of Incorporation (the "Network
General Certificate") and the Network General Amended and Restated Bylaws (the
"Network General Bylaws"). As stockholders of the Combined Company, their
rights will be governed by Delaware law and by McAfee's Second Restated
Certificate of Incorporation (the "McAfee Certificate") and McAfee's Bylaws,
as amended (the "McAfee Bylaws"). The following discussion summarizes the
material differences between the rights of holders of Network General Common
Stock and holders of McAfee Common Stock and differences between the charters
and bylaws of Network General and McAfee. This summary does not purport to be
complete and is qualified in its entirety by reference to the Network General
Certificate and Network General Bylaws, the McAfee Certificate and the McAfee
Bylaws and the relevant provisions of Delaware law.
Special Meeting of the Stockholders
The Network General Bylaws provide that special meetings of the stockholders
may only be called by the President or the Network General Board. The McAfee
Certificate provides that special meetings of the stockholders may be called
by resolution of the McAfee Board or by the holders of shares entitled to cast
not less than 10% of the votes at the meeting. Under Delaware law, a special
meeting of stockholders may be called by the board of directors or by any
other person authorized to do so in the certificate of incorporation or the
bylaws.
Action by Consent of Stockholders
Under Delaware law, unless the certificate of incorporation provides
otherwise, any action to be taken by stockholders may be taken without a
meeting, without prior notice, and without a vote, if the stockholders having
the number of votes that would be necessary to take such action at a meeting
at which all stockholders were present and voted consent to the action in
writing. Neither the McAfee Certificate nor the Network General Certificate
allows for actions by written consent of the stockholders.
Cumulative Voting
Neither the McAfee Certificate nor the Network General Certificate provides
for cumulative voting by stockholders in elections of directors. Delaware law
does not provide for cumulative voting unless cumulative voting by
stockholders is provided for in the company's certificate of incorporation.
Classification of the Board of Directors
The Network General Bylaws provide that the number of directors shall
initially be five, and thereafter shall be fixed from time to time by
resolution of the Network General Board. Pursuant to applicable board
resolutions, the Network General Board currently consists of eight directors.
The Network General Bylaws provide for division of its Board of Directors into
three classes, as nearly equal in size as possible, with staggered terms. The
McAfee Certificate and McAfee Bylaws provide that the number of directors
shall be initially six and, thereafter, shall be fixed from time to time by
the McAfee Board. Pursuant to applicable resolutions, the McAfee Board
currently consists of six directors. There is currently one vacancy on the
McAfee Board. The McAfee Certificate also provides for three classes of
directors, as nearly equal in size as possible, with staggered terms.
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Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company following the Merger will initially consist of six members.
The Combined Company will have a staggered board, with three classes of
directors: Classes I, II and III. The classes of directors will be elected in
sequential years for three year terms. Mr. Bolger (a Class I director with his
term expiring in 1999) will be leaving the Combined Company Board effective
April 30, 1998, at which time the Combined Company Board will be reduced to
five members.
Removal of Directors
The McAfee Bylaws and the Network General Bylaws each provide that any
director or the entire Board of Directors may be removed, with or without
cause, by the holders of at least a majority of the voting power of all of the
then-outstanding shares of capital stock entitled to vote generally in the
election of directors, voting together as a single class. Under Delaware law,
the stockholders of a corporation that has a classified board of directors,
such as McAfee and Network General, may only remove directors for cause.
Exculpation of Directors
Each of McAfee and Network General has included in its Certificate of
Incorporation and Bylaws a provision which eliminates the personal liability
of its directors from monetary damages resulting from a breach of fiduciary
duty as a director to the fullest extent permitted by the Delaware General
Corporation Law.
Indemnification of Directors, Officers and Others
The McAfee Bylaws and the Network General Bylaws require indemnification of
their directors, officers, employees and agents to the maximum extent and in
the manner permitted by the Delaware General Corporation Law.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger, using the pooling of
interests method of accounting.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions deemed probable by management regarding the Merger (for
example, that share information used in the unaudited pro forma information
approximates actual share information at the Effective Date). No adjustments
to the unaudited pro forma combined condensed financial information have been
made to account for different possible results in connection with the
foregoing, as management believes that the impact on such information of the
varying outcomes, individually or in the aggregate, would not be materially
different.
The unaudited pro forma combined balance sheet as of September 30, 1997
gives effect to the Merger as if it had occurred on September 30, 1997, and
combines the unaudited consolidated balance sheet of McAfee and the unaudited
consolidated balance sheet of Network General as of September 30, 1997. The
unaudited pro forma combined statements of income for all periods presented
give effect to the Merger as if it had occurred on January 1, 1994. Network
General has a fiscal year that ends on March 31 of each year. For purposes of
the pro forma statement of income, Network General's consolidated statement of
income (loss) for each of the three fiscal years ended March 31, 1997, and for
the nine month periods ended September 30, 1996 and 1997, have been combined
with McAfee's consolidated statement of income for each of the three fiscal
years ended December 31, 1996, and the nine month periods ended September 30,
1996 and 1997 (as a result, Network General's results of operations for the
three month period ended March 31, 1997 are included in the pro forma combined
statement of income for both the twelve months ended December 31, 1996 and the
nine months ended September 30, 1997, and results for the three month period
ended March 31, 1996 are included in the pro forma combined statement of
income for both the twelve months ended December 31, 1995 and the nine months
ended September 30, 1996).
McAfee and Network General estimate they will incur direct transaction costs
of approximately $15,000,000 associated with the Merger, consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing and other related charges, as well as costs associated with the
proposed change of name of the Combined Company to "Network Associates, Inc."
These nonrecurring transaction costs will be charged to operations upon
consummation of the Merger. It is expected that following the Merger, the
Combined Company will incur an additional significant charge to operations,
which is not currently reasonably estimable, to reflect costs associated with
integrating the two companies. This charge has not been reflected in the pro
forma condensed balance sheet or pro forma condensed statements of income.
There can be no assurance that the Combined Company will not incur additional
charges to reflect costs associated with the Merger or that management will be
successful in its efforts to integrate the operations of the two companies.
Such unaudited pro forma combined consolidated financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger occurred at the beginning of the periods presented,
nor is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma combined financial statements are based
upon the respective historical consolidated financial statements and notes
thereto of McAfee and Network General included elsewhere in this Joint Proxy
Statement/Prospectus, and do not incorporate, nor do they assume, any benefits
from cost savings or synergies of operations of the Combined Company.
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UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NETWORK PRO FORMA PRO FORMA
MCAFEE GENERAL ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and short term investments......... $134,564 $ 20,799 -- $155,363
Marketable securities................... 34,987 78,866 -- 113,853
Accounts receivable, net................ 63,271 43,434 -- 106,705
Prepaid, other current assets and
deferred taxes......................... 12,636 21,712 -- 34,348
-------- -------- ------- --------
Total current assets.................. 245,458 164,811 -- 410,269
Long term investments..................... 68,193 23,138 -- 91,331
Fixed assets, net......................... 17,532 22,404 -- 39,936
Intangibles, deferred taxes and other
assets................................... 11,310 11,346 -- 22,656
-------- -------- ------- --------
Total assets.......................... $342,493 $221,699 $ -- $564,192
======== ======== ======= ========
<CAPTION>
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable........................ $ 9,455 $ 8,957 $ -- $ 18,412
Accrued merger costs.................... -- -- 15,000 15,000
Accrued liabilities..................... 21,376 23,164 (5,550) 38,990
Deferred revenue........................ 31,479 31,189 -- 62,668
-------- -------- ------- --------
Total current liabilities............. 62,310 63,310 9,450 135,070
Deferred revenue less current portion and
deferred taxes........................... 6,129 4,801 -- 10,930
-------- -------- ------- --------
Total liabilities..................... 68,439 68,111 9,450 146,000
Common stock and additional paid in
capital.................................. 134,596 45,581 -- 180,177
Retained earnings......................... 139,458 108,007 (9,450) 238,015
-------- -------- ------- --------
Total stockholders' equity............ 274,054 153,588 (9,450) 418,192
-------- -------- ------- --------
Total liabilities & stockholders'
equity............................... $342,493 $221,699 $ -- $564,192
======== ======== ======= ========
</TABLE>
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue....................... $192,692 $278,910 $421,794 $282,913 $438,888
Operating costs and expenses:
Cost of net revenue............. 36,483 48,722 72,749 46,866 69,081
Research and development........ 26,825 36,771 53,082 36,174 61,898
Marketing and sales............. 64,847 92,295 125,964 86,563 136,786
General and administrative...... 14,904 20,134 30,315 20,912 31,115
Amortization of intangibles..... 792 1,356 3,169 2,295 588
Acquired in-process research and
development and other non-
recurring charges.............. 13,788 19,936 30,669 11,165 43,192
-------- -------- -------- -------- --------
Total operating costs and
expenses......................... 157,639 219,214 315,948 203,975 342,660
-------- -------- -------- -------- --------
Income from operations............ 35,053 59,696 105,846 78,938 96,228
Other income...................... 6,201 8,799 9,548 7,221 11,094
-------- -------- -------- -------- --------
Net income before tax............. 41,254 68,495 115,394 86,159 107,322
Provision for income taxes........ 13,238 26,154 51,284 33,917 54,782
-------- -------- -------- -------- --------
Net income........................ $ 28,016 $ 42,341 $ 64,110 $ 52,242 $ 52,540
======== ======== ======== ======== ========
Net income per share.............. $ 0.43 $ 0.62 $ 0.89 $ 0.73 $ 0.72
======== ======== ======== ======== ========
Shares used in per share
calculation...................... 64,771 68,459 72,251 71,883 72,512
======== ======== ======== ======== ========
</TABLE>
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) PRO FORMA BASIS OF PRESENTATION
The unaudited pro forma combined financial statements for the years ended
December 31, 1994, 1995 and 1996 reflect the combination of the financial
statements of McAfee for the years ended December 31, 1994, 1995 and 1996 and
the financial statements of Network General for the years ended March 31,
1995, 1996 and 1997. The unaudited pro forma combined statements of income for
the nine month periods ended September 30, 1996 and 1997 reflect the
combination of the statements of income (loss) of McAfee and Network General
for the nine month periods ended September 30, 1996 and 1997. Therefore, the
unaudited pro forma combined statements of income for nine month periods ended
September 30, 1996 and 1997 include Network General's statements of income
(loss) for the three month periods ended March 31, 1996 and 1997 which are
also included in the unaudited pro forma combined statements of income for the
years ended December 31, 1995 and 1996, respectively. Revenues and net income
(loss) of Network General for the quarters ended March 31, 1996 and 1997 were
$53.8 million and $10.4 million and $68.0 million and $(6.4) million,
respectively.
These unaudited pro forma combined financial statements reflect the issuance
of 17,663,698 shares of McAfee Common Stock in exchange for an aggregate of
42,389,485 shares of Network General Common Stock (outstanding as of September
30, 1997) in connection with the Merger, based on the Exchange Ratio of 0.4167
set forth in the following table:
<TABLE>
<S> <C>
Network General Common Stock outstanding as of September 30,
1997............................................................ 42,389,485
Exchange Ratio................................................... 0.4167:1.0
Number of shares of McAfee Common Stock exchanged................ 17,663,698
Number of shares of McAfee Common Stock Outstanding at September
30, 1997........................................................ 51,259,448
----------
Number of shares of Combined Company Common Stock outstanding
after the completion of the Merger.............................. 68,923,146
==========
</TABLE>
The actual number of shares of McAfee Common Stock to be issued will be
determined at the Effective Time based on the number of shares of Network
General Common Stock outstanding at that date.
(2) PRO FORMA COMBINED BALANCE SHEET
(a) McAfee and Network General estimate they will incur direct transaction
costs of approximately $15,000,000 associated with the Merger, consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing and other related charges. These nonrecurring transaction costs will
be charged to operations upon consummation of the Merger. These changes have
been reflected in the unaudited pro forma combined balance sheet but have not
been included in the unaudited pro forma combined statements of income.
(b) It is expected that following the Merger, the Combined Company will
incur an additional significant charge to operations, which is not currently
reasonably estimable, to reflect costs associated with integrating the two
companies. This charge has not been reflected in the pro forma condensed
balance sheet or condensed statements of income. There can be no assurance
that the Combined Company will not incur additional charges to reflect costs
associated with the Merger or that management will be successful in its
efforts to integrate the operations of the two companies.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) PRO FORMA COMBINED STATEMENTS OF INCOME
The following are the historical results of operations of McAfee and Network
General and their pro forma combined amounts to reflect the Merger as if it
were effected for all periods presented below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES:
McAfee........................ $ 52,937 $ 90,065 $ 181,126 $121,902 $247,960
Network General............... 139,755 188,845 240,668 161,011 190,928
-------- -------- --------- -------- --------
$192,692 $278,910 $ 421,794 $282,913 $438,888
======== ======== ========= ======== ========
COST OF REVENUES:
McAfee........................ $ 4,684 $ 4,801 $ 11,057 $ 7,220 $ 18,864
Network General............... 31,799 43,921 61,692 39,646 50,217
-------- -------- --------- -------- --------
$ 36,483 $ 48,722 $ 72,749 $ 46,866 $ 69,081
======== ======== ========= ======== ========
RESEARCH AND DEVELOPMENT:
McAfee........................ $ 6,857 $ 9,354 $ 22,191 $ 14,212 $ 33,804
Network General............... 19,968 27,417 30,891 21,962 28,094
-------- -------- --------- -------- --------
$ 26,825 $ 36,771 $ 53,082 $ 36,174 $ 61,898
======== ======== ========= ======== ========
SALES AND MARKETING:
McAfee........................ $ 17,798 $ 29,762 $ 51,326 $ 34,664 $ 72,878
Network General............... 47,049 62,533 74,638 51,899 63,908
-------- -------- --------- -------- --------
$ 64,847 $ 92,295 $ 125,964 $ 86,563 $136,786
======== ======== ========= ======== ========
GENERAL AND ADMINISTRATIVE:
McAfee........................ $ 5,733 $ 7,751 $ 14,949 $ 9,876 $ 18,327
Network General............... 9,171 12,383 15,366 11,036 12,788
-------- -------- --------- -------- --------
$ 14,904 $ 20,134 $ 30,315 $ 20,912 $ 31,115
======== ======== ========= ======== ========
AMORTIZATION OF INTANGIBLES:
McAfee........................ $ 792 $ 1,356 $ 3,169 $ 2,295 $ 588
Network General............... -- -- -- -- --
-------- -------- --------- -------- --------
$ 792 $ 1,356 $ 3,169 $ 2,295 $ 588
======== ======== ========= ======== ========
ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT AND OTHER NON-
RECURRING CHARGES:
McAfee........................ $ 13,788 $ 12,783 $ 11,165 $ 11,165 $ --
Network General............... -- 7,153 19,504 -- 43,192
-------- -------- --------- -------- --------
$ 13,788 $ 19,936 $ 30,669 $ 11,165 $ 43,192
======== ======== ========= ======== ========
OTHER INCOME:
McAfee........................ $ 873 $ 1,713 $ 3,461 $ 2,164 $ 5,936
Network General............... 5,328 7,086 6,087 5,057 5,158
-------- -------- --------- -------- --------
$ 6,201 $ 8,799 $ 9,548 $ 7,221 $ 11,094
======== ======== ========= ======== ========
INCOME TAXES:
McAfee........................ $ 1,553 $ 11,055 $ 31,713 $ 21,253 $ 41,585
Network General............... 11,685 15,099 19,571 12,664 13,197
-------- -------- --------- -------- --------
$ 13,238 $ 26,154 $ 51,284 $ 33,917 $ 54,782
======== ======== ========= ======== ========
</TABLE>
74
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------ ----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS):
McAfee............................. $ 2,605 $14,916 $ 39,017 $23,381 $ 67,850
Network General.................... 25,411 27,425 25,093 28,861 (15,310)
------- ------- -------- ------- --------
$28,016 $42,341 $64,110 $52,242 $ 52,540
======= ======= ======== ======= ========
</TABLE>
(4) PRO FORMA NET INCOME PER SHARE
The following table reconciles the number of shares used in the pro forma
per share computations to the numbers set forth in McAfee's and Network
General's historical statements of operations.
SHARES USED IN PRO FORMA PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
-------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(IN THOUSANDS EXCEPT CONVERSION
NUMBER)
<S> <C> <C> <C> <C> <C>
SHARES USED IN PER SHARE CALCULATIONS
Historical--McAfee...................... 46,175 49,365 53,207 52,810 54,012
------ ------ ------ ------ ------
Historical--Network General............. 44,626 45,822 45,703 45,772 44,396
Conversion Number....................... 0.4167 0.4167 0.4167 0.4167 0.4167
------ ------ ------ ------ ------
18,596 19,094 19,044 19,073 18,500
------ ------ ------ ------ ------
Pro forma combined ..................... 64,771 68,459 72,251 71,883 72,512
------ ------ ------ ------ ------
</TABLE>
75
<PAGE>
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY MCAFEE STOCKHOLDERS
PROPOSAL TWO--AMENDMENT TO SECOND RESTATED CERTIFICATE OF INCORPORATION--NAME
CHANGE
The McAfee Certificate provides that the name of McAfee is "McAfee
Associates, Inc." On October 13, 1997, the McAfee Board approved an amendment
of the McAfee Certificate to, at the Effective Time, change McAfee's name to
"Network Associates, Inc.," subject to stockholder approval of this proposal
and contingent upon consummation of the Merger. Under the proposed amendment,
upon consummation of the Merger, Article FIRST of the McAfee Certificate would
be amended and restated to read as follows:
"The name of the corporation is Network Associates, Inc. (hereinafter
sometimes referred to as the "Corporation")."
The McAfee stockholders are being asked to approve such amendment. The
affirmative vote of the majority of the votes entitled to be cast by holders
of outstanding shares of McAfee securities (including McAfee Common Stock and
other securities entitled to vote together with the McAfee Common Stock) will
be required to approve this amendment of the McAfee Certificate. The effect of
a broker non-vote or an abstention is the same as that of a vote against the
proposal.
THE MCAFEE BOARD UNANIMOUSLY RECOMMENDS THAT MCAFEE STOCKHOLDERS VOTE "FOR"
THE AMENDMENT OF THE MCAFEE CERTIFICATE TO CHANGE THE CORPORATE NAME OF MCAFEE
TO "NETWORK ASSOCIATES, INC.," CONTINGENT UPON CONSUMMATION OF THE MERGER.
APPROVAL OF THE MERGER IS NOT DEPENDENT ON MCAFEE STOCKHOLDER APPROVAL OF THE
NAME CHANGE.
PROPOSAL THREE--AMENDMENT TO SECOND RESTATED CERTIFICATE OF INCORPORATION--
INCREASE TO AUTHORIZED COMMON STOCK
On October 21, 1997, the McAfee Board approved an amendment to the McAfee
Certificate to increase the number of authorized shares of McAfee Common Stock
by 200 million shares to 300 million shares. Under such amendment, subject to
stockholder approval, the first paragraph of Article FOURTH of the McAfee
Certificate would be amended and restated to read as follows:
"The Corporation is authorized to issue a total of three hundred five
million (305,000,000) shares of stock in two classes designated respectively
"Preferred Stock' and "Common Stock.' The total number of shares of Preferred
Stock the Corporation shall have authority to issue is five million
(5,000,000), par value one cent ($0.01) per share, and the total number of
shares of Common Stock the Corporation shall have the authority to issue is
three hundred million (300,000,000), par value one cent ($0.01) per share."
The one outstanding share of Series A Preferred Stock, which will not be
affected by the foregoing amendment, has no preferential rights other than the
right to vote 325,062 votes together with the shares of McAfee Common Stock.
See "Comparison of Capital Stock--Description of McAfee Capital Stock."
As of September 30, 1997, there were 100,000,000 shares of McAfee Common
Stock authorized, of which approximately 51,259,448 shares were issued and
outstanding and approximately 11,000,000 of which were reserved for issuance
under McAfee's stock benefit plans and in connection with the conversion of
certain non-voting exchangeable shares of FSA Corporation, leaving only
approximately 37,750,000 authorized shares available for future issuance. The
issuance of McAfee Common Stock to the stockholders and option holders of
Network General pursuant to Proposal One herein would require up to
approximately 19,200,000 shares of McAfee Common Stock.
In addition, although McAfee has no specific plans to use the additional
authorized shares of McAfee Common Stock other than as described above, the
McAfee Board believes that it is prudent to increase the number of authorized
shares of McAfee Common Stock to the proposed level in order to provide a
reserve of
76
<PAGE>
shares available for issuances in connection with possible future actions.
Such actions may include, but are not limited to, stock splits or stock
dividends if the McAfee Board were to determine that such would be desirable
to facilitate a broader base of stockholders. The McAfee Board also believes
that the increased number of shares will provide the flexibility to effect
other possible actions such as financings, corporate mergers, acquisitions of
property, employee benefit plans and other general corporate purposes. Having
such additional authorized shares available for issuance in the future would
allow the McAfee Board to issue shares of McAfee Common Stock without the
delay and expense associated with seeking stockholder approval. Elimination of
such delays and expense occasioned by the necessity of obtaining stockholder
approval will better enable McAfee (or, after the Merger, the Combined
Company), among other things, to engage in financing transactions and
acquisitions as well as to take advantage of changing market and financial
conditions on a more competitive basis as determined by the Board.
The increase in authorized McAfee Common Stock will not have any immediate
effect on the rights of existing stockholders. To the extent that the
additional authorized shares are issued in the future, they will decrease the
existing stockholders' percentage equity ownership and, depending on the price
at which they are issued, could be dilutive to the existing stockholders.
The increase in the authorized number of shares of McAfee Common Stock could
have an anti-takeover effect. Shares of authorized and unissued McAfee Common
Stock could (within the limits imposed by applicable law) be issued in one or
more transactions that would make a takeover of McAfee more difficult, and
therefore less likely. Any such issuance of additional stock could have the
effect of diluting the earnings per share and book value per share of
outstanding shares of McAfee Common Stock, and such additional shares could be
used to dilute the stock ownership or voting rights of persons seeking to
obtain control of McAfee.
The McAfee stockholders are being asked to approve such amendment. The
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of McAfee securities (including McAfee Common Stock and
other securities entitled to vote together with the McAfee Common Stock) will
be required to approve this amendment to the McAfee Certificate. The effect of
a broker non-vote or an abstention is the same as that of a vote against the
proposal.
THE MCAFEE BOARD UNANIMOUSLY RECOMMENDS THAT MCAFEE STOCKHOLDERS VOTE "FOR"
THE AMENDMENT OF THE MCAFEE CERTIFICATE TO INCREASE THE AUTHORIZED MCAFEE
COMMON STOCK TO 300 MILLION SHARES. APPROVAL OF THIS AMENDMENT IS NOT
CONTINGENT UPON CONSUMMATION OF THE MERGER.
PROPOSAL FOUR--AMENDMENT OF MCAFEE'S 1997 STOCK INCENTIVE PLAN--INCREASE IN
NUMBER OF SHARES ELIGIBLE FOR GRANT AND ELIMINATION OF ABILITY TO MAKE CERTAIN
OPTION GRANTS
McAfee's 1997 Stock Incentive Plan (the "McAfee Incentive Plan") was
initially adopted by the McAfee Board on April 17, 1997 and approved by the
McAfee stockholders on June 5, 1997. The McAfee Incentive Plan authorizes the
grant of stock options to employees, nonemployee directors and consultants of
the Combined Company. A total of 2,450,000 shares of McAfee Common Stock are
currently reserved for issuance under the McAfee Incentive Plan. Options
granted under the McAfee Incentive Plan may include nonstatutory stock options
("NSOs") as well as incentive stock options ("ISOs").
As of September 30, 1997, options to purchase approximately 150,000 shares
of McAfee Common Stock granted under the McAfee Incentive Plan were
outstanding, approximately 2,300,000 shares remained available for future
option grants and no options had been exercised.
On October 21, 1997 the McAfee Board approved, contingent upon consummation
of the Merger, (i) a further increase of 3,400,000 shares for issuance under
the McAfee Incentive Plan, which, if approved by the McAfee stockholders,
would increase the total shares reserved for issuance under the McAfee
Incentive Plan since its inception and as of the date immediately following
approval of this proposal to 5,850,000 shares and (ii) elimination from the
McAfee Incentive Plan of the ability of the McAfee Board to grant options with
an exercise price less than the fair market value of McAfee Common Stock on
the date of grant. The proposed
77
<PAGE>
increase of 3,400,000 shares represents approximately 5% of McAfee Common
Stock to be outstanding or issuable following the Merger, based on the
capitalization of Network General and McAfee on October 28, 1997.
Section 162(m) of the Internal Revenue Code of 1986, as amended ("Section
162(m)"), limits McAfee's deduction in any one fiscal year for federal income
tax purposes to $1,000,000 per person with respect to McAfee's Chief Executive
Officer and its four other highest paid executive officers who are employed on
the last day of the fiscal year unless the compensation was exempt from the
deduction limit (the "Section 162(m) Limit"). Option grants under the McAfee
Incentive Plan will be exempt from the deduction limitation if the
stockholders approve the material provisions of the McAfee Incentive Plan. The
McAfee Incentive Plan allows for the grant of incentive stock options to all
employees of the Combined Company and the grant of nonstatutory stock options
and restricted stock to employees, directors and consultants of the Combined
Company. After approval of the amendments, stock options must be granted with
an exercise price not less than the fair market value of McAfee's Common Stock
on the date of grant. The McAfee Incentive Plan provides that no employee of
the Combined Company may be granted, in any fiscal year, options to purchase
more than 1,000,000 shares of Common Stock. However, notwithstanding this
limit, in connection with such individual's initial employment with the
Combined Company, the individual may be granted options to purchase up to an
additional 500,000 shares.
McAfee stockholders are requested to approve these amendments to the McAfee
Incentive Plan. The McAfee Board believes the increase in the number of shares
reserved under the McAfee Incentive Plan is in the best interests of the
Combined Company following the Merger, as the Merger will double the size of
the employee base. The increase will help ensure that the Combined Company
will have an adequate reserve of shares under the McAfee Incentive Plan. The
McAfee Incentive Plan provides long term incentives to help retain key
personnel in the Combined Company following the Merger. Additionally, the
McAfee Board believes that the elimination of the ability to grant options
with an exercise price less than the fair market value of the Common Stock on
the date of grant reflects McAfee's historic policy and practice.
Summary of the Provisions of the McAfee Incentive Plan
The key provisions of the McAfee Incentive Plan are summarized below. This
summary, however, is not intended to be a complete description of all terms of
the McAfee Incentive Plan. A copy of the McAfee Incentive Plan text will be
furnished to any stockholder upon request. Such a request should be directed
to the Corporate Secretary at McAfee's principal executive office.
Administration and Eligibility. The McAfee Incentive Plan is administered by
a committee of the McAfee Board (the "Committee") and may, in the case of
award recipients who are not officers or directors of McAfee, be administered
by another committee of the McAfee Board consisting of at least one director.
The Committee selects the individuals who receive awards, determines the size
of any award and establishes any vesting or other conditions. Employees,
nonemployee directors and consultants of McAfee are eligible to participate in
the McAfee Incentive Plan, although incentive stock options may be granted
only to employees. In addition, awards may be granted to prospective employees
or consultants in connection with a written offer of employment or engagement
from McAfee.
Form of Awards. The McAfee Incentive Plan provides for awards in the form of
options, stock appreciation rights ("SARs"), restricted stock or stock units,
or any combination thereof. No payment is required upon receipt of an award,
except that a recipient of newly issued restricted stock may be required to
pay the par value of such restricted stock to McAfee.
Options. Options may include NSOs as well as ISOs intended to qualify for
special tax treatment. The term of an option cannot exceed 10 years. After the
amendments are approved, the exercise price of an option must be equal to or
greater than the fair market value of the Common Stock on the date of grant.
78
<PAGE>
The exercise price of an option may be paid in any lawful form permitted by
the Committee, including (without limitation) cash, a full-recourse promissory
note, the surrender of shares of Common Stock or restricted shares already
owned by the optionee or through a cashless exercise program. The Committee
may likewise permit optionees to satisfy their withholding tax obligation upon
exercise of an NSO by surrendering a portion of their option shares to McAfee.
The Committee may at any time offer to buy out an outstanding option for
cash or give an optionee the right to surrender his or her option for cash.
Stock Appreciation Rights. An SAR permits the participant to elect to
receive any appreciation in the value of the underlying stock from McAfee,
either in shares of Common Stock or in cash or a combination of the two, with
the Committee having the discretion to determine the form in which such
payment is made. The amount payable on exercise of an SAR is measured by the
difference between the market value of the underlying stock at exercise and
the exercise price. All SARs intended to be exempt from the Section 162(m)
Limit will be granted with an exercise price equal to or greater than 100% of
the fair market value of the Common Stock on the date of grant. SARs may, but
need not, be granted in conjunction with options. Upon exercise of an SAR
granted in tandem with an option, the corresponding portion of the related
option must be surrendered and cannot thereafter be exercised. Conversely,
upon exercise of an option to which an SAR is attached, the SAR may no longer
be exercised to the extent that the corresponding option has been exercised.
Restricted Shares. Restricted shares are shares of McAfee Common Stock that
are subject to forfeiture in the event that the applicable vesting conditions
are not satisfied. Restricted shares have the same voting and dividend rights
as other shares of McAfee Common Stock. The recipient of restricted shares may
pay all projected withholding taxes relating to the award with shares of
McAfee Common Stock rather than cash.
Stock Units. A stock unit is an unfunded bookkeeping entry representing the
equivalent of one share of McAfee Common Stock. A holder of stock units has no
voting rights or other privileges as a stockholder but may be entitled to
receive dividend equivalents equal to the amount of dividends paid on the same
number of shares of McAfee Common Stock. Dividend equivalents may be converted
into additional stock units or settled in the form of cash, McAfee Common
Stock or a combination of both. Stock units, when vested, may be settled by
distributing shares of McAfee Common Stock or by a cash payment corresponding
to the fair market value of an equivalent number of shares of McAfee Common
Stock, or a combination of both. Vested stock units are settled at the time
determined by the Committee. If the time of settlement is deferred, interest
or additional dividend equivalents may be credited on the deferred payment.
The recipient of stock units may pay all withholding taxes relating to the
settlement of the award with McAfee Common Stock rather than cash.
Vesting Conditions. As noted above, the Committee determines the number of
options, SARs, restricted shares or stock units to be included in the award as
well as the vesting and other conditions. The vesting conditions may be based
on the length of the recipient's service, his or her individual performance,
McAfee's performance or other appropriate criteria. In the case of restricted
shares and stock units that are intended to be exempt from the Section 162(m)
Limit, vesting is based on McAfee's performance as measured by cash flow,
earnings per share, gross margin, net income, operating income, operating
margin, pre-tax profit, return on assets, return on capital, return on
stockholder equity, growth with respect to any of the foregoing measures,
expense reduction, growth in bookings, growth in revenue or stock price
increase, or any combination of the foregoing.
Vesting may be accelerated in the event of the recipient's death, disability
or retirement or in the event of a transfer of control with respect to McAfee.
For purposes of the McAfee Incentive Plan, a "transfer of control" of McAfee
will be deemed to occur upon any of the following events in which the
stockholders of McAfee immediately before such event do not retain in
substantially the same proportions immediately after such event, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of McAfee or its successor or the corporation to which McAfee's assets have
been transferred: (a) the direct or indirect sale or exchange by the
stockholders of McAfee of all or substantially all of the voting stock of
McAfee, (b) a merger in which McAfee is a party or (c) the sale, exchange or
transfer of all or substantially all of McAfee's assets. A transfer of control
will also occur in the event of a liquidation or dissolution of McAfee.
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<PAGE>
Deferral of Awards. The Committee (in its sole discretion) may permit or
require the recipient of an award to have cash that otherwise would be paid to
him or her as a result of the exercise of an SAR or the settlement of stock
units credited to a deferred compensation account established for him or her
as an entry on McAfee's books, to have shares of McAfee Common Stock that
otherwise would be delivered to him or her as a result of the exercise of an
option or SAR converted into an equal number of stock units, or to have shares
that otherwise would be delivered to him or her as a result of the exercise of
an option or SAR or the settlement of stock units converted into an amount
credited to a deferred compensation account established for him or her on
McAfee's books. The amount to be credited is measured by reference to the fair
market value of McAfee Common Stock as of the date when shares otherwise would
have been delivered to the award recipient. A deferred compensation account
established under this provision may be credited with interest or other forms
of investment return, as determined by the Committee.
Number of Reserved Shares and Maximum Awards. The total number of shares of
McAfee's Common Stock currently available (prior to the approval of this
proposed amendment of the McAfee Incentive Plan) for grants under the McAfee
Incentive Plan is 2,450,000 (subject to anti-dilution adjustments) before
approval of the proposed amendment. If any options, SARs, restricted shares or
stock units are forfeited, or if options or SARs terminate for any other
reason prior to exercise, then they again become available for awards. If
options currently outstanding under the Predecessor Plan are forfeited or
otherwise terminate unexercised, they become available for awards under the
McAfee 1995 Stock Incentive Plan. If stock units are settled, then only the
number of shares (if any) actually issued in settlement of such stock units
reduces the number of shares available under the McAfee Incentive Plan and the
balance again becomes available for awards under the Plan. If SARs are
exercised, then only the number of shares (if any) actually issued in
settlement of such SARs reduces the number available and the balance again
becomes available for awards. No individual may receive options or SARs
covering more than one million shares in any calendar year (subject to anti-
dilution adjustments), except that the limit is 1,500,000 shares for a new
employee in the year in which he or she is hired. In the case of an award that
is subject to performance vesting conditions, no individual may receive more
than 300,000 restricted shares or stock units in any calendar year (subject to
anti-dilution adjustments).
Federal Income Tax Consequences
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to the
alternative minimum tax. Upon a disposition of the shares more than two years
after grant of the option and one year after exercise of the option, any gain
or loss is treated as long-term capital gain or loss. If these holding periods
are not satisfied, the optionee recognizes ordinary income at the time of
disposition equal to the difference between the exercise price and the lower
of (i) the fair market value of the shares at the date of the option exercise
or (ii) the sale price of the shares. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as
ordinary income is treated as long-term or short-term capital gain or loss,
depending on the holding period. A different rule for measuring ordinary
income upon such a premature disposition may apply if the optionee is also an
officer, director, or 10% shareholder of Combined Company. The Combined
Company is entitled to a deduction in the same amount as the ordinary income
recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted an NSO. Upon exercise, the optionee
recognizes taxable income generally measured by the excess of the then fair
market value of the shares over the exercise price. Any taxable income
recognized in connection with an option exercise by an employee of Combined
Company is subject to tax withholding by Combined Company. Combined Company is
entitled to a deduction in the same amount as the ordinary income recognized
by the optionee. Upon a disposition of such shares by the optionee, any
difference between the sale price and the optionee's exercise price, to the
extent not recognized as taxable income as provided above, is treated as long-
term or short-term capital gain or loss, depending on the holding period.
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<PAGE>
Restricted Stock. Restricted Stock will generally be taxed in the same
manner as NSOs. At the time of purchase, restricted stock is subject to a
"substantial risk of forfeiture" within the meaning of Section 83 of the Code.
As a result, the purchaser will not recognize ordinary income at the time of
purchase. Instead, the purchaser will recognize ordinary income on the dates
when stock ceases to be subject to a substantial risk of forfeiture. The stock
will generally cease to be subject to a substantial risk of forfeiture when it
is no longer subject to Combined Company's right to repurchase the stock upon
the purchaser's termination of employment with Combined Company. At such
times, the purchaser will recognize ordinary income measured as the difference
between the purchase price and the fair market value of the stock on the date
the stock is no longer subject to a substantial risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding
period by timely filing an election pursuant to Section 83(b) of the Code. In
such event, the ordinary income recognized, if any, is measured as the
difference between the purchase price and the fair market value of the stock
on the date of purchase, and the capital gain holding period commences on such
date. The ordinary income recognized by a purchaser who is an employee will be
subject to tax withholding by Combined Company. Different rules may apply if
the purchaser is also an officer, director, or 10% shareholder of Combined
Company.
Stock Appreciation Rights. No income will be recognized by a recipient in
connection with the grant of a stock appreciation right. When the stock
appreciation right is exercised, the recipient generally will be required to
include as taxable ordinary income in the year of exercise an amount equal to
the sum of the amount of cash received and the fair market value of any Common
Stock received on the exercise. In the case of a recipient who is also an
employee, any income recognized on exercise of a stock appreciation right will
constitute wages for which withholding will be required. Combined Company will
be entitled to a tax deduction in the same amount as the ordinary income
recognized by recipient. If the optionee receives Common Stock upon the
exercise of a stock appreciation right, any gain or loss on the subsequent
sale of such stock will be treated in the same manner as discussed above under
"Nonstatutory Stock Options."
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF RESTRICTED STOCK AND STOCK APPRECIATION RIGHTS AND
THE COMBINED COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS AND
RESTRICTED STOCK AND STOCK APPRECIATION RIGHTS UNDER THE MCAFEE INCENTIVE
PLAN. IT DOES NOT PURPORT TO BE COMPLETE AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
EMPLOYEE OR CONSULTANT MAY RESIDE.
Vote Required and Board of Directors' Recommendation
The McAfee stockholders are being asked to approve these amendments,
contingent upon consummation of the Merger. The affirmative vote of a majority
of the votes cast will be required to approve the amendments to the McAfee
Incentive Plan. For purposes of this proposal, abstentions are counted as
votes cast and accordingly have the same effect as votes against the proposal,
whereas broker non-votes are not counted as votes cast and therefore once a
quorum is present, will have no effect on the proposal.
THE MCAFEE BOARD UNANIMOUSLY RECOMMENDS THAT MCAFEE STOCKHOLDERS VOTE "FOR"
THE AMENDMENTS TO THE MCAFEE INCENTIVE PLAN.
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MCAFEE ASSOCIATES, INC.
MCAFEE BUSINESS
BACKGROUND
McAfee develops, markets, distributes and supports network security and
management software products. McAfee provides industry-leading network
security products for anti-virus protection as well as client/server network
management tools. Many of McAfee's network management products are available
as individual software modules as well as integrated product suites. McAfee is
also a leader in electronic software distribution, which is the principal
channel through which it distributes its products to large corporations,
institutions and government entities. McAfee generally utilizes a two-year
subscription licensing model for this distribution method.
PRODUCTS
McAfee provides a broad line of network security and management software
products. The following summarizes McAfee's principal products and lists the
operating system(s) on which each product runs:
<TABLE>
<CAPTION>
PRODUCT CATEGORY PRINCIPAL PRODUCTS OPERATING SYSTEMS
---------------- ------------------ -----------------
<C> <C> <S>
Enterprise Management McAfee Enterprise NetWare, Windows NT
Network Security NetShield Security Suite Novell & NT Servers, Lotus
Notes Servers, MS Exchange
Servers, MS Proxy Servers,
Dedicated PC
VirusScan Security Suite DOS, OS/2, Windows 3.X, Windows
95, Windows NT
PowerLogin Multiple Unix variants
PowerBroker Multiple Unix variants
VirusScan DOS, OS/2, Windows 3.X, Mac,
Windows 95, Windows NT, Linux,
Solaris, FreeBSD
GroupScan Windows 95, Windows NT, Windows
3.X, OS/2
Webscan Windows 95
NetShield NetWare, Windows 95
WebShield Dedicated system supports web
servers of any OS
GroupShield Windows NT, Windows 95, OS/2,
Lotus Notes Servers
Bootshield Windows 3.X, DOS
ROMShield Windows 3.X, DOS, OS/2
Desktop Security Suite DOS, OS/2, Windows 3.X, Mac,
Windows 95, Windows NT
NetCrypto Windows NT, Windows 95, Windows
3.X and multiple Unix variants
WebWall Dedicated System supports web
servers of any OS
PCCrypto Windows 95, Windows NT, Windows
3.X
PCFirewall Windows 95, Windows NT, Windows
3.X
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT CATEGORY PRINCIPAL PRODUCTS OPERATING SYSTEMS
---------------- ------------------ -----------------
<C> <C> <S>
Network Management Zero Administration Client Suite NetWare & Windows NT
Servers, and Windows
3.X, Windows 95 and
Windows NT
Saber Lan Workstation NetWare, Windows NT
SaberTools Windows 3.X, Windows 95
and Windows NT with a
Windows NT or NetWare
server
Help Desk McAfee Help Desk EZ SQL Windows 95, Windows NT &
MS SQL Server
McAfee Help Desk Windows 95, Windows NT
McAfee Service Desk NetWare, Windows NT
Storage Management WebStor Windows 95
NT-ssential Windows NT and NetWare
QuickBackup Windows 95
Professional Services JumpStarts NetWare & Windows NT
Servers, and Windows
3.X, Windows 95 and
Windows NT
Enterprise Support NetWare & Windows NT
Servers, and Windows
3.X, Windows 95 and
Windows NT
Training NetWare & Windows NT
Servers, and Windows
3.X, Windows 95 and
Windows NT
</TABLE>
ENTERPRISE MANAGEMENT
McAfee Enterprise ("ME!"). McAfee Enterprise combines McAfee's anti-virus
and security software with network management, storage management and help
desk components, all supporting Windows NT ("NT") and integrated under an OLE
enabled, Active-X, explorer console. The ME! modules share a common scripting
language, common reporting, and common alerting via SNMP and integrate into
Unix consoles including HP Openview, BMC Patrol, and Tivoli TME. McAfee
Enterprise on NT is positioned to help bridge the gap between NetWare and UNIX
by managing the legacy NetWare file and print servers, and the UNIX database
and application servers. ME! integrates into enterprise management systems
including HP Openview for Windows, Novell NMS, BMC Patrol, Tivoli TME and
other SNMP consoles. In addition to ME! availability from the host console
menu and/or toolbar, task management can even further extend the level of
integration within the enterprise management system. The current U.S. list
price for a 1,000 node ME! site license is $120,000.
NETWORK SECURITY PRODUCTS
VirusScan Security Suite. VirusScan, McAfee's flagship product, is a virus
protection program for Windows 3.X, Windows 95, Windows NT, Macintosh, DOS and
OS/2 personal computers ("PCs"). VirusScan scans for known and unknown viruses
prior to installation. When the scan is completed, VirusScan becomes memory
resident and protects systems from further infection. VirusScan is designed to
detect and remove even the most sophisticated categories of PC viruses.
Corporate users now purchase VirusScan almost exclusively as part of the
VirusScan Security Suite ("VSS"). VSS also includes the following: PCCrypto
provides easy to use, yet military strength desktop file encryption to ensure
data confidentiality. WebScanX protects against virus infected internet
downloads and e-mails, as well as emerging hostile java and Active-X applets.
PCMedic automatically diagnoses and corrects PC system problems, as well as
prevents errors and crashes which damage data. QuickBackup provides fast and
easy retrieval of automatically backed up data files. PCFirewall prevents
hackers from entering network "back doors" via PC modem lines. The McAfee
Enterprise Management Console and SecureCast are also included to provide
automated remote installation, updating, and management of the VSS components.
The current list price for a 1,000 user VSS site license is $25,000. The
single user retail version of VirusScan sells at an average retail price of
approximately $49.
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NetShield Security Suite. NetShield provides virus protection for network
file servers running NT or Netware operating systems. NetShield blocks viruses
from being transferred over networks by scanning files which are accessed from
the server. It can also perform regularly scheduled scanning of the server.
NSS also includes the following: (i) NetCrypto instantly provides networks
with strong encryption, preventing hackers and cyberthieves from sniffing data
from the network, and creating a Virtual Private Network. NetCrypto
transparently encrypts all TCP/IP data, including email, file transfers, web
traffic, remote logins, database access etc. NetCrypto is a pure software,
unobtrusive, powerful privacy system, and (ii) GroupShield for Notes is a
native Lotus Notes application that is designed to protect the Notes server
from viruses as well as other known security threats. GroupShield for
Microsoft Exchange is a native NT service which prevents virus infected
attachments from being stored or transported by MS Exchange. WebShield is a
family of applications which centrally prevent viruses from entering an
organization via the Internet Gateway. WebShield can run on a dedicated Intel
PC adjacent to the Firewall, or on SMTP machine or Proxy Servers. WebWall is a
full featured firewall for small-to-medium capacity Internet Gateways,
designed to prevent unauthorized access to an organizations' network, and
includes ease of use features and integrated virus filtering. The McAfee
Enterprise Management Console and SecureCast are also included to provide
automated remote installation, updating, and management of the NSS components.
The current list price for a 1,000 node NetShield Security Suite site license
is $16,000.
Total Virus Defense Suite. Total Virus Defense Suite includes both the
VirusScan Security Suite and NetShield Security Suite components.
PowerBroker. PowerBroker allows users to perform appropriate system
administration tasks without bothering an administrator, and without ever
knowing the root password, thereby enhancing system security. PowerBroker will
also log to an indelible file all system administration tasks. Users with
access to PowerBroker have the power they need without being able to alter the
log files, or disclose the root password. The current list price for a 1,000
node PowerBroker site license is $155,000.
PowerLogin. PowerLogin gives system administrators control over the UNIX
login and password environment, including control over who can log in where,
when, and how, and with what kinds of passwords. Using a flexible login policy
language, system administrators can specify such things as what time of day a
user may log in, who may log in over modem lines or over the network, whether
additional passwords or authentication schemes are used, and so on. The
current list price for a 1,000 node PowerLogin site license is $155,000.
VirusScan. VirusScan, McAfee's flagship product, is a virus protection
program for Windows 3.X, Windows 95, Windows NT, Macintosh, DOS, OS/2 PCs,
Linux, Solaris and FreeBSD operating systems. VirusScan scans for known and
unknown viruses prior to installation. When the scan is completed, VirusScan
becomes memory resident and protects systems from further infection. VirusScan
is able to detect and remove polymorphic, word macro and boza viruses. The
current U.S. list price for a 1,000 user VirusScan site license is $20,500.
The single user retail packaged version of VirusScan sells at an average
retail price of approximately $49.
GroupScan. GroupScan is a native Lotus Notes application which is designed
to protect the Notes client from popular viruses as well as other known
security threats. GroupScan scans encrypted attachments on the users desk to
insure they are virus-free before they are transmitted over the network. The
current U.S. list price for a 1,000 node GroupScan site license is $10,000.
Webscan. Webscan is designed to provide virus protection for most popular
Internet services, Web browsers and E-mail. Webscan includes Spry's Mosaic
Browser and Pegasus E-mail but is compatible with Netscape Navigator and Lotus
cc:mail and is available for Windows 95 computers. The current U.S. list price
for a 1,000 node Webscan site license is $20,500.
NetShield. NetShield provides virus protection for network file servers.
NetShield blocks viruses from being transferred over networks by scanning
files which are accessed from the server. It can also perform regularly
scheduled scanning of the server. The current U.S. list price for a 1,000 node
NetShield site license is $11,800.
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WebShield. WebShield is a complete virus protection product for Internet
gateways. With WebShield, McAfee has deployed its virus detection software to
scan Internet e-mail, file transfers and Web traffic. The current U.S. list
price for a 1,000 node WebShield site license is $9,000.
GroupShield. GroupShield is a native Lotus Notes application that is
designed to protect the Notes server from popular viruses as well as other
known security threats. GroupShield employs McAfee's scanning facilities,
which can identify, stop, and even clean these viruses on user demand, in
real-time or during background processes. The current U.S. list price for a
1,000 node GroupShield site license is $25,000.
Bootshield. Bootshield is a companion product to VirusScan which provides
pre-boot protection from boot-sector viruses. Bootshield is available for DOS
and Window 3.X computers. The current U.S. list price for a 1,000 node
Bootshield site license is $11,000.
ROMShield. ROMShield is a boot sector anti-virus detection and shielding
product. Boot sector viruses infect the BIOS prior to boot-up and cannot be
shielded by traditional anti-virus programs which run on the operating system.
ROMShield checks the BIOS before the computer boots up and prevents boot-up if
the computer is infected.
Desktop Security Suite ("DSS"). DSS offers secure, economical desktop
protection combining strong encryption for files and data being stored on a
hard drive or sent over a network, with McAfee's virus detection and removal
engine. Desktop Security Suite stresses ease-of-use and fast, transparent
operation while providing a safe, secure infrastructure for storing or sending
information. The current U.S. list price for a 1,000 node Desktop Security
Suite site license is $72,000.
PCCrypto. PCCrypto lets a user encrypt files before storing them or sending
them to someone else. Files can be encrypted with a password only known to the
user, and then stored on the user's hard drive or sent over a network. The
current U.S. list price for a 1,000 node PCCrypto site license is $31,000.
NetCrypto. NetCrypto provides networks with encryption, preventing hackers
and cyberthieves from sniffing data from the user's network. NetCrypto
transparently encrypts all TCP/IP data, including e-mail, file transfers, web
traffic, remote logins, database access etc. The current U.S. list price for a
1,000 node NetCrypto site license is $34,000.
PC Firewall. PCFirewall provides firewall protection for Windows desktops
with a central administration console to manage multiple installations. Acting
as a cookie cutter, individuals are protected from Web server tracking of
their activities on the Internet. It also provides access control for modem
protocols to block popular war dialer attacks, often known as the "back doors"
around a main perimeter firewall (i.e. the front door). Completely transparent
to users and applications, PCFirewall is easy to install and manage. The
current U.S. list price for a single copy of PCFirewall is $65.
NETWORK MANAGEMENT TOOLS
Zero Administrator Client Suite ("ZAC"). ZAC provides functionality that
allows network administrators to manage and maintain LAN resources. This
product includes menuing which provides a common definition for application
presentation across different operating environments, and facilitates the
management of multiple platforms from a central point. ZAC includes software
metering, hardware and software inventory, basic NetWare bindery viewing
management, printer management, software distribution, job scheduling, disk
monitoring, file auditing, event notification and alarm management. ZAC also
includes enterprise management reporting and a high level scripting language
for automating network administration tasks under DOS, Windows, Windows 95 and
NT. The current list price for a 1,000 user SLW site license is $36,000.
Saber LAN Workstation ("SLW"). SLW is an integrated suite of network
management software solutions that natively support both NT and Novell NetWare
environments. SLW automates time-consuming tasks and
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reduces costs by managing network assets more efficiently. SLW includes
integrated enterprise metering, hardware and software inventory, software
distribution and desktop control under a central OLE-enabled explorer console.
SLW also includes customizable reporting, SNMP alerting and supports an open
data format, which facilitates integration of SLW with other systems
management products. The current U.S. list price for a 1,000 user license is
$47,300.
SaberTools. SaberTools is an integrated suite of tools designed specifically
for Microsoft SMS users. SaberTools delivers the functionality not available
in SMS such as network menuing, application metering, 32-bit remote control,
scripting, and customizable reporting. Using SaberTools advanced menuing and
desktop control features, users can control NT, Windows 95, Windows 3.X and
DOS clients running on NetWare or NT networks. Together these tools are
designed to help network administrators centrally manage and control their
Windows environment by restricting access to various features and resources.
Administrators no longer have to visit each workstation to make changes,
saving time and money. SaberTools decreases software costs by addressing
issues such as support, administration and upgrades. In addition, SaberTools
can help eliminate unnecessary software purchases by providing accurate
tracking of software usage on LANs or WANs. The current U.S. list price for a
1,000 SaberTools site license is $26,600.
HELP DESK
McAfee Help Desk Suite. McAfee Help Desk Suite is a suite of help desk tools
offering problem management, resolution and prevention. McAfee Help Desk Suite
provides access to trouble ticketing and knowledge bases through telephony, e-
mail and Web browsers. Native support for SQL database systems such as Oracle,
Sybase, and Microsoft provide fast access to help desk data. The current list
price for a ten concurrent user license for McAfee Help Desk Suite is $23,950.
McAfee Help Desk EZ SQL. McAfee HelpDesk EZ SQL provides easy call tracking,
problem resolution and prevention, and a pre-populated Microsoft Sequel Server
database with a unique Database Administrator Wizard which can install in less
than an hour. A Microsoft SQL Server license and McAfee Exclusive Virtual Data
Base Administrator Wizard are included.
McAfee Service Desk ("MSD") Suite. MSD Suite combines all the elements of
the ZAC and McAfee Help Desk Suites above. Additionally, PCMedic automated
crash prevention is included for attached desktops. Remote Desktop provides
help desk administrators the ability to remotely take control of,
troubleshoot, diagnose and repair network PC's. The McAfee Enterprise
Management Console and SecureCast are also included to provide automated
remote installation, updating, and management of the MSD components.
McAfee Enterprise Suite. The McAfee Enterprise Suite is a super suite
containing the components of McAfee's Total Virus Defense Suite, and McAfee
Service Desk Suite. Additionally, the McAfee Enterprise Console provides an
OLE wrapper for managing third party LAN and WAN tools, and can enable SNMP
level integration with Unix based Enterprise Management tools.
McAfee Help Desk ("MHD"). MHD was a native SQL client/server help desk
solution and is a solution for proactive call management and problem
resolution. Important features include asset management, service level
agreements, change management, dynamic call linking, flexible reporting,
crisis management, and enterprise-enabled network integration. MHD includes
the industry standard case-based reasoning engine and 15 hardware and software
knowledge-paks. The current U.S. list price is $1,295 per help desk operator.
McAfee Service Desk ("MSD"). MSD is a comprehensive service desk solution.
MSD starts by incorporating all of the traditional help desk functionality
found in McAfee HelpDesk. MSD elevates the customer's help desk into a true
"service desk" by adding integrated software distribution, network management,
desktop management, cross-platform asset management, systems diagnostics, push
technology alerting, end user Web access and remote control. MSD includes
network listeners that allow the user to link their help desk to network
management platforms such as HP's OpenView and Tivoli's TME10. MSD is
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available in both workgroup and enterprise editions. A typical MSD-Workgroup
installation with 5 concurrent help desk operators supporting 500 nodes has a
U.S. list price of $30,975. A typical MSD-Enterprise installation with 15
concurrent help desk operators supporting 2,000 nodes has a U.S. list price of
$135,425.
STORAGE MANAGEMENT
WebStor. WebStor is a Windows 95 program that provides automated back up and
file restore capabilities, along with disaster recovery tools using any FTP
site for back-up. The current U.S. list price for a 1,000 user WebStor site
license is $20,500.
NT-ssential. NT-ssential combines anti-virus and backup, into one solution.
The product combines McAfee's NetShield with Backup Exec Enterprise Edition
from Seagate to provide both security and protection. Netware-ssential is
available for the Netware environment. The current U.S. list price for a 1,000
user NT-ssential site license is $13,000.
QuickBackUp. Designed for Windows 95 and NT, QuickBackUp combines an easy to
use Explorer user interface with a broad range of backup media support.
QuickBackUp supports SCSI tape drives, writeable CD-ROMs, Iomega Zip and Jazz
drives and the Internet as back up devices. QuickBackUp sells at an average
retail price of approximately $49.
PROFESSIONAL SERVICES
JumpStarts. McAfee technicians go on site to fully implement McAfee
solutions for the customer environment. The current price varies considerably
depending on products to be implemented and size of installation.
Enterprise Support. Seven days per week, 24 hours per day support with a
dedicated senior technician providing comprehensive emergency expertise.
Training. McAfee trains and certifies technicians in the advanced use of
McAfee solutions in classes held both at the McAfee campus, or by arrangement
at customer sites.
SUBSCRIPTION LICENSING MODEL
McAfee typically licenses its products to corporate, government and
institutional customers for a period of two years during which time they
receive all upgrades, updates and technical support at no additional charge.
Upon expiration of the two-year period, customers are contacted by McAfee for
renewal. McAfee believes that the two-year subscription licensing model offers
several benefits to its customers. For one initial fee, the customer receives
the software and all upgrades, updates and support for two years. In addition,
the customer only has to make a decision on its investment in the software
every two years. Since McAfee is able to distribute its products and upgrades
at a lower cost than do companies using traditional distribution methods,
McAfee also has the ability to offer upgrades and address user feature
requirements on a more regular basis. In addition, by offering a two-year
license, as opposed to a traditional perpetual term license, McAfee is able to
meet a lower initial cost threshold for customers with annual budgeting
constraints.
McAfee's two-year subscription licensing model creates the opportunity for
recurring revenue for McAfee through the renewal of existing licenses. Since
McAfee typically licenses its products on a per user basis, at the time of
renewal McAfee has the potential to increase the number of computers licensed
at existing sites and to expand its licenses to new sites in an organization.
The renewal process also provides an opportunity to cross-sell new products to
existing customers. There can be no assurance that McAfee will be able to
sustain current renewal rates in the future.
With the expansion of McAfee's distribution channels to include resellers
and distributors, McAfee also provides single user licenses for its products
under traditional, unlimited term licenses with product updates, upgrades and
support available to customers under separate maintenance contracts.
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ELECTRONIC SOFTWARE DISTRIBUTION
McAfee was the first company to successfully utilize electronic software
distribution to reach large corporate, government and institutional customers.
Through the World Wide Web and various online services such as CompuServe,
America Online and The Microsoft Network, McAfee is able to electronically
communicate and interact with its customers from pre-sales evaluation through
product delivery and post-sales support. McAfee believes that the electronic
channel is becoming an important source of information and support for IT
professionals. By making fully-functioning, unencrypted versions of its
products widely available for evaluation, McAfee is seeking to encourage
product sampling among these sophisticated users. Unlike traditional software
evaluation programs where potential customers often are required to identify
themselves (typically resulting in their inclusion in a sales database), go
through a qualification process and then wait for the evaluation copy to be
shipped, potential customers desiring to evaluate McAfee's products for a 30-
day period can anonymously download any of McAfee's products from its World
Wide Web site. In 1996, McAfee opened the McAfee Store on the World Wide Web
to distribute its own and third party products.
McAfee uses electronic software distribution as its primary means of
delivering licensed software, as well as upgrades and updates to its
customers. Electronic software distribution offers a number of advantages to
McAfee over traditional software distribution methods including the ability to
distribute its products and upgrades more rapidly and at a lower cost than
traditional distribution methods. Since all of the software and documentation
can be distributed electronically, the cost of internal distribution by the
customer is also lower than with traditional software and printed
documentation.
McAfee also seeks to increase awareness of its products, to provide customer
and technical support and to encourage dialogue regarding its products by
maintaining a World Wide Web site and forums on CompuServe, America Online and
The Microsoft Network. McAfee also provides support through the World Wide
Web. By providing support electronically, McAfee believes that it is often
able to more rapidly identify and solve customer problems.
SALES AND MARKETING
To augment and capitalize upon the awareness of McAfee's products resulting
from its electronic distribution model, McAfee's sales and marketing efforts
are directed primarily at large corporate, government and institutional
customers as well as to resellers and distributors worldwide through the
following channels:
NORTH AMERICAN DIRECT SALES
McAfee has significantly expanded its internal sales organization through
investments in its corporate sales force. McAfee's direct sales organization
consists of regional sales directors, national account managers, territory
sales representatives and a corporate telesales organization. McAfee's
national account managers are each responsible for ten to fifteen designated
large enterprise accounts. Territory sales representatives manage accounts
within a specified geographic region with 1,000 or more personal computers. To
augment its sales organization, McAfee's executives are involved with sales to
many major accounts. McAfee's outbound corporate telesales force consists of
experienced sales personnel who actively market McAfee's products to customers
with less than 1,000 personal computers. McAfee's corporate telesales
representatives also respond to prospective customers who contact McAfee as a
result of a particular marketing program or after electronically evaluating a
McAfee product. Another significant focus of McAfee's corporate telesales
force is to contact existing customers to cross-sell additional products.
McAfee devotes a portion of its corporate telesales force to the renewal of
its existing licenses. Prior to expiration of a license, a corporate telesales
representative contacts the customer and encourages renewal of the expiring
license while determining if increasing the number of computers licensed is
appropriate and, additionally, marketing new products to this existing
customer.
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INTERNATIONAL SALES
McAfee has sales and support operations in Europe and Asia. McAfee currently
has sales representatives in Paris, France, Bracknell, England, Munich,
Germany, Amsterdam, The Netherlands, Tokyo, Japan and Sao Paulo, Brazil.
Historically, McAfee had relied primarily upon independent agents and
distributors to market its products internationally. McAfee is continuing to
use independent agents primarily in smaller markets where a direct sales
presence is not currently warranted. While McAfee's agents and distributors
include some large systems integrators, most are small companies that market
McAfee's software along with products of other companies that they represent.
McAfee typically enters into agreements with its agents which, among other
things, obligate its agents to provide technical support and the most current
versions of McAfee's products to its customers and to provide McAfee with
information about its licensees. Such agreements permit either McAfee or the
agent to terminate the agreement upon 60 days' prior written notice.
International agents invoice their own orders and collect payment, remitting
the license fee, net of commissions, to McAfee in United States dollars.
CHANNEL SALES
To complement its direct sales, McAfee markets its products through
corporate resellers and distributors, and indirectly through retailers. While
historical sales through these distribution channels have generated a
relatively small portion of McAfee's net revenue, over the past two years
McAfee's presence in these channels has expanded significantly. McAfee
currently utilizes corporate resellers, including STREAM, Software Spectrum,
Softmart and ASAP, which focus primarily on selling site licenses for McAfee's
software to corporate customers.
Independent software distributors who market McAfee's products include
Ingram Micro, Merisel America and Tech Data. These distributors stock McAfee's
products in inventory for redistribution primarily to large retailers, VARs
and mail order companies. Through its authorized distributors, McAfee sells
its retail packaged products to several of the large computer and software
retailers in the United States, including Egghead Discount Software, CompUSA,
Computer City, Software Etc. and Best Buy. Several members of McAfee's channel
sales force work closely with McAfee's major reseller and distributor accounts
on the management of orders and inventory level, as well as on promotion and
selling activities.
McAfee's distributors generally are permitted stock balancing and stock
rotation rights but are typically required to place offsetting orders of equal
value. McAfee expects to increasingly rely on resellers and distributors,
including retail outlets, to market and support its products. McAfee's
agreements with its distributors are not exclusive and may be terminated by
either party without cause. There can be no assurance that any distributors
will continue to represent McAfee's products.
ORIGINAL EQUIPMENT MANUFACTURERS ("OEMS")
OEMs license McAfee's products and bundle them with personal computer
hardware or software. OEMs typically sublicense a single version of McAfee's
products to end users who must contact McAfee in order to license updates.
McAfee typically receives a per copy royalty from its OEMs.
OTHER MARKETING ACTIVITIES
McAfee promotes its products through advertising activities in trade
publications and direct mail campaigns. McAfee also attends trade shows,
sponsors conferences and publishes a quarterly newsletter which is mailed to
existing and prospective customers. In addition, McAfee solicits prospective
customers by providing marketing material through the World Wide Web and
allows customers to purchase McAfee's products directly through McAfee's World
Wide Web Page. McAfee also maintains forums on CompuServe, America Online and
The Microsoft Network which provide electronic forums for subscribers of these
services to discuss issues related to computer viruses and make inquiries
regarding McAfee's products.
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CUSTOMERS
McAfee primarily markets its products directly to large corporate,
government and institutional customers as well as to resellers and
distributors. Ingram Micro accounted for 14% of net revenue in the nine months
ended September 30, 1997 and 17%, 12% and 12% of net revenue in the years
ended December 31, 1996, 1995 and 1994, respectively. No other customer
accounted for more than 10% of McAfee's net revenue.
CUSTOMER AND TECHNICAL SUPPORT
McAfee believes that a high level of customer and technical support is
important for success in corporate, government and institutional markets.
Customer support representatives answer product inquiry, customer support and
routine technical support calls. If a customer service representative receives
a call requiring more complex technical or professional support, the call is
transferred to McAfee's technical or professional support personnel. McAfee
intends to continue to invest in customer and technical support.
Technical support representatives handle technical support calls and respond
to inquiries addressed to McAfee's World Wide Web Page and various online
services such as CompuServe, America Online and The Microsoft Network. If a
call or inquiry involves more complex strategic or implementation issues, the
customer is referred to McAfee's product development staff.
McAfee also provides specialized assistance to customers in detecting and
eradicating viruses. McAfee has the ability to receive uploaded programs
containing suspect virus infections through the Web. Alternatively, customers
can send a copy of the virus to McAfee via disk. McAfee believes that its
ongoing exposure to a large number of new viruses contributes to the virus
detection rate of McAfee's anti-virus products.
McAfee also offers on-site training and consulting services to its customers
on an hourly or packaged rate basis. On-site and regional training for the
full range of McAfee's products is conducted by McAfee's technical personnel.
In addition, McAfee offers a wide variety of consulting services to assist
customers in the installation, customization and deployment of its products.
PRODUCT DEVELOPMENT AND ACQUISITION
It is expected that McAfee will grow both internally and through strategic
acquisitions. McAfee frequently evaluates potential acquisitions of
complementary businesses, products and technologies. McAfee has consummated a
series of acquisitions since 1995, including acquisition of a controlling
interest in FSA Corporation of Canada in August 1996, Vycor Corporation in
February 1996 and Saber Software Corporation in August 1995. In addition,
since 1995 McAfee has acquired a number of its international distributors,
including distributors in France, England and The Netherlands. McAfee intends
to continue to evaluate strategic acquisitions of complementary products that
will enable McAfee to offer more comprehensive network security and management
solutions. Over the past year, McAfee has also made a substantial investment
in product development by significantly increasing the size of its product
development staff.
McAfee believes that its ability to maintain its competitiveness will depend
in large part upon its ability to enhance existing products, develop and
acquire new products and develop and integrate acquired products. The market
for personal computer software is characterized by low barriers to entry and
rapid technological change, and is highly competitive with respect to timely
product introductions. There can be no assurance that new products will be
developed or acquired on a timely basis or at all.
In addition to developing new products, McAfee's internal development staff
is also focused on developing updates to existing products and modifying and
enhancing any acquired products. Future updates may, among other things,
include additional functionality, respond to user problems or address issues
of compatibility with changing operating systems and environments. McAfee
believes that the ability to provide these updates to users frequently and at
a low cost is key to its success. Failure to release such updates on a timely
basis could have a
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material adverse impact on McAfee. There can be no assurance that McAfee will
be successful in these efforts. In addition, there can be no assurance that
future changes in Windows 95, Windows NT, NetWare or other popular operating
systems would not result in incompatibility with McAfee's products. McAfee's
failure to introduce new products on a timely basis that are compatible with
operating systems and environments preferred by desktop computer users would
have a material adverse effect on McAfee's business, financial condition and
results of operations.
McAfee expended $12.3 million in the nine month period ended September 1997
and $22.2 million, $9.4 million and $6.9 million in the years ended December
31, 1996, 1995 and 1994, respectively, on research and development.
COMPETITION
The market for McAfee's products is intensely competitive and McAfee expects
competition to increase in the future. McAfee believes that the principal
competitive factors affecting the market for its products include performance,
functionality, quality, customer support, breadth of product line, frequency
of upgrades and updates, brand name recognition, company reputation and price.
Certain of the criteria upon which the performance and quality of McAfee's
anti-virus software products compete include the number and types of viruses
detected, the speed at which the products run and ease of use. Certain of
McAfee's competitors have been in the network management market longer than
McAfee, and other competitors, such as Symantec Corporation, Intel and
Seagate, are larger and have greater name recognition than McAfee. In
addition, certain larger competitors such as Intel, Microsoft and Novell have
established relationships with hardware vendors related to their other product
lines. These relationships may provide them with a competitive advantage in
penetrating the OEM market with their network management products. As is the
case in many segments of the software industry, McAfee has been encountering,
and expects to further encounter, increasing competition. This could reduce
average selling prices and, therefore, profit margins. Competitive pressures
could result not only in sustained price reductions but also in a decline in
sales volume, which events would materially adversely affect McAfee's
business, financial condition and results of operations. In addition
competitive pressures will make it difficult for McAfee to maintain or exceed
its historic growth rate.
The network security and management market is highly fragmented with
products offered by many vendors. McAfee's principal competitor is the Peter
Norton Group of Symantec in the network security market and Intel's LanDesk in
the network management market. Other competitors include Computer
Associates/Cheyenne Software, Intel, Seagate, the Dr. Solomon Group and Trend
Micro, Inc., as well as numerous smaller companies and shareware authors that
may in the future develop into stronger competitors or be consolidated into
larger competitors. McAfee also faces competition in the security market from
Cisco Systems, Inc., Security Dynamics, Checkpoint and other vendors in the
encryption/firewall market. In addition, McAfee faces competition from large
and established software companies such as Microsoft, Novell and HP which
offer network management products as enhancements to their network operating
systems. McAfee believes that as the network management market develops,
McAfee may face increased competition from these large companies, as well as
other companies seeking to enter the market. The trend toward enterprise-wide
network management and security solutions may result in a consolidation of the
network management and security market around a smaller number of vendors who
are able to provide the necessary software and support capabilities. McAfee's
principal competitors in the help desk market are Remedy Corporation and
Software Artistry. McAfee also faces significant competition in the storage
management market. There can be no assurance that McAfee will continue to
compete effectively against existing and potential competitors, many of whom
have substantially greater financial, technical, marketing and support
resources and name recognition than McAfee. In addition, there can be no
assurance that software vendors who currently use traditional distribution
methods will not in the future decide to compete more directly with McAfee by
utilizing electronic software distribution.
The competitive environment for anti-virus software internationally is
similar to that in North America, although local competitors in specific
foreign markets present stronger competition and shareware authors control
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a more significant portion of the European market. The international market
for network management software has developed more slowly than the North
American market, although larger competitors such as Intel and Symantec have
begun to penetrate European markets. Asian markets have significantly lagged
behind North America and Europe in their adoption of networking technology.
There can be no assurance that McAfee will be able to compete successfully in
international markets.
PROPRIETARY TECHNOLOGY; LITIGATION
McAfee's success is heavily dependent upon its proprietary software
technology. McAfee relies on a combination of contractual rights, trademarks,
trade secrets and copyrights to establish and protect proprietary rights in
its software. McAfee has a limited number of patents and has registered only
selected copyrights and trademarks. SABER is a trademark of a subsidiary of
the SABRE Group, Inc. and is licensed to McAfee pursuant to a non-exclusive
worldwide, royalty free license. McAfee is not otherwise affiliated with the
SABRE Group, Inc. or SABRE Travel Information Network. In the event that the
license of the trademark were to expire or be terminated, McAfee could be
required to cease using the trademark on its products, which could involve
significant expense and the possibility of customer confusion. Any loss of
McAfee's ability to use this trademark could have a material adverse effect on
McAfee's business, financial condition and results of operations.
McAfee does not typically obtain signed license agreements from its
corporate, government and institutional customers who license products
directly from McAfee. McAfee includes an electronic version of a "shrink-wrap"
license in all of its electronically distributed software and a printed
license in the box for its products distributed through traditional
distribution channels in order to protect its copyrights and trade secrets in
those products. Since none of these licenses are signed by the licensee, many
authorities believe that they may not be enforceable under many state laws and
the laws of many foreign jurisdictions.
In addition, the laws of some foreign countries either do not protect
McAfee's proprietary rights or offer only limited protection for those rights.
Furthermore, McAfee has obtained only one foreign registration of its "McAfee"
trademark, and publication in two jurisdictions, due to the significant costs
involved. As a result, McAfee may not be able to prevent a third party from
using its trademarks in many foreign jurisdictions. Subject to consummation of
the proposed Merger with Network General and McAfee stockholder approval, the
combined company will be called "Network Associates, Inc." Based on a
preliminary review, McAfee believes that there are a number of other companies
with similar names. There can be no assurance that the combined company will
be able to enforce rights in that name, that it will be free to use the name
in all jurisdictions or that there will be no challenges to the use of that
name.
There can be no assurance that the steps taken by McAfee to protect its
proprietary software technology will be adequate to deter misappropriation of
this technology. McAfee is aware that a substantial number of users of its
anti-virus products have not paid any registration or license fees to McAfee.
Changing legal interpretations of liability for unauthorized use of McAfee's
software, or lessened sensitivity by corporate, government or institutional
users to avoiding copyright infringement, would have a material adverse effect
on McAfee's business, financial condition and results of operations.
There has also been substantial industry litigation regarding intellectual
property rights of technology companies. McAfee is currently engaged in
litigation related to its intellectual property and, from time to time, McAfee
receives claims that it has infringed the intellectual property rights of
others. There can be no assurance that infringement claims will not be
asserted against McAfee in the future or that the outcome of any such claims
would not have a material adverse effect on McAfee's business, financial
condition and results of operation. In April 1997, Symantec filed a complaint
alleging copyright infringement and unfair competition by McAfee. Symantec
alleged that McAfee's computer software program called "PC Medic 1997" copied
portions of Symantec's computer software program entitled "CrashGuard", and by
amendment of the complaint, Symantec expanded the allegations to McAfee's
software program "VirusScan". On October 6, 1997, the United States District
Court, Northern District of California, San Jose Division (the "Court") issued
an order granting Symantec's motion to amend its complaint and enjoining
McAfee from shipping any product containing either
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an approximately 30-line routine found in one Symantec product or an
approximately 100-line routine found in a Symantec Dynamic Link Library. Trial
is set for September, 1998. In addition, on May 13, 1997, Trend Micro, Inc.
("Trend") filed suit in United States District Court for the Northern District
of California against both McAfee and Symantec. Trend alleges that McAfee's
"WebShield" and "GroupShield" products infringe a Trend patent which issued on
April 22, 1997. Trend's complaint seeks injunctive relief and unspecified
money damages. On June 6, 1997, McAfee filed its answer denying any
infringement. McAfee also filed counterclaims accusing Trend of unfair
competition, false advertising, trade libel, and interference with prospective
economic advantage. The case is in the initial stages of discovery. A patent
claim interpretation hearing before the Court is set for April 28, 1998. The
Court has not yet set a date for trial. McAfee is also subject to two other
claims for patent infringement. There can be no assurance that there will be
no developments arising out of the foregoing matters which could have a
material adverse effect on McAfee's business, financial condition and results
of operation. In addition, as McAfee may acquire a portion of software
included in future products from third parties, its exposure to infringement
actions may increase because McAfee must rely upon such third parties as to
the origin and ownership of any software being acquired. Similarly, McAfee's
exposure to infringement claims exists and will increase to the extent that it
currently employs or hires software engineers previously employed by its
competitors, notwithstanding measures taken by McAfee to prevent usage by
these software engineers of intellectual property used or developed by them
while employed by a competitor. In the future, litigation may be necessary to
enforce and protect trade secrets and other intellectual property rights owned
by McAfee. McAfee may also be subject to litigation to defend it against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. Any such litigation could be
costly and cause diversion of management's attention, either of which could
have a material adverse effect on McAfee's business, financial condition and
results of operations. Adverse determinations in such litigation could result
in the loss of McAfee's proprietary rights, subject McAfee to significant
liabilities, require McAfee to seek licenses from third parties or prevent
McAfee from manufacturing or selling its products, any one of which could have
a material adverse effect on McAfee's business, financial condition and
results of operations. Furthermore, there can be no assurance that any
necessary licenses will be available on reasonable terms, or at all.
EMPLOYEES
From December 31, 1995 to December 31, 1996, the number of people employed
by McAfee increased from 250 to 481 and from December 31, 1996 to September
30, 1997 increased from 481 to 721. Competition for qualified management and
technical personnel is intense in the software industry. McAfee's continued
success will depend in part upon its ability to attract and retain qualified
personnel. None of McAfee's employees is represented by a labor union and
McAfee believes that its employee relations are good.
FACILITIES
McAfee's principal administrative, research and development and marketing
and sales facilities total approximately 105,000 square feet and are located
in a single building in Santa Clara. McAfee occupies its current facilities
under a lease that expires on April 30, 2001.
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MCAFEE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which reflect McAfee's
current judgment on those issues. Because such statements apply to future
events, they are subject to risks and uncertainties and, therefore, actual
results may differ materially. Important factors which could cause actual
results to differ materially are described in the following paragraphs and are
particularly noted under "Risk Factors."
OVERVIEW
McAfee licenses network security and management products, including help
desk and storage management software. Historically, net revenue from
subscription licenses for anti-virus software was generally recognized ratably
over the two year license period because there was no basis for unbundling the
separate maintenance portion of the license, while net revenue from
subscription licenses for network management software was generally recognized
80% at the time of the licensing transaction with the remaining 20%,
representing the maintenance portion of the license fee, recognized ratably
over the two year license period. Effective July 1, 1995, McAfee established a
basis for unbundling the maintenance portion of the anti-virus subscription
license and began to generally recognize 80% of license fees for
electronically distributed anti-virus software at the time of the licensing
transaction. The deferred revenue from anti-virus subscription licenses
entered into prior to July 1, 1995 was recognized over the original 24-month
subscription period. This resulted in incremental license revenue being
recognized over the eight quarters beginning July 1, 1995 with a corresponding
decrease in the amount of deferred revenue on McAfee's balance sheet. Revenue
from perpetual licenses, for which maintenance is sold separately, is
recognized in full upon the initial sale.
As a result of the change in revenue recognition for anti-virus subscription
licenses, period-to-period results are not directly comparable and should not
be relied upon as indicative of future performance. In addition, since a
decreasing percentage of McAfee's net revenue is attributable to the
recognition of previously deferred revenue, McAfee's net revenue in future
periods may be subject to greater fluctuations on a quarter-to-quarter basis.
In addition to direct subscription and perpetual licenses, McAfee sells its
network security and management products with shrink-wrap licenses through
traditional distribution channels. Historically, net revenue generated from
sales of these shrink-wrapped products through traditional channels was
recognized 100% at the time of sell-through of the products. However, based
upon the history that McAfee has now developed with indirect distribution,
effective July 1, 1995, McAfee began to recognize revenue from sales to
distributors upon shipment, subject to a reserve for returns. The impact of
this change on the consolidated financial statements was not material.
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RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1996 Compared With the Three and
Nine MonthsEnded September 30, 1997
The following table sets forth, for the periods indicated, the percentage of
net revenue represented by certain items in McAfee's statements of operations
for the three and nine month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER
SEPTEMBER 30, 30,
-------------- ------------
1997 1996 1997 1996
------ ------ ----- -----
<S> <C> <C> <C> <C>
Net revenue....................................... 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of net revenue............................. 7.4 5.7 7.6 5.9
Research and development........................ 13.9 11.9 13.6 11.7
Marketing and sales............................. 29.0 28.5 29.4 28.4
General and administrative...................... 7.3 8.9 7.4 8.1
Amortization of intangibles..................... 0.3 1.4 0.3 1.9
Acquisition and other unusual costs............. -- -- -- 9.2
------ ------ ----- -----
Total operating costs and expenses............ 57.9 56.4 58.3 65.2
------ ------ ----- -----
Income from operations...................... 42.1 43.6 41.7 34.8
Other income...................................... 2.6 1.9 2.4 1.8
Income before income taxes.................. 44.7 45.5 44.1 36.6
Provision for income taxes........................ 17.0 18.2 16.8 17.4
Net income.................................. 27.7% 27.3% 27.4% 19.2%
====== ====== ===== =====
</TABLE>
Net Revenue. Net revenue increased 86.8% to $88.3 million in the three
months ended September 30, 1997 from $47.3 million in the three months ended
September 30, 1996. For the nine month period ended September 30, 1997, net
revenue increased 103% to $248.0 million from $121.9 million in the same
period in 1996. This increase is largely attributable to increased revenue
from licenses for anti-virus/security products and renewal of expiring anti-
virus licenses and, to a lesser extent, licenses for network management and
help desk (McAfee Service Desk) products. McAfee has experienced increased
price competition for its products and should competition increase in the
future, McAfee may experience reduced average selling prices for its products.
Due to competitive and other factors (such as a maturing client anti-virus
market and an increasingly higher base from which to grow), McAfee's historic
growth rate will be difficult to maintain or exceed. In response to increasing
price competition and in an effort to maintain average selling prices, McAfee
introduced its anti-virus/security product suites. There can be no assurance
that this strategy will be successful in the long term. In January 1997,
McAfee implemented a licensing program with its distribution and corporate
channel resellers (such as value added resellers ("VARs") and systems
integrators) in an effort to increase sales through indirect channels. There
can be no assurance that this licensing program will be successful. If the
Merger with Network General is consummated, the Combined Company is expected
to have an overall lower growth rate than McAfee's historic growth rate.
Network General's business has historically grown at a lower rate than
McAfee's historical growth rate.
Net revenue from international sales accounted for approximately 32% and 16%
of net revenue for the three months ended September 30, 1997 and 1996,
respectively. For the nine month periods ended September 30, 1997 and 1996,
the percentage of net revenue from international licenses was approximately
28% and 18%, respectively. These increases were due to increased sales through
traditional distribution channels as well as the expansion of McAfee's
international operations in Japan, The Netherlands and Brazil as a result of
the acquisition of Jade KK and a former distributor Schuijers Holding B.V.
("SHBV") in February 1997 and Compusul Consultoria e Comercio de Informatica
Ltda. in April 1997. McAfee denominates certain international
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license fees in local currencies, primarily European currencies. As a result,
McAfee is subject to the risks associated with fluctuations in currency
exchange rates. In July 1997, McAfee began to manage potential foreign
currency fluctuations using non-leveraged forward currency contracts. Risks
inherent in McAfee's international sales generally include the impact of
fluctuating exchange rates, longer payment cycles, greater difficulty in
accounts receivable collection, unexpected changes in regulatory requirements,
seasonality due to the slowdown in European business activity during the third
quarter, and tariffs and other trade barriers. There can be no assurance that
these factors will not have a material adverse effect on McAfee's future
business, financial condition and results of operations. Further, in countries
with a high incidence of software piracy, McAfee may experience a higher rate
of piracy of its products. In addition, a portion of McAfee's international
sales are generated through independent agents. Since these agents are not
employees of McAfee and are not required to offer McAfee's products
exclusively, there can be no assurance that they will continue to market
McAfee's products. Also, despite McAfee's dependence in certain international
markets upon the marketing, sales and customer support of its agents, McAfee
currently has limited control over its agents. For example, McAfee is
dependent upon its international agents to provide it with information
regarding licensees and there can be no assurance that McAfee will be able to
obtain sufficient information to contact such licensees, if necessary,
regarding renewal. In addition, McAfee may be unaware of the nature and scope
of the representations made to customers by these agents.
Cost of Net Revenue. McAfee has historically distributed the majority of its
products electronically, and as a result, its cost of net revenue has been low
relative to other software vendors. McAfee's cost of net revenue includes the
cost of media, manuals and packaging for products distributed through
traditional distribution channels and third-party royalties. The cost of net
revenue varies among McAfee's products, because, in part, products may include
third party technology on which royalties are payable. The cost of net revenue
also differs between international and domestic sales as international sales
are primarily through traditional distribution channels and costs of media,
manuals and packaging for products sold internationally tend to be higher as
Network General on as a percent of revenue has a higher cost of revenue.
For the three months ended September 30, 1997 and 1996, McAfee's cost of net
revenue was $6.5 million and $2.7 million, respectively. The cost of net
revenue for the nine month period ended September 30, 1997 increased to $18.9
million from $7.2 million in the same period in 1996. As a percentage of net
revenue, cost of net revenue increased to 7.4% from 5.7% in the three month
period ended September 30, 1997 and 1996, respectively and increased to 7.6%
from 5.9% in the nine month period ended September 30, 1997 and 1996,
respectively. The cost of revenue fluctuates slightly on a quarter to quarter
basis depending on the percentage of revenue that is distributed
electronically versus traditional channels. The increases in cost as a percent
of revenue is attributable to an increasing percentage of McAfee's products
being distributed through traditional distribution channels, partially as a
result of the increase in the overall percentage of international sales. To
the extent this trend continues, McAfee's cost of net revenue would increase
and, accordingly, gross margins would decrease. Should the Merger be
completed, the cost of net revenue of the Combined Company would represent a
larger percentage of net revenue as Network General has (on a percentage of
revenue basis) a higher cost of net revenue.
Research and Development. Research and development expenses consist
primarily of salary and benefits for McAfee's software development and
technical support staff and to a lesser extent, costs associated with
independent contractors. Research and development expenses increased 117% to
$12.3 million in the three months ended September 30, 1997 from $5.7 million
in same period in 1996. For the nine month period ended September 30, 1997,
research and development expenditures increased 138% to $33.8 million from
$14.2 million in the same period in 1996. These increases were primarily due
to growth in McAfee's product development staff, increased use of third-party
contractors and increased development activity mainly in security products,
server based products, McAfee Service Desk, as well as the transition to
McAfee's VirusScan 3.0 product. As a percentage of net revenue, research and
development expenses increased to 13.9% for the three months ended September
30, 1997 from 11.9% for the same period in 1996 and increased to 13.6% in the
nine months ended September 30, 1997 from 11.7% for the same period in 1996.
These increases primarily reflect McAfee's continued investment in new and
existing products. McAfee anticipates that research and development expenses
will continue to increase in absolute dollars but may fluctuate as a
percentage of net revenue.
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McAfee's future success will depend in large part upon its ability to
continue to offer a broad range of anti-virus/security and network
management/help desk products, to continue to enhance its existing products,
to develop and introduce in a timely manner new products that take advantage
of technological advances and to respond to new customer requirements. McAfee
also believes that providing a high level of technical support is key to
success in the anti-virus/security and network management/help desk markets.
Furthermore, while McAfee updates its products on a regular basis, competitors
may announce new products with capabilities or technologies that could have
the potential to replace or shorten the life cycles of McAfee's existing or
new products. As a result, McAfee believes that significant investments in
product development and technical support are essential. The timing and amount
of research and development expenses may vary significantly based upon the
number of new products and significant upgrades under development during a
given period.
Marketing and Sales. Marketing and sales expenses consist principally of
salary, commissions and benefits for marketing, sales and customer support
personnel and costs associated with advertising and promotions. Marketing and
sales expenses increased 90% to $25.6 million in the three months ended
September 30, 1997 from $13.5 million in the three months ended September 30,
1996. For the nine month period ended September 30, 1997, marketing and sales
expenditures increased 110% to $72.9 million from $34.7 million in the same
period in 1996. These increases principally reflect growth in McAfee's sales
and marketing staff, including the expansion of McAfee's international
operations, expanded coverage in indirect channels in an effort to grow
indirect sales, and increased advertising and promotional expenses.
As a percentage of net revenue, marketing and sales expenses increased to
29.0% in the three months ended September 30, 1997, from 28.5% in the same
period in 1996, and increased to 29.4% in the nine months ended September 30,
1997 from 28.4% in the same period in 1996. These increases principally
reflect greater proportionate growth in McAfee's sales and marketing staff and
advertising and promotional expenses as compared to revenue growth. McAfee is
seeking to expand its product line in the future, and such expansion could
contribute to an increase in marketing and sales expenses as a percentage of
revenue.
General and Administrative. General and administrative expenses consist
principally of salary and benefit costs for administrative personnel, general
operating costs and legal, accounting and other professional fees. General and
administrative costs increased 54% to $6.5 million in the three months ended
September 30, 1997 from $4.2 million in the three months ended September 30,
1996. For the nine months ended September 30, 1997, general and administrative
expenditures increased 86% to $18.3 million from $9.9 million. These increases
are largely a result of a concerted effort to strengthen the infrastructure of
McAfee both domestically and internationally to accommodate its growth in
revenue. As a percentage of net revenue, general and administrative expenses
decreased to 7.3% in the three months ended September 30, 1997 from 8.9% in
the same period in 1996, and decreased to 7.4% in the nine months ended
September 30, 1997 from 8.1% in the same period in 1996. McAfee intends to
continue to make investments in its general and administrative infrastructure,
and, as a result, expects general and administrative expenses to increase in
absolute dollars.
Amortization of Intangibles. McAfee expensed $271,000 and $646,000 of
amortization related to intangibles in the three months ended September 30,
1997 and 1996, respectively, and $588,000 and $2.3 million in the nine months
ended September 30, 1997 and 1996, respectively. Intangibles consist of
purchased goodwill and certain technology acquired through acquisitions.
Other Income. Other income consists primarily of interest income earned on
McAfee's cash and short and long term investments and foreign exchange gains.
Other income totaled $2.3 million and $922,000 in the three months ended
September 30, 1997 and 1996, respectively, and $5.9 million and $2.2 million
in the nine months ended September 30, 1997 and 1996, respectively. These
increases in McAfee's other income relate to higher interest income resulting
from higher average balances invested.
Provision for Income Taxes. The provision for income taxes is recorded at
McAfee's effective tax rate which, for the three month periods ended September
30, 1997 and 1996, was 38.0% and 40.1%, respectively. For the nine month
periods ended September 30, 1997 and 1996, the effective tax rate was 38.0%
and
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47.6%, respectively. McAfee's effective tax rate reflects the non-
deductibility for tax purposes of $11.2 million in acquisition costs expensed
during the nine months ended September 30, 1996, of which $8.3 million was
expensed in the three months ended March 31, 1996. McAfee has not reduced the
deferred tax asset by a valuation allowance as it is likely that all of the
deferred tax asset will be realized due to sufficient taxable income available
through carryback to prior years and to carryforward to future years.
Years Ended December 31, 1996, 1995 and 1994
The following table sets forth for the periods indicated the percentage of
net revenue represented by certain items in McAfee's statements of income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenue...................................... 100% 100% 100%
Operating costs and expenses:
Cost of net revenue............................ 6 5 9
Research and development....................... 12 10 13
Marketing and sales............................ 29 33 34
General and administrative..................... 8 9 11
Amortization of intangibles.................... 2 2 1
Acquisition and other unusual costs............ 6 14 26
-------- -------- --------
Total operating costs and expenses........... 63 73 94
-------- -------- --------
Income from operations..................... 37 27 6
Other income, net................................ 2 2 2
-------- -------- --------
Income before provision for income taxes... 39 29 8
Provision for income taxes....................... 18 12 3
-------- -------- --------
Net income................................. 21% 17% 5%
======== ======== ========
</TABLE>
Net Revenue. Net revenue increased 101% to $181.1 million in 1996 from $90.1
million in 1995, and 70% from $52.9 million in 1994. The increases in net
revenue were primarily due to increases in the licensing of anti-virus
software products to new customers and renewing expiring anti-virus licenses.
The increase is also attributable to a lesser extent to the licensing of
network management, security and help desk software to new and existing
customers. Finally, the change in revenue recognition described below
contributed to the increases in both 1996 and 1995. See Note 2 of Notes to
McAfee's audited consolidated financial statements included elsewhere in this
Joint Proxy Statement/Prospectus for a discussion of the effects of the change
in revenue recognition.
International licenses accounted for approximately 19%, 29% and 23% of net
revenue for 1996, 1995 and 1994, respectively. The decrease in international
net revenue as a percentage of net revenue from 1995 to 1996 was due primarily
to domestic revenue growing at a faster rate. International net revenue grew
in absolute dollars in 1996. The increase in international net revenue as a
percentage of net revenue from 1994 to 1995 was due primarily to McAfee
establishing operations in Europe and the acquisition by McAfee of its former
European distributors.
Cost of Net Revenue. In 1996, cost of net revenue increased 130% to $11.1
million from $4.8 million in 1995. This increase is largely due to a
corresponding increase in net revenue. In 1995, the cost of net revenue
increased 2% to $4.8 million from $4.7 million in 1994. As a percentage of net
revenue, cost of net revenue increased in 1996 to 6% compared to 5% in 1995.
The increase is largely attributable to an increase in revenue from packaged
product sold through the retail channel. In 1995, the cost of net revenue
decreased to 5% from 9% in 1994. This decrease resulted from decreased royalty
obligations and decreases in the amortization of software development costs.
To the extent that the percentage of McAfee's net revenue which is generated
through traditional distribution channels increases, McAfee's cost of net
revenue will increase and, accordingly,
98
<PAGE>
gross margins will decrease. In addition, to the extent that McAfee increases
its reliance on retail distribution, it may encounter problems related to
product returns and limited shelf space availability.
Research and Development. Research and development expenses increased 137%
to $22.2 million in 1996 from $9.4 million in 1995. From 1994 to 1995,
research and development expenses increased 36% from $6.9 million. These
increases were primarily a result of the expansion of McAfee's product
development and technical support staff and, to a lesser extent, the increased
use of independent contractors. In addition, in 1996, McAfee increased
development spending associated with help desk products through its
acquisition of Vycor Corporation and increased its investment in security and
encryption products through its acquisition of FSA Corporation. As a
percentage of net revenue, research and development expenses increased to 12%
in 1996 from 10% in 1995. Research and development spending decreased as a
percentage of net revenue in 1995 to 10% from 13% in 1994. This decrease
primarily reflected the increase in net revenue that occurred in 1995.
Marketing and Sales. Marketing and sales expenses consist primarily of
salary, commissions and benefits for marketing, sales and customer support
personnel and costs associated with advertising and promotions. Marketing and
sales expenses increased 72% to $51.3 million in 1996 from $29.8 million in
1995. From 1994 to 1995, marketing and sales expenses increased 67% from $17.8
million in 1994. These increases were primarily the result of an increase in
marketing and sales personnel and, to a lesser extent, increased advertising
and promotional expenses. As a percentage of net revenue, marketing and sales
expense decreased to 29% in 1996 from 33% in 1995 and 34% in 1994. This
decrease primarily reflects growth in McAfee's net revenue.
General and Administrative. General and administrative costs increased 93%
to $14.9 million in 1996 from $7.8 million in 1995. From 1994 to 1995, general
and administrative expenses increased 35% from $5.7 million. The increase in
1996 is largely a result of a concerted effort to strengthen the
infrastructure of McAfee both domestically and internationally to accommodate
the growth in revenue. Additionally, McAfee reserved $1.5 million in
connection with a dispute with respect to the timing of prior tax payments and
also incurred additional expense related to the acquisition of FSA
Corporation. As a percentage of net revenue, general and administrative
expenses decreased to 8% in 1996 from 9% in 1995 and 11% in 1994. These
decreases primarily reflect growth in McAfee's net revenue.
Acquisition and Other Unusual Costs
On August 30, 1996, McAfee acquired a controlling interest in FSA
Corporation of Calgary, Canada, a developer of security software for 534,000
shares and options to purchase shares of McAfee common stock. The combination
was accounted for as a pooling of interests. FSA's 1996 results have been
included in McAfee's consolidated results, however, 1995 results have not been
restated as the effect was not material.
During the second quarter of 1996, McAfee acquired in-process technology
from Interactive Distributed Systems Software GmbH of Linz, Austria. The
purchase price and related transaction costs of approximately $2.1 million
were charged to operations during this period.
In the first quarter of 1996, McAfee acquired Vycor Corporation for $9.0
million in cash. Of the total purchase price, $7.8 million of in-process
technology was charged to operations and approximately $0.4 million of
transaction and restructuring costs were expensed in the quarter ended March
31, 1996.
McAfee acquired Saber Software Corporation ("Saber") in the third quarter of
1995. The acquisition was accounted for as a pooling of interests. In
connection with this acquisition, McAfee expensed approximately $2.5 million
in transaction costs and approximately $4.3 million in other costs primarily
relating to severance costs, allowances for sales returns and inventory
valuation, the write-off of certain capitalized software development costs,
the cancellation of certain contractual obligations, and the elimination of
certain duplicative facilities. McAfee also incurred other unusual costs
during the three months ended September 30, 1995 consisting of an accrual for
approximately $1.7 million in settlement and other legal costs associated with
a lawsuit filed against Saber which was settled in October 1995.
99
<PAGE>
During the third quarter of 1995, McAfee acquired Assurdata, its former
French distributor and received a fully paid up worldwide perpetual license to
certain in-process technology from an affiliate of Assurdata for approximately
$0.8 million in cash, an earnout providing for additional payments of up to
approximately $0.8 million and a warrant to purchase 33,750 shares of McAfee's
common stock at the fair market value on the date of issuance. Approximately
$0.6 million of the purchase price was allocated to in-process technology
which was expensed during the third quarter.
During the third quarter of 1995, McAfee also acquired IPE, its former UK
distributor for $2.5 million in cash. At the effective date, IPE's only assets
consisted of a distribution agreement and a distribution agreement with
McAfee. Approximately $2.0 million was charged to operations to write off the
value of the agreement and related legal costs in the third and fourth quarter
of 1995.
In the fourth quarter of 1995, McAfee repurchased distribution rights and
customer lists from its three major German distributors for approximately $1.9
million including legal fees. The entire amount was expensed in the quarter.
In the first quarter of 1994, McAfee acquired substantially all of the
assets and assumed certain liabilities of Brightwork Development, Inc.
("Brightwork") for $10.3 million in cash and related acquisition costs of $0.5
million. The acquisition was accounted for as a purchase. Of the $7.8 million
of the purchase price allocated to technology, $7.1 million was attributed to
in-process technology and expensed in 1994. Certain other acquisition costs
related to the Brightwork acquisition aggregating $0.1 million were also
expensed in the three months ended March 31, 1994. In the second quarter of
1994, McAfee acquired certain net assets of Automated Design Systems, Inc.
("ADS") for $5.0 million in cash and related acquisition costs of $0.7
million. In addition, McAfee paid an additional $0.3 million in 1995 in
connection with the acquisition. Of the $6.8 million allocated to acquired
technology, $5.5 million was allocated to in-process technology and expensed
together with other costs of approximately $0.2 million in the three months
ended June 30, 1994. In addition, $3.9 million of related intangible assets as
a result of the Brightwork and ADS acquisitions are being amortized over three
to five years.
Interest and Miscellaneous Income. Interest and miscellaneous income
increased to $3.5 million in 1996 from $1.7 million in 1995 and $0.9 million
in 1994. Interest and miscellaneous income increased from 1995 to 1996 and
from 1994 to 1995 due to the investment of cash generated from operating
activities.
Provision for Income Taxes. McAfee's effective tax rate for 1996, 1995 and
1994 was 44.9%, 42.6% and 37.4% respectively. The provision for income taxes
for each year presented includes the effect of a net deferred tax asset
arising from the different treatment of revenue recognition for tax and
financial reporting purposes and for differing treatment of purchased
intangible assets and in-process technology. The increase in the effective
rate from 1994 to 1995 relates principally to permanent differences arising
from the non-deductibility of certain acquisition costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, McAfee had $134.6 million in cash and cash
equivalents and $103.2 million in marketable securities, for a combined total
of $237.7 million.
Net cash provided by operating activities was $57.1 million and $31.5
million for the nine months ended September 30, 1997 and 1996, respectively.
Net cash provided by operating activities for the nine months ended September
30, 1997 consisted primarily of net income, an increase in accounts payable
and accrued liabilities together with an increase in deferred revenue offset
by an increase in accounts receivable and prepaids and other assets. Net cash
provided by operating activities for the nine months ended September 30, 1996
consisted primarily of net income plus and non-cash expenses plus an increase
in accounts payable and accrued liabilities offset by decreases in accounts
receivable, prepaid income taxes, deferred taxes and deferred revenue.
Net cash provided by operating activities was $46.4 million, $10.6 million
and $15.0 million in 1996, 1995 and 1994, respectively. Net cash provided by
operating activities in 1996 consisted primarily of net income plus
100
<PAGE>
an increase in accounts payable and accrued liabilities which were offset
primarily by an increase in accounts receivable and deferred revenue. In 1995,
net cash provided by operating activities consisted primarily of net income
plus an increase in accounts payable and accrued liabilities which was offset
primarily by an increase in accounts receivable and refundable income taxes. In
1994, net cash provided by operating activities consisted primarily of net
income, the non-cash write-off of in-process technology and deferred revenue
offset primarily by increases in accounts receivable.
At September 30, 1997, McAfee's accounts receivable balance as a percentage
of sales for the quarter then ended increased over the prior period. This
increase was due to, among other factors, McAfee's increased emphasis on
international sales (typically having longer payment terms); a higher
percentage of indirect sales through indirect channels; and a shift in McAfee's
product mix to more server/enterprise based products. McAfee expects this trend
to continue into the first quarter of fiscal 1998. With an increase in business
through indirect channels, McAfee's receivable collection experience has become
more dependent on the longer payment cycle for VARs and system integrators. To
address this increase in accounts receivable and to improve cash flow, McAfee
may, among other things, take actions to encourage earlier payment of
receivables or sell receivables. To the extent that McAfee's receivable balance
increases, McAfee will be subject to greater general credit risks with respect
thereto.
Net cash used in investing activities was $55.5 million in the nine months
ended September 30, 1997, primarily reflecting purchases of marketable
securities and fixed assets as well as goodwill from the acquisition of
Compusul. Net cash used by investing activities in the nine months ended
September 30, 1996 was $26.0 million, primarily reflecting purchases of
marketable securities.
Net cash used in investing activities was $47.0 million, $12.4 million and
$18.8 million in 1996, 1995 and 1994, respectively, primarily reflecting
investments in marketable securities and for 1996 additions to fixed assets and
for 1994 additions to acquired assets.
Net cash provided by financing activities was $56.6 million and $32.4 million
in the nine months ended September 30, 1997 and 1996, respectively, consisting
primarily of the proceeds and tax benefits associated with the exercise of
nonqualified stock options. Net cash provided by financing activities was $46.4
million, $11.7 million and $12.9 million in 1996, 1995 and 1994, respectively,
consisting primarily of the proceeds and tax benefits associated with the
exercise of non-qualified stock options, and for 1994, the proceeds of the
initial public stock offering of Saber.
Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each
of Network General and McAfee has agreed that if the Merger is not consummated
as a result of certain specified events, it will pay to the other party a
termination fee of $30.0 million. Payment of the fees described in this
paragraph shall not be in lieu of damages incurred in the event of material and
willful breach of the Reorganization Agreement.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break-up" fees described above)
could have a material adverse effect on McAfee's results of operations.
McAfee believes that its available cash and anticipated cash flow from
operations will be sufficient to fund McAfee's working capital and capital
expenditure requirements for at least the next twelve months.
101
<PAGE>
MCAFEE QUARTERLY OPERATING RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1997 1997 1997 1996 1996 1996 1996 1995 1995 1995 1995
--------- -------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
INCOME AND OTHER
DATA:
Net revenue........ $88,332 $86,271 $73,357 $59,224 $47,290 $40,767 $33,845 $29,362 $25,613 $18,569 $16,521
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating costs and
expenses:
Cost of net
revenue......... 6,528 6,418 5,918 3,837 2,703 2,450 2,067 1,262 877 1,421 1,241
Research and
development..... 12,268 11,878 9,658 7,979 5,650 4,752 3,810 2,394 2,572 2,368 2,020
Marketing and
sales........... 25,599 25,292 21,987 16,662 13,485 11,596 9,583 9,135 7,580 6,934 6,113
General and
administrative.. 6,472 6,300 5,555 5,073 4,202 2,961 2,713 2,223 2,256 1,735 1,537
Amortization of
intangibles..... 271 213 104 874 646 1,099 550 414 414 264 264
Acquisition and
other unusual
costs........... -- -- -- -- -- 2,868 8,297 1,999 10,784 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
costs and
expenses....... 51,138 50,101 43,222 34,425 26,686 25,726 27,020 17,427 24,483 12,722 11,175
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations..... 37,194 36,170 30,135 24,799 20,604 15,041 6,825 11,935 1,130 5,847 5,346
Interest income.... 2,290 2,014 1,632 1,297 922 645 597 454 518 422 319
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
income taxes...... 39,484 38,184 31,767 26,096 21,526 15,686 7,422 12,389 1,648 6,269 5,665
Provision for
income taxes...... 15,004 14,510 12,071 10,460 8,628 6,286 6,339 5,079 1,218 2,506 2,252
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income...... $24,480 $23,674 $19,696 $15,636 $12,898 $ 9,400 $ 1,083 $ 7,310 $ 430 $ 3,763 $ 3,413
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per
share............. 0.45 0.44 0.37 0.29 0.24 0.18 0.02 0.14 0.01 0.08 0.07
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF NET
REVENUE:
Net revenue........ 100.0% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating costs and
expenses:
Cost of net
revenue......... 7.4 7.4 8.1 6 6 6 6 4 3 8 8
Research and
development..... 13.9 13.8 13.2 13 12 12 11 8 10 13 12
Marketing and
sales........... 29.0 29.3 30.0 28 28 28 28 31 30 37 37
General and
administrative.. 7.3 7.3 7.5 9 9 7 8 8 9 9 9
Amortization of
intangibles..... 0.3 0.2 0.1 2 1 3 2 1 2 1 2
Acquisition and
other unusual
costs........... -- -- -- -- -- 7 25 7 42 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
costs and
expenses....... 57.9 58.1 58.9 58 56 63 80 59 96 68 68
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations..... 42.1 41.9 41.1 42 44 37 20 41 4 32 32
Interest income.... 2.6 2.4 2.2 2 2 2 2 2 2 2 2
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
income taxes...... 44.7 44.3 43.3 44 46 38 22 43 6 34 34
Provision for
income taxes...... 17.0 16.8 16.4 18 18 15 19 17 5 13 14
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income...... 27.7% 27.5% 26.9% 26% 28% 23% 3% 26% 1% 21% 20%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
102
<PAGE>
Variability of Quarterly Operating Results. In view of McAfee's acquisitions
in various quarters of 1997, 1996 and 1995 and the changes in revenue
recognition in 1995, the growth in revenues and operating income experienced
by McAfee in the first nine months of 1997 and in 1996 and 1995 are not
necessarily indicative of future results. In addition, McAfee believes that
period-to-period comparisons of its financial results should not be relied
upon as an indication of future performance.
McAfee's licensing activity and results of operations can fluctuate
significantly on a quarterly basis. Causes of such fluctuations may include
the volume and timing of new orders and renewals, the introduction of new
products, distributor inventory levels and return rates, McAfee inventory
levels, upgrades or updates by McAfee or its competitors, changes in product
prices, changes in product mix, seasonality, trends in the computer industry,
general economic conditions, extraordinary events such as acquisitions or
litigation and the occurrence of unexpected events. Because of the nature of
its distribution methods, McAfee generally cannot predict when a user will
license its products. Historically, renewals have accounted for a significant
portion of McAfee's net revenue; however, there can be no assurance that
McAfee will be able to maintain or exceed historic renewal rates in the
future. In addition, revenue generated through distribution channels tends to
be non-linear and this may cause McAfee's revenue to fluctuate.
Significant quarterly fluctuations in licensing activity will cause
significant fluctuations in McAfee's cash flows and cash and cash equivalents,
accounts receivable and deferred revenue accounts on McAfee's balance sheet.
In addition, the operating results of many software companies reflect seasonal
trends, and McAfee's business, financial condition and results of operations
may be affected by such trends in the future. Such trends may include higher
net revenue in the fourth quarter as many customers complete annual budgetary
cycles, and lower net revenue in the summer months when many businesses
experience lower sales, particularly in the European market.
The software industry has experienced and is expected to continue to
experience a significant amount of consolidation. In addition, it is expected
that McAfee will grow both internally and through strategic acquisitions.
McAfee frequently evaluates potential acquisitions of complementary
businesses, products and technologies. Any acquisition, depending on its size,
could result in a significant charge to earnings, or the use of a significant
portion of McAfee's available cash, or if such acquisition is made utilizing
McAfee's securities, could result in significant dilution to McAfee's
stockholders.
103
<PAGE>
MCAFEE MANAGEMENT
DIRECTORS
The directors of McAfee and their ages as of October 28, 1997 are as
follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME POSITION WITH MCAFEE AGE SINCE
---- -------------------- --- --------
<S> <C> <C> <C>
Class I directors whose terms
expire at the 1999 Annual
Meeting of Stockholders:
John C. Bolger................ Director 51 1996
Virginia Gemmell.............. Director 48 1996
Edwin L. Harper............... Director 52 1993
Class II director whose term
expires at the 2000 Annual
Meeting of Stockholders:
Leslie G. Denend.............. Director 56 1995
Class III directors whose
terms expire at the 1998
Annual Meeting of
Stockholders:
William L. Larson............. President, Chief Executive Officer
and Chairman of the Board 41 1993
</TABLE>
Mr. Bolger has been a director of McAfee since April 18, 1996. Since 1992,
Mr. Bolger has been a business consultant and private investor. Mr. Bolger was
Vice President of Finance and Administration of Cisco Systems, Inc., a
networking company, from May 1989 through December 1992. Mr. Bolger serves as
a director of Integrated Systems Inc., TCSI Corporation, Sanmina Corporation
and Integrated Device Technology, Inc. To pursue other opportunities, Mr.
Bolger has submitted his resignation from the McAfee Board effective April 30,
1998.
Ms. Gemmell has been a director of McAfee since September 16, 1996. Ms.
Gemmell founded GlidePath, Inc., a consulting firm, and has served as its
President since August 1995. From May 1986 to August 1995, Ms. Gemmell was
Managing Partner of Synectics, Inc., a consulting firm.
Mr. Harper has been a director of McAfee since January 1993. Since June
1996, Mr. Harper has been the President and Chief Executive Officer of SyQuest
Technology, Inc., a manufacturer of computer peripherals. From June 1993 to
June 1996, Mr. Harper was President and Chief Executive Officer of ComByte,
Inc., a privately-held PC peripherals company. Mr. Harper was President and
Chief Executive Officer of Colorado Memory Systems ("CMS"), a manufacturer of
computer peripherals, from June 1992 to April 1993, and served as President
and Chief Operating Officer of CMS from September 1990 through May 1992. Mr.
Harper serves as a director of SyQuest Technology, Inc. and Apex PC Solutions,
Inc.
Mr. Denend has been a director of McAfee since June 14, 1995. Since June of
1993, Mr. Denend has been Chief Executive Officer and President of Network
General. From February of 1993 to June of 1993, Mr. Denend was Senior Vice
President of Network General Corporation. Mr. Denend was President of
Vitalink, a manufacturer of inter-networking products, from November 1990 to
December 1992. Mr. Denend serves as a director of Rational Software
Corporation, Proxim, Inc. and Network General.
Mr. Larson joined McAfee in September 1993 as its Chief Executive Officer.
In October 1993, Mr. Larson was appointed as a director of McAfee and was
elected to the additional office of President. In April 1995, Mr. Larson was
also elected Chairman of the Board of Directors. From August 1988 to September
1993, Mr. Larson was employed as a Vice President of SunSoft, Inc., a system
software subsidiary of Sun Microsystems, Inc., where he was responsible for
worldwide sales and marketing.
After the Effective Time, Dr. Saal will serve as a Class II director of
McAfee. See "Network General Corporation--Network General Management."
104
<PAGE>
EXECUTIVE OFFICERS
The executive officers of McAfee as of October 28, 1997 are as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH MCAFEE AGE
---- -------------------- ---
<S> <C> <C>
William L. Larson....... President, Chief Executive Officer and Chairman of the Board 41
Dennis L. Cline......... Vice President of International Sales 37
Prabhat K. Goyal........ Chief Financial Officer, Vice President of Finance and
Administration, Treasurer and Secretary 43
Zachary A. Nelson....... Vice President and General Manager of Network Management 36
Peter R. Watkins........ Vice President and General Manager of Security 42
</TABLE>
Mr. Larson joined McAfee in September 1993 as its Chief Executive Officer.
In October 1993, Mr. Larson was appointed as a director of McAfee and was
elected to the additional office of President. In April 1995, Mr. Larson was
also elected Chairman of the Board of Directors. From August 1988 to September
1993, Mr. Larson was employed as a Vice President of SunSoft, Inc., a system
software subsidiary of Sun Microsystems, Inc., where he was responsible for
worldwide sales and marketing.
Mr. Cline joined McAfee in September 1994 as Vice President of North
American Sales. Mr. Cline was Vice President of North American Channel Sales
from October 1995 to April 1996 and was Vice President of Worldwide Channel
Sales from April 1996 to October 1996 when he became Vice President of
International Sales. From November 1993 to September 1994, Mr. Cline performed
sales consulting services for various companies. From January 1993 to November
1993, Mr. Cline was Vice President of Worldwide Sales for Fifth Generation
Systems, a software utilities company. Mr. Cline was a Director of Sales for
GCC Technologies, Inc., a manufacturer of computer printers, from April 1992
to January 1993. From June 1991 to March 1992, Mr. Cline served as Director
for Worldwide Sales for Alias Research, a graphics software company. Prior to
that time, from January 1988 to August 1991, Mr. Cline was a Sales Manager for
Claris Corporation, an applications software company.
Mr. Goyal joined McAfee in March 1996 and was elected as Vice President of
Finance, Corporate Controller and Treasurer in April 1996. Mr. Goyal became
Chief Financial Officer, Vice President of Finance and Administration and
Secretary in October 1996. From July 1994 to March 1996 Mr. Goyal was
Director, Finance and OEM Development, Solaris Products Group for SunSoft,
Inc. From November 1991 to June 1994, Mr. Goyal served as Director, Finance
and Sales Operations of SunSoft, Inc.
Mr. Nelson joined McAfee in March 1997 as Vice President and General Manager
of Network Management. From February 1993 to March 1997, Mr. Nelson was
employed in various capacities, most recently as Vice President of Marketing,
for Oracle Corporation, a database company. From January 1990 to February
1993, Mr. Nelson was employed in various capacities, ultimately serving as
Director of Corporate Marketing, at SunSoft, Inc.
Mr. Watkins joined McAfee in May 1995 as Vice President of International
Operations. Mr. Watkins was Vice President of International Operations from
May 1995 to October 1996 and Vice President of Security from October 1996 to
January 1997 when he became Vice President and General Manager of Security.
From January 1991 to April 1995, Mr. Watkins was employed in various
capacities, ultimately serving as Managing Director of European Operations, at
SunSoft, Inc.
McAfee's officers serve at the discretion of the Board of Directors. There
are no family relationships among any of McAfee's directors and executive
officers.
105
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MCAFEE
The following table sets forth certain information, as of October 28, 1997,
except where noted, with respect to the beneficial ownership of McAfee's
Common Stock by (i) all persons known by McAfee to be the beneficial owners of
more than 5% of the outstanding Common Stock of McAfee, (ii) each director and
each person who will serve as a director, (iii) each person named in the
Summary Compensation Table, and (iv) all executive officers and directors of
McAfee as a group.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OF SHARES OF CLASS
- --------------------------------------- --------- ----------
<S> <C> <C>
Putnam Investments, Inc.(2)............................... 1,104,487 2.1%
One Post Office Square
Boston, MA 02109
American Century Companies, Inc.(3)....................... 3,375,900 6.6%
Twentieth Century Tower
4500 Main Street
Kansas City, MO 64111
Pilgrim Baxter & Associates(4)............................ 3,596,237 7.0%
1255 Drummers Lane, Suite 300
Wayne, PA 19087
Nicholas-Applegate Capital Management(5).................. 2,603,036 5.1%
600 West Broadway, 29th Floor
San Diego, CA 92101
FMR Corp.(6).............................................. 2,505,837 4.9%
82 Devonshire Street
Boston, MA 02109
William L. Larson(7)...................................... 356,407 *
Harry J. Saal............................................. 0 *
John C. Bolger(8)......................................... 875 *
Leslie G. Denend(8)....................................... 3,750 *
Virginia Gemmell.......................................... 16,875 *
Edwin L. Harper........................................... 15,950 *
Dennis L. Cline(9)........................................ 50,263 *
R. Terry Duryea(10)....................................... 10,138 *
Peter R. Watkins(11)...................................... 72,113 *
Mark Woodward(12)......................................... 7,851 *
Executive officers and directors as a group (10
persons)(13)............................................. 588,909 1.1%
Former Executive Officers
Richard D. Kreysar(14).................................... 1,868 *
</TABLE>
- --------
* Less than 1%
(1) Except as indicated in the footnotes to this table, McAfee believes that
the persons named in the table have sole voting and investment power with
respect to all shares of McAfee Common Stock shown as beneficially owned
by them, subject to community property laws, where applicable.
(2) According to a Schedule 13G/A filed with the SEC on January 30, 1997,
Putnam Investments, Inc. has shared voting power with respect to 381,747
of these shares and shared dispositive power with respect to all
5,271,140 shares.
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(3) According to a Schedule 13G filed with the SEC on February 7, 1997.
(4) According to a Schedule 13G/A filed with the SEC on March 12, 1997,
Pilgrim Baxter & Associates has shared voting power with respect to all
3,596,237 of these shares.
(5) According to a Schedule 13G filed with the SEC on February 5, 1997,
Nicholas-Applegate has sole voting power with respect to 1,970,471 of
these shares.
(6) According to a Schedule 13G filed with the SEC on February 13, 1997, FMR
Corp. has sole voting power with respect to 32,450 of these shares.
(7) Includes 356,407 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of October 28,
1997.
(8) Represents shares subject to stock options that are currently exercisable
or will become exercisable within 60 days of October 28, 1997.
(9) Includes 50,000 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of October 28,
1997.
(10) Includes 9,582 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of October 28,
1997. Mr. Duryea ceased to be an executive officer of McAfee in January
1997.
(11) Includes 70,899 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of October 28,
1997.
(12) Mr. Woodward resigned from his position as an executive officer of McAfee
on July 25, 1997.
(13) Includes 586,056 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of October 28,
1997.
(14) Mr. Kreysar resigned from his position as an executive officer of McAfee
in November 1996.
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McAFEE EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of McAfee and the four other most highly
compensated executive officers of McAfee as of December 31, 1996 whose total
salary and bonus for the year ended December 31, 1996 exceeded $100,000, as
well as one former officer who would otherwise have been included in the table
but for his termination as an officer prior to December 31, 1996, in all cases
for services in all capacities to McAfee during the years ended December 31,
1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
----------------------------------- ------------
OTHER
ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR ($)(1) ($) ($) OPTIONS (#) ($)(2)
------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William L. Larson(3).... 1996 $248,260 $151,044 0 0 $2,375
President, Chief 1995 220,008 229,676 0 1,181,250 2,310
Executive Officer 1994 200,000 198,688 0 0 2,310
and Chairman of the
Board
R. Terry Duryea(4)...... 1996 $164,664 $ 50,525 0 0 $2,375
Vice President of 1995 102,092 22,564 0 421,875 522
Corporate Development 1994 -- -- -- -- --
Peter R. Watkins(5)..... 1996 $144,488 $ 87,358 $108,748(6) 56,250 $2,202
Vice President and 1995 123,259 20,025 56,949(7) 421,875 0
General Manager of 1994 -- -- -- -- --
Security
Dennis L. Cline(8)...... 1996 $109,503 $ 99,100 0 75,000 $2,375
Vice President of 1995 100,000 92,642 0 337,500 1,802
International Sales 1994 33,333 32,674 0 -- 0
Mark Woodward(9)........ 1996 $101,132 $ 97,037 0 0 $2,202
Vice President of North 1995 19,360 0 0 337,500 0
American Sales 1994 -- -- -- -- --
Former Officer:
Richard D. Kreysar(10).. 1996 $157,385 $ 41,983 0 0 $2,375
Vice President of 1995 128,752 37,011 0 371,250 2,310
Network Management 1994 -- -- -- -- --
</TABLE>
- --------
(1) Salary includes amounts deferred under McAfee's 401(k) Plan.
(2) Represents contributions made by McAfee pursuant to McAfee's 401(k) Plan.
(3) Mr. Larson was elected Chairman of the Board in April 1995.
(4) Mr. Duryea joined McAfee in May 1995, ceased to be an executive officer
of McAfee in January 1997 and resigned from McAfee in January 1997.
(5) Mr. Watkins joined McAfee in May 1995. Mr. Watkins was Vice President of
Security as of December 31, 1996 and was elected Vice President and
General Manager of Security in January 1997.
(6) Represents cost of living allowance for overseas assignment and amounts
reimbursed for payment of certain taxes.
(7) Represents cost of living allowance for overseas assignment.
(8) Mr. Cline joined McAfee in September 1994. Mr. Cline was Vice President
of Europe and Channels as of December 31, 1996 and was elected Vice
President of International Sales in January 1997.
(9) Mr. Woodward joined McAfee in October 1995. Mr. Woodward was Vice
President of Direct Sales as of December 31, 1996 and was elected Vice
President of North American Sales in January 1997. Mr. Woodward resigned
from his position as an executive officer of McAfee effective July 25,
1997.
(10) Mr. Kreysar joined McAfee in January 1995 and resigned from his position
as an executive officer of McAfee effective November 1, 1996.
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The following table provides the specified information concerning grants of
options to purchase McAfee's Common Stock made during the year ended December
31, 1996 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) YEAR ($/(SH)(2) DATE 5%($) 10%($)
- ---- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William L. Larson....... 0 -- -- -- -- --
R. Terry Duryea(4)...... 0 -- -- -- -- --
Peter R. Watkins........ 56,250(5) 1.8% $19.33 01/25/06 $ 683,922 $1,733,192
Dennis L. Cline......... 75,000(6) 2.3% $45.50 09/30/06 $2,207,186 $5,535,911
Mark Woodward(7)........ 0 -- -- -- -- --
Richard D. Kreysar(8)... 0 -- -- -- -- --
</TABLE>
- --------
(1) Generally, initial grants of options made in 1996 under McAfee's 1995
Stock Incentive Plan (the "1995 Stock Incentive Plan") vest at the rate of
one-fourth on the first anniversary of the optionee's date of hire and
1/48th per month thereafter for each full month of the optionee's
continuous employment with McAfee; subsequent option grants vest over a
four year period at the rate of one-fourth on the first anniversary of the
date of grant and 1/48th per month thereafter for each full month of the
optionee's continuous employment with McAfee. Under the 1995 Stock
Incentive Plan, the Board retains discretion to modify the terms of
outstanding options. See "--Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values--Employment and Change in Control
Arrangements" below. Under the 1995 Stock Incentive Plan, options will
become fully exercisable upon a transfer of control of McAfee, unless the
option is assumed by the acquiring entity. See "--Aggregate Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values--
Employment and Change in Control Arrangements" below. However, McAfee has
entered into change of control agreements with each of the executive
officers providing for the full acceleration of their options in
connection with a transfer of control.
(2) All options were granted at an exercise price equal to the fair market
value of the Common Stock on the date of grant. The exercise price may be
paid in cash, in shares of Common Stock valued at fair market value on the
exercise date or through a cashless exercise procedure involving a same-
day sale of the purchased shares. McAfee may also finance the option
exercise by loaning the optionee sufficient funds to exercise the option
and pay any withholding taxes incurred upon exercise.
(3) Potential gains are net of exercise price, but before taxes associated
with the exercise. These amounts represent hypothetical gains assuming
rates of appreciation specified by the Securities and Exchange Commission,
and do not represent McAfee's estimate or projection of future McAfee
Common Stock prices. Actual gains, if any, on stock option exercises are
dependent on the future performance of McAfee, overall market conditions
and the optionees' continued employment through the vesting period. The
amounts reflected in this table may not be achieved.
(4) Mr. Duryea ceased to be an executive officer of McAfee in January 1997.
(5) This option vests over a period of four years commencing in January 1996
at a rate of one-fourth on the first anniversary of the date of grant and
1/48th per month thereafter for each full month of Mr. Watkins' continuous
employment with McAfee.
(6) This option vests over a period of four years commencing in September 1996
at a rate of one-fourth on the first anniversary of the date of grant and
1/48th per month thereafter for each full month of Mr. Cline's continuous
employment with McAfee.
(7) Mr. Woodward resigned from his position as an executive officer of McAfee
effective July 25, 1997.
(8) Mr. Kreysar resigned from his position as an executive officer of McAfee
effective November 1, 1996.
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The following table provides the specified information concerning exercises
of options to purchase McAfee's Common Stock during the year ended December
31, 1996, and unexercised options held as of December 31, 1996, by the persons
named in the Summary Compensation Table:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 12/31/96(#) 12/31/96($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Larson....... 728,760 $22,610,478 386,876 1,246,875 $15,548,836 $45,527,779
R. Terry Duryea(3)...... 158,000 $ 3,960,541 8,992 254,883 $ 320,382 $ 9,081,405
Peter R. Watkins........ 149,413 $ 3,643,563 17,579 311,133 $ 626,335 $10,468,907
Mark Woodward(4)........ 88,110 $ 2,931,903 10,327 239,063 $ 323,579 $ 7,490,633
Dennis L. Cline......... 84,375 $ 2,388,316 14,063 222,657 $ 581,270 $ 6,103,151
Richard D. Kreysar(5)... 162,406 $ 3,498,637 15,484 193,360 $ 596,420 $ 7,447,937
</TABLE>
- --------
(1) Based on the closing price of $44.00 on December 31, 1996, less exercise
price.
(2) Market price on date of exercise, less exercise price.
(3) Mr. Duryea ceased to be an executive officer of McAfee in January 1997.
(4) Mr. Woodward resigned from his position as an executive officer of McAfee
effective July 25, 1997.
(5) Mr. Kreysar resigned from his position as an executive officer of McAfee
effective November 1, 1996. Effective February 1, 1997, Mr. Kreysar
resigned from his employment with McAfee, resulting in the cancellation of
unexercisable options to purchase shares.
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
William L. Larson currently serves as President and Chief Executive Officer
of McAfee pursuant to an agreement dated April 14, 1995 which provides that,
in the event that Mr. Larson's employment is involuntarily terminated other
than for cause, he will be entitled to receive severance payments consisting
of his then current base salary and bonus for twelve (12) months after such
termination, which payments would cease in the event that he accepted
employment elsewhere.
Dennis L. Cline, who currently serves as Vice President of International
Sales of McAfee, entered into an agreement with McAfee that provides that, in
the event his employment with McAfee is terminated within three months of a
merger of McAfee or a sale of substantially all of McAfee's assets due to such
transaction, he would be entitled to receive his salary for nine months and
payment of his full target bonus over such period.
The terms of McAfee's 1995 Stock Incentive Plan applicable to options
granted thereunder after April 14, 1995 and McAfee's 1997 Stock Incentive Plan
applicable to options granted thereunder after June 5, 1997 (the 1995 Stock
Incentive Plan and the 1997 Stock Incentive Plan, collectively the "Option
Plans") provide that in the event of a "transfer of control" of McAfee, the
acquiring corporation shall assume the options outstanding under the Option
Plans or substitute options on the acquiring corporation's stock for the
outstanding options. Should the acquiring corporation elect not to assume
outstanding options or substitute new options for outstanding options, then
all outstanding options shall become immediately exercisable and fully vested
as of the date ten days prior to the date of the "transfer of control." In
addition, the McAfee Board has discretion to provide for accelerated vesting
of assumed options.
In April 1995, McAfee entered into agreements with each of its current
executive officers and all new executive officers since that date. Such
agreements provide that, in the event of a "transfer of control" of McAfee,
all stock options held by the executive officer will become fully vested and
immediately exercisable as of the date ten days prior to the "transfer of
control," conditioned upon consummation of the "transfer of control" event.
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COMPENSATION OF DIRECTORS
The one employee director of McAfee did not receive any cash compensation
for his services as member of the Board of Directors of McAfee in the year
ended December 31, 1996. The non-employee directors of McAfee are eligible to
receive up to $15,000 each on an annual basis for their services as directors
of McAfee, based on attendance at meetings of McAfee's Board of Directors.
McAfee's Stock Option Plan for Outside Directors (the "McAfee Directors Plan")
provides for initial and annual automatic grants of nonstatutory stock options
to directors of McAfee who are not employees of McAfee or of any affiliated
corporation and who are not associated with any entity or affiliated group of
entities owning ten percent or more of McAfee's outstanding stock. McAfee
recently amended its McAfee Directors Plan to provide that each individual who
first becomes an outside Board member is granted an option to purchase 25,000
shares on the date such individual joins the Board. In addition, on the
anniversary date of each grant, each outside director who received an initial
grant will receive an additional option grant to purchase 10,000 shares of
McAfee Common Stock. Previously, directors received an initial option grant of
options to purchase 50,625 shares of McAfee Common Stock and additional annual
option grants to purchase of 16,875 shares of McAfee Common Stock. In 1996,
Messrs. Denend and Harper each received an option to purchase 16,875 shares,
and Mr. Bolger and Ms. Gemmell each received an initial grant of an option to
purchase 50,625 shares. Initial options vest annually in equal installments
over a three year period from the date of grant. Annual options vest on the
third anniversary of the date of grant. All options granted under the McAfee
Directors Plan become fully exercisable upon certain mergers, sales of asset
or sales of all or substantially all the voting stock of McAfee. The Merger
will not result in the acceleration of the exercisability of options under the
McAfee Directors Plan.
Directors who are also employees of McAfee are eligible to receive options
and be issued shares of Common Stock directly under the 1995 Stock Incentive
Plan and are also eligible to participate in McAfee's Employee Stock Purchase
Plan and, if an executive officer of McAfee, the Executive Bonus Plan.
Effective as of the date of the Annual Meeting, and subject to stockholder
approval, non-employee and employee directors of McAfee will also be eligible
to participate in McAfee's 1997 Stock Incentive Plan on a discretionary basis.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
McAfee has entered into indemnification agreements with each of its officers
and directors containing provisions that may require McAfee, among other
things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as officers or directors
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified and to obtain directors' and officers'
liability insurance if available on reasonable terms. McAfee maintains an
insurance policy covering officers and directors under which the insurer has
agreed to pay the amount of any claim made against the officers or directors
of McAfee for wrongful acts that such officers or directors may otherwise be
required to pay or for which McAfee is required to indemnify such officers and
directors, subject to certain exclusions.
See "--Employment and Change in Control Agreements" for descriptions of
agreements regarding the employment of Mr. Larson and Mr. Cline and change of
control agreements entered into with each of McAfee's executive officers.
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NETWORK GENERAL CORPORATION
NETWORK GENERAL BUSINESS
INTRODUCTION
Network General Corporation was incorporated in California in May 1986 and
reincorporated in Delaware in December 1987. Network General designs,
manufactures, markets and supports software-based fault and performance (also
known as analysis and monitoring) solutions for managing computer networks.
Recognizing the growing diversity of network technologies and the need to make
them work together, Network General develops products and provides services
which help maximize network productivity and minimize downtime. Network
General's products consist of portable tools and centralized systems
incorporating a proprietary technology linking advanced protocol decodes with
expert analysis capabilities to facilitate real-time identification, diagnosis
and resolution of network problems. Network General also provides product
support, education and network consulting services.
Network General's portable tools are designed to analyze local area
networks, wide area networks, internetwork segments and enterprise network
environments. Network General's flagship portable product is the Expert
Sniffer Network Analyzer. All of Network General's portable network analysis
tools consist of software and a choice of network interface cards that run on
a variety of portable and notebook personal computers.
Network General's Distributed Sniffer System product is designed for
monitoring and troubleshooting distributed enterprise and client/server
networks, including Ethernet, Fast Ethernet, token ring and FDDI local area
networks ("LAN") as well as bridged and routed internetworks or wide area
networks ("WAN"). The Distributed Sniffer System product line consists of
centralized console software which receives and displays information received
from distributed servers.
In March 1997, Network General purchased 3DV Technology, Inc. ("3DV"), a
provider of software tools for evaluating and managing the performance of
heterogeneous enterprise networks. 3DV's family of Proactive Management
products are primarily used by network engineers in maintaining the day-to-day
operational level of network infrastructure devices. They provide specific
applications for the analysis of Cisco routers, Bay Networks and Cabletron
hubs, as well as RMON (remote monitoring)-based LAN switches. Utilizing a
sophisticated, rules-based expert system for analyzing a device, the products
identify abnormalities in device operation which impact device performance.
Left untreated, these abnormalities may lead to diminished network performance
and eventual device failure.
In August 1997, Network General acquired Cinco Networks, Inc. ("Cinco"), a
privately-held, Pleasanton, California-based developer and provider of entry-
level network analysis products. Cinco's NetXRay and Distributed NetXRay
products are Windows-based network analysis software applications which
provide fault and performance management capabilities for front-line network
troubleshooters and complement Network General's Sniffer Network Analyzer and
Distributed Sniffer System family of products.
Network General sells its products and services to domestic end users
principally through its direct sales force, although Network General also
maintains an indirect distribution channel using authorized resellers and
systems integrators. Internationally, Network General sells its products and
services through its direct sales force in several countries, as well as
through a combination of distributors, systems integrators and authorized
resellers worldwide.
Unless the context otherwise requires "Network General" refers to Network
General Corporation and its predecessors and subsidiaries.
THE MARKET FOR NETWORK FAULT AND PERFORMANCE MANAGEMENT
Network Management Personnel. Network General's largest group of customers
can be classified as network management personnel who are directly responsible
for supporting the operation of sophisticated data networks. Generally, these
users are charged with the management of an enterprise-wide network which
serves a
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department, a division of a large organization or an entire organization.
Network General's products are designed to enable local LAN and WAN managers
to do their jobs more effectively with the following benefits to the
organization:
Minimization Of Network Downtime. Network General's products provide
fault isolation and performance management capabilities which help find and
solve problems quickly and minimize network downtime. Network General's
artificial intelligence-based Expert Analysis software facilitates the
pinpointing of problem origins and suggests diagnoses to expedite complex
problem resolution.
Proactive Network Management. Identifying problems before they occur is
the key to effective network management. Network General's Sniffer and
Distributed Sniffer System family of products automatically forewarns
network professionals of symptoms before they become problems. Network
General products help companies understand network activity and detect
changes in network behavior which, in turn, assist network managers in
proactively managing network expansion. As a result, employees continue to
perform key business functions on a network without interruption.
Reduced Operating Costs. Network General's systems products provide
centralized monitoring and analysis capabilities to help solve remote
problems from a single location. By reducing the time needed to resolve
problems, Network General's products maximize existing network personnel
resources and minimize the need to hire additional network management
professionals.
Optimization Of Network Investments. Network General products assist
network managers with effective bandwidth planning, helping eliminate
unnecessary purchases of network infrastructure such as bridges and
routers. Network General's Services Group provides educational, consulting
and product support services to increase network managers' productivity and
to solve problems where there may be scarce expertise.
Systems Integrators And Field Service Organizations. Many data processing
and data communications organizations offer systems integration and service
options to their customers. These services include designing, purchasing,
implementing, and servicing the customer's entire data network and/or
servicing only the equipment and software which they have supplied. In either
case, determining the cause of network problems is an ongoing issue for
systems integrators and field service organizations. Diagnostic tools,
including network fault and performance tools and systems such as those
offered by Network General, are useful in resolving such issues. Benefits to
these organizations include:
Increased Customer Satisfaction. Network General's network fault and
performance management products aid integrators and field service
organizations in resolving customer problems quickly and enhancing customer
satisfaction.
Reduced Service Expense. The network manager's ability to resolve
problems rapidly, at the location site or from a central office, lowers the
cost of service calls.
Greater Leverage Of Technical Experts. Network General's products allow
relatively unskilled field service personnel to capture customer problems
at the source for remote analysis by technical experts. As a consequence,
technical experts do not need to travel or replicate problems, and their
resources can be used more effectively.
TECHNOLOGY AND ARCHITECTURE
Network General's fault and performance management products are designed to
help network professionals effectively manage their growing networks. Network
General's technology is available on portable platforms (the Expert Sniffer
Network Analyzer, the Sniffer Internetwork Analyzer and NetXRay) and as
comprehensive systems (the Distributed Sniffer System, Distributed NetXRay and
the Service Level Manager products). These products are available in a variety
of operating systems and prices to enable customers to tailor monitoring and
analysis solutions to their specific networks and operating budgets.
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Network Fault And Performance Management Products. Network General's network
fault and performance management products consist of software and the
communications cards necessary to run the software. The specialized analysis
software code interprets over 250 network protocols and utilizes artificial
intelligence-based technology to diagnose network problems. Network General's
analysis software operates on networks utilizing a mix of operating systems,
protocols and physical connection technologies.
Different software is written for each physical network connection
technology. This software must manage the capture of packets of data in real
time for display and analysis. It is extremely important that this software be
highly efficient, since Expert Sniffer Network Analyzer products examine data
packets on the network rather than just packets destined for a particular
node.
Since 1992, Network General's analysis software has incorporated artificial
intelligence-based technology, referred to as "Expert Analysis." Expert
Analysis "learns" network configurations automatically as it captures network
data for analysis. By automating the real-time identification and diagnosis of
network problems, Expert Analysis enables faster problem resolution. The
Expert Analysis technology, which is a component of the Sniffer and
Distributed Sniffer System family of products, provides network managers with
a complete set of actionable information about their networks. The Expert
Analysis automated recognition of problems allows less experienced network
managers to manage their networks more effectively. Network General originally
developed Expert Analysis for the portable Sniffer Network Analyzers.
Subsequently, Network General developed Expert Analysis capability for the
Distributed Sniffer System. Today, the Distributed Sniffer System with Expert
Analysis console software is compatible with UNIX and Microsoft Windows
operating systems.
Network General continues to develop new releases of its portable Expert
Sniffer Network Analyzer software including additional topology and hardware
platform options. In 1993, Network General introduced the Notebook Sniffer
Network Analyzer to address the growing demand for lighter-weight, portable
network analysis platforms. The first Expert Analysis product to support the
Personal Computer Memory Card International Association (PCMCIA) Type II
standard, the Notebook Sniffer Network Analyzer (composed of software and a
PCMCIA network interface card) supports a variety of popular, lightweight
Pentium-based notebook computers. In 1994, Network General began shipping
Network General Reporter, an application that allows users to easily generate
management reports from information generated by other Network General
products. In 1995, Network General expanded its customers' vision beyond the
traditional network with products that monitor and analyze database
client/server applications from Oracle Corporation.
In 1995, Network General introduced and shipped the Integrated Services
Digital Network ("ISDN") package for the Sniffer Internetwork Analyzer
(Primary Rate), as well as Sniffer Network Analyzer for Fast Ethernet, an
emerging high speed network standard. In 1996, Network General introduced and
shipped the Sniffer Network Analyzer for asynchronous transfer mode ("ATM"),
another emerging high speed network standard, as well as the ISDN Package for
the Sniffer Internetwork Analyzer (Basic Rate). Also introduced in 1996 was
the Database Module (with Expert Analysis) for Sybase and Microsoft SQL
Server, which allows network professionals to understand the impact of these
database applications on network performance. In 1997, Network General
introduced the Fast Ethernet Notebook Sniffer Network Analyzer, which uses the
PCMCIA CardBus standard and is the first Fast Ethernet Analysis product to use
this standard.
Today, portable Sniffer Network Analyzers and the Distributed Sniffer System
deliver Expert Analysis solutions that respond in real time, automatically
learn about each network segment and expedite solutions to network problems.
Portable Expert Sniffer Network Analyzers and Distributed Sniffer Systems
examine network segments for symptoms, diagnose problems, explain diagnoses
and recommend corrective action.
Total Network Visibility Architecture. During fiscal 1997, Network General
announced its Total Network Visibility Architecture ("TNV"). TNV is an open,
distributed application architecture for enterprise-wide management of complex
heterogeneous client/server environments. The architecture is designed to
support a variety of fault and performance management solutions for
distributed enterprise networks while working with existing network management
technologies including a variety of data collection agents and probes. TNV is
a
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platform-independent, three-tier architecture that consists of distributed
data collection devices, domain-level server intelligence and an integrated
suite of management applications. The architecture leverages Network General's
Experience Technology with Windows NT-based, domain-level server engines to
enable data to be collected from a variety of sources, including RMON, RMON2,
MIB2, customized MIBs, Network General's Distributed Sniffer System products
and management platforms. The collected data is correlated, filtered and
presented as actionable information, via solution-oriented management
applications, helping network managers prioritize their workloads and handle
problems more efficiently. In addition to direct communication with data
sources throughout the network, TNV applications are designed to share
information with other systems, platforms and frameworks. These applications
will be able to operate in a stand alone environment or co-exist with and be
deployed from management systems such as HP OpenView, IBM Netview, Sun Net
Manager, Cabletron SPECTRUM and Tivoli TME. The first TNV product, Service
Level Manager, was announced in October 1996 and began shipping in February
1997. The acquisition of 3DV technology provided a source for additional TNV
applications for the analysis of routers, switches and hubs.
PRODUCTS AND SERVICES
During fiscal 1997, Network General reorganized its product lines into
business units to provide more focus to the target markets and on the products
for which they have responsibility. The business units are not only chartered
with the continuing development and enhancement of their products, but for
creating related marketing programs. The following is a brief description of
the business units, their charters and products:
Analysis Tools Business Unit. The Analysis Tools Business Unit provides
fault and performance management products designed to help network
professionals effectively manage their growing LANs and networked
applications. The Tools products are available on portable/notebook PC
platforms (e.g., the Expert Sniffer Network Analyzer) and as comprehensive
systems (e.g., the Distributed Sniffer System). These products are available
for a variety of LAN and application types such as Ethernet, Fast Ethernet,
Token Ring, FDDI, Oracle7, Microsoft SQL Net and Sybase, and in a variety of
operating systems and prices to enable customers to tailor monitoring and
analysis solutions to their specific networks and operating budgets.
WAN/Broadband Business Unit. The WAN/Broadband Business Unit is responsible
for the Network General products which provide fault and performance
management of data communication and ATM networks based on existing
technologies such as T1/E1, frame relay, ISDN, high speed corporate backbone,
telecommunications remote access and international carrier services. The
business unit intends to address emerging technologies such as OC-12 and
SONET. The current products of the business unit are the Sniffer Internetwork
Analyzer, the WAN Sniffer Analyzer NB, the Sniffer Internetwork Server and the
ATM Sniffer Analyzer.
Systems Technology Business Unit. The Systems Technology Business Unit
provides systems-level products for enterprise reporting and analysis to help
managers increase the reliability, availability and serviceability of their
complex heterogeneous networks. The product offerings include Service Level
Manager, 3DV Proactive Management Analysis and Exception Reporting,
Distributed Sniffer Systems and NetScout RMON-based probes and console.
Internet Business Unit. The Internet Business Unit is chartered with the
creation of products to detect external intrusion into a user's network
organizations over the Internet as well as from within the network and to
locate and resolve performance problems with a user's Web site. Its first
product, the CyberCop intrusion detection system, is scheduled for release in
late calendar 1997.
Services Business Unit. This business unit provides Network General
customers with product support, educational and consulting services. Customer
support is provided through the unit's PrimeSupport program. Education is made
available through Network General's Sniffer University classes held in six
training centers in the U.S., and centers in the United Kingdom, Germany and
Switzerland, as well as in over 45 major cities in the
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U.S. and Canada and 20 countries throughout the world. Network Consulting
Services are delivered through headquarters and field personnel.
PRODUCTS
Portable Expert Sniffer Analyzer Products. Network General began shipping
Sniffer Network Analyzer products in September 1986. To address the growing
complexity of multivendor, multiprotocol, multitopology network environments,
Network General designed and tested its software to run on a variety of
computer platforms. The product is intended to be used as a portable tool,
either on a portable or notebook size computer platform, but it can also be
installed on a desktop computer platform.
Network General markets its Expert Sniffer Network Analyzer software in a
module-level configuration which includes software and a communications card.
Each Analyzer offers customers a combination of the following: (i) multiple
physical connection technologies, (ii) over 250 protocol interpreter suites,
(iii) Expert Analysis technology and (iv) software configured for a variety of
computer platforms. As a result, Expert Sniffer Network Analyzer products can
adapt to customers' specific analysis needs as their network configurations
change.
While the functions performed by the Sniffer family of products are complex,
a significant amount of design effort has gone into making the use of each
Expert Sniffer Network Analyzer relatively simple. A unique user interface
with an intuitive menuing system allows customers to become productive
quickly.
Network General offers the ability to capture information from a number of
different physical connection technologies; ATM, Ethernet and Fast Ethernet,
16/4 Mbps token ring, FDDI, and internetworks (including T-1, ISDN and Frame
Relay). Network General offers the following protocol interpreter suites with
Expert Sniffer Network Analyzers:
TCP/IP, Novell NetWare, DECnet, Sun NFS, X-Window, IBM, AppleTalk, Banyan
VINES, OSI, NetBIOS, OS/2 LAN Manager, 3Com 3+Open, SQL*NET, XNS/MS-Net,
IBM LAN Server, Bridge/ Router HDLC, X.25 and Frame Relay.
In addition to the families of protocol interpreters provided by Network
General, network managers can write their own protocol interpreters using
Network General's defined and documented interface for custom protocol
interpreters.
Sniffer Internetwork Analyzer. The Sniffer Internetwork Analyzers are
Network General's WAN line of products. A WAN is a data communications network
spanning relatively long distances, typically using a public telephone network
or a public data communications network as its data transmission media. WANs
must be monitored, maintained, corrected and expanded to optimize the amount
and speed of data transmitted on the networks. Network General's line of
protocol and internetwork analyzers allow a user to test a data communications
path and monitor and analyze the data traveling over the path for a variety of
purposes, including configuring a network, monitoring the health of a network
and analyzing a network when it malfunctions.
WAN ATM Sniffer Analyzer. In 1996, Network General began shipping its ATM
Sniffer Analyzer, a portable fault and performance management tool
specifically designed for troubleshooting complex network problems and
optimizing client/server applications across ATM networks at speeds up to OC-
3. The optimal ATM Traffic Generator, announced during fiscal 1997, performs
stress tests on ATM network devices to help validate throughput capabilities
and is designed to complement the ATM Sniffer Network Analyzer. During fiscal
1997, Network General announced and began shipping the WAN Sniffer Analyzer
NB, a troubleshooting and analysis tool for both wide and local area networks.
The product, designed for use on PC-based notebooks, is a WAN expert protocol
analyzer solution designed to isolate and troubleshoot complex LAN protocol
problems over WAN internetworks, including traditional router-based
interfaces, digital transport links (such as T1 and E1) and frame relay
services.
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Distributed Sniffer System. Network General first shipped its Distributed
Sniffer System product in June 1991 and has been enhancing the product ever
since, primarily by adding additional protocol decoders and system
functionality. Distributed Sniffer System allows customers to monitor and
diagnose problems on complex, multisegment networks from centralized
locations. With the addition of expert analysis capabilities, Distributed
Sniffer System provides automatic problem diagnosis and recommends solutions
which are displayed on a console. A Distributed Sniffer System solution
consists of one or more servers and consoles.
Distributed Sniffer Systems solutions are composed of SniffMaster consoles
and distributed intelligent Sniffer servers which analyze, process and
consolidate information from individual network segments. When placed on
distributed segments, Sniffer servers communicate through the network to one
or more central SniffMaster consoles. Information from the same Sniffer server
can be viewed by network managers at various locations concurrently. Sniffer
servers provide continuous 24-hour alarm functions and analysis of network
segments. Distributed Sniffer System communicates alarm information to network
management stations to integrate analysis with other network management
functions on a single console. To enhance centralized network analysis and
further maximize customers' hardware investments, Distributed Sniffer System
monitoring and analysis solutions are integrated with leading network
management system platforms and operating systems.
Distributed Sniffer System analysis products are available for Ethernet,
16/4 Mbps token ring, FDDI and internetwork topologies (including T-1 and
Frame Relay). Network General offers the following protocol interpreters with
the Distributed Sniffer System:
TCP/IP, Novell NetWare, DECnet, Sun NFS, X-Window, IBM, AppleTalk, Banyan
VINES, OSI, NetBIOS, OS/2 LAN Manager, 3Com 3+Open, XNS/MS-Net, IBM LAN
Server, Bridge/Router HDLC, X.25, ISDN and Frame Relay.
NetXRay Products. As a result of its August 1997 acquisition of Cinco,
Network General now owns and sells Cinco's NetXRay and Distributed NetXRay
family of products. NetXRay products are software-based fault and performance
management tools running under the Windows 95 and Windows NT operating systems
and supporting all major LAN topologies, including Ethernet, Fast Ethernet
(100BaseT), 100VG-AnyLAN and Token Ring. The flagship product is the NetXRay
protocol analyzer which captures data, monitors network traffic and collects
key network statistics. NetXRay was developed specifically for the 32-bit
Windows operating system and graphical user interface. This tool enables
network managers to extract and review vital and detailed information needed
to troubleshoot and manage complex network environments. NetXRay is intended
for use by MIS personnel supporting small business, remote offices and
departmental networks and for front-line IS personnel to monitor and
troubleshoot common network problems.
Management Reporting Products. Network General's Service Level Manager
("SLM") is a Windows NT-based solution which provides network and IS managers
with high-level network health and availability information to assess trends,
manage performance and isolate problems quickly. SLM was launched at Fall
InterOp '96 and began shipping in February 1997. A UNIX version was released
in August 1997.
SLM is based on Network General's new three tier Total Network Visibility
Architecture which uses intelligent agents (1st tier) distributed throughout
the network to collect data, advanced middleware called Experience Technology
Engines (2nd tier) to consolidate and correlate data into a central SQL-based
database and high-level network management applications (3rd tier), of which
SLM is the first, to present actionable information for monitoring and
analysis.
SLM utilizes network instrumentation already embedded in major network
components--i.e., segments, routers, servers (NT-based and Novell) and RMON I
and II based probes to exploit the customer's existing investment in network
management. SLM automatically correlates this data into summaries that can be
used in real-time for immediate troubleshooting by focusing the Distributed
Sniffer System using SLM's integrated Distributed Sniffer System viewer on a
problem segment for expert problem analysis and resolution, or can report
historical service levels that illustrate changes over time and show the
network manager how to address future resource needs.
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Device Analysis and Exception Reporting Products. The 3DV family of advanced
network device analysis tools provide intelligent diagnostics for network
devices such as Routers, Switches and Hubs. Through a continuous process of
monitoring and checking the data against a modifiable rules-based inference
engine, the RouterPM tool identifies abnormalities within the network and
automatically generates Web browsable graphs and diagnostic reports and
recommends specific solutions to many impending difficulties before they
become significant. The 3DV family of products was acquired by Network General
in March 1997.
Standards-Based Monitoring Products. NetScout RMON-based network probes,
sold under a July 1996 distribution agreement with NetScout Systems, provide
cost-effective, standards-based network instrumentation for monitoring network
utilization and activity and are available for all popular network topologies
including ethernet, token ring, FDDI and WAN. NetScout Systems' UNISON
architecture optimizes the NetScout probes to provide monitoring-level
visibility into switched network architectures. With the NetScout family, the
network administrator can choose different price points to match the
performance needs of the network. NetScout probes are the recommended data
sources for Network General's Service Level Manager to provide visibility into
networks which are not adequately instrumented with embedded RMON or MIB data
sources. The NetScout RMON console provides access to all nine levels of RMON
data gathered by the NetScout probes and is available for Sun, HP and IBM
UNIX-based workstations as well as Microsoft Windows-based management
stations.
Network General Reporter. Network General's reporter applications use
information provided by Distributed Sniffer System and the Sniffer Network
Analyzer to document network performance with a range of reports including
network usage over time, error summaries, baseline comparisons and other
important network data. Reporter is available for Windows NT or UNIX
platforms. These products save the end user time by providing a wide selection
of preformatted reports, improve the end user's network knowledge by supplying
reports on network status and facilitate trend analyses by providing reports
on historical information.
CyberCop Intrusion Detection Software. In September 1997, Network General
announced the Internet Business Unit's first product--the CyberCop intrusion
detection system. The CyberCop system is designed to safeguard networks from
external and internal attacks by performing real-time surveillance of network
traffic and sending out an alarm when intrusion is detected. The CyberCop
product's sensors are placed at key locations throughout a network, from LAN
segments and dial-up modem servers to connection to the Internet or other wide
area networks. If CyberCop detects suspicious activity, it alerts IS
professionals managing the network and simultaneously records data in
permanent logs and Sniffer Network Analyzer trace files. The IS professionals
can use these trace files to build trend analysis information or as evidence
to prove that improper use of the network occurred. The CyberCop system is
scheduled to be released in late calendar 1997.
SERVICES
Network General supports its products domestically on a direct basis and
internationally through a combination of direct support and with the
assistance of distributors. Network General offers a range of services,
including product support, education and network consulting.
Network General's products are typically sold with a support agreement of up
to one year included in the sales price. Network General also offers support
services for its products beyond this initial period, for a fixed fee, through
its PrimeSupport program. Customers whose Network General products are covered
under support agreements receive software updates, phone-in technical support
and various electronic support options. Support agreements also include repair
coverage on all hardware components purchased from Network General. Warranty
costs to date have not been significant.
From fiscal year 1994 through fiscal year 1997, Network General expanded its
sales efforts related to extended software service support agreements by
promoting the purchase of these agreements at the time of the original product
order. Because Network General recognizes the revenues from these agreements
over the term of the agreement, sales of these agreements contributed to a
significant increase in deferred revenue related to support services. In
fiscal year 1997, Network General opened a technical assistance center in the
United Kingdom to better serve its European end user and sales channel
customers.
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Network General also offers a wide range of education services for its
products, known as Sniffer University. Network General believes education
creates increased awareness of and demand for Network General's products. In
fiscal year 1997, Network General expanded its Sniffer University education
program with a new training center in Woodbridge, New Jersey, its sixth
training center in North America. Education courses are also conducted in over
45 major cities throughout the United States and Canada and 20 countries
internationally, as well as at customer facilities.
Network General offers consulting services which provide both proactive and
reactive network services to customers. These services assist customers in
deploying Network General's products throughout their networks, in integrating
products with other network management systems and in performing fault and
performance analysis.
DISTRIBUTION, MARKETING AND CUSTOMERS
Distribution
Network General sells its products to end users in the United States and
Canada primarily through its direct sales force (including a telesales
organization) and, to a lesser extent, through resellers and systems
integrators. Network General sells its products internationally to end users
directly in several countries and through a combination of authorized
distributors, resellers and systems integrators worldwide and through an
independent sales representative in the Middle East. Network General's
distributors, resellers and systems integrators do not receive sales
commissions, but are entitled to purchase at a discount (relative to suggested
end-user prices) the products which they resell.
United States and Canadian Direct Sales. In the United States and Canada,
approximately 75% of fiscal year 1997 revenues were derived from Network
General's direct sales force. In an effort to expand its direct sales force in
North America, in March 1995 Network General reacquired the exclusive right to
distribute its products in Canada from Atelco, Limited ("Atelco") through an
Asset Purchase Agreement. In connection with that agreement, Network General's
wholly owned subsidiary, Network General (Canada) Limited, hired a direct
sales force of approximately 10 people from Atelco.
United States and Canadian Indirect Sales. Network General also sells its
products, to a lesser extent, to end users in the United States and Canada
through authorized distributors, resellers and systems integrators. In fiscal
year 1997, approximately 25% of U.S. and Canadian orders were generated
through indirect channels and Network General intends to continue to leverage
its North American indirect channels to contribute to order generation.
International Distribution. International sales accounted for approximately
$31.0 million, $44.7 million and $65.6 million, in revenues in fiscal 1995,
1996 and 1997, respectively. As of March 31, 1997, Network General had 72
employees whose responsibilities primarily included sales outside the United
States, compared to 50 on March 31, 1996.
Network General reestablished its direct sales efforts in France, Germany
and Switzerland during fiscal year 1996 and in the United Kingdom, Australia
and New Zealand during fiscal 1997. However, Network General generates most of
its international revenues from sales by distributors, resellers and systems
integrators. No single distributor accounted for 10% or more of Network
General's revenues in any one of the three fiscal years ended March 31, 1995,
1996 or 1997. Network General had 56 international distributors as of March
31, 1995, 46 as of March 31, 1996 and 54 international distributors as of
March 31, 1997. Network General retains the option to terminate these
relationships if sales quotas are not attained.
Network General is subject to the normal risks of conducting business
internationally, including longer payment cycles and greater difficulty in
accounts receivable collection. Network General generally offers 30 day net
terms in the United States, Canada and Europe and 45 day net terms in other
parts of the world. Collection of overdue receivables generally is more
difficult overseas than it is in the United States. Prior to fiscal 1994, all
sales outside of the United States were denominated in U.S. dollars. However,
Network General began to make
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direct sales in foreign currencies during fiscal year 1994. The amount of
revenues from direct sales in foreign currencies was not a significant portion
of international revenues in fiscal years 1994 through 1996, and Network
General has not experienced any material adverse effects due to fluctuating
exchange rates. With the increase of direct sales in foreign currencies to
international markets in fiscal 1997, Network General began utilizing hedging
arrangements to reduce its exposure against such risks.
Network General's distributors, systems integrators and resellers sell and
represent other companies' products which have not been competitive with those
of Network General. While Network General encourages these distributors,
integrators and resellers to focus on its products through marketing and
support programs, there is risk they may give higher priority to products of
other suppliers, thus reducing their efforts to sell Network General's
products. In addition, these distributors, systems integrators and resellers
may not have the resources to expand their operations to meet increased demand
for Network General's products.
Marketing
Network General's marketing efforts focus on defining Network General
products and services to meet customers' changing needs for network fault and
performance management. Network General supports these efforts through market
education and demand generation programs in an effort to increase company
awareness and build brand value. Some of the programs in which Network General
is involved include participation in industry trade shows, advertising in the
trade press, conducting executive seminars and electronic marketing through
the Internet.
Network General has established cooperative relationships with other
networking industry leaders in order to be in a position to support new
developments in networking. Network General believes that these relationships
are made possible by the fact that Network General, unlike its principal
competitors, does not offer network products in competition with many of these
industry leaders.
Customers
As of March 31, 1997, Network General had shipped over 85,000 units of its
portable Sniffer Network Analyzer and Distributed Sniffer System products.
Network General products are purchased by 80% of Fortune 500 industrial
companies. In addition, Network General has provided products to many leading
education, government, health care and service organizations. No single
customer accounted for more than 10% of revenues during fiscal years 1995,
1996 or 1997.
Many of Network General's customers have purchased multiple product
components. Since the market for LAN and WAN fault and performance management
tools and systems is subject to changing competitive forces and new
functionality in products, it is difficult for Network General to precisely
estimate the requirements of its customers and, therefore, the size of its
potential market.
COMPETITION
Network General currently experiences substantial competition from
established and emerging computer, communications, intelligent network wiring,
network management and test equipment companies and expects such competition
to increase in the future. The primary competitor for Network General products
is HP, which has greater name recognition, more extensive engineering,
manufacturing and marketing organizations and substantially greater financial,
technological and personnel resources than those available to Network General.
Other competitors include Azure Technologies Incorporated, Concord
Communications, Inc., Kaspia Systems, Inc., DeskTalk Systems, Inc., Wandel &
Goltermann Technologies, Inc., Shomiti Systems, Inc., embedded systems
companies and other reporting and analysis vendors.
Network General competes principally on the basis of Network General's
reputation as a market leader in network fault and performance management.
Network General believes this leadership position is a direct result of
developing products and services that meet customers' changing requirements
for network fault and performance management.
Network General differentiates itself from the competition with a wide range
of product offerings that deliver multivendor, multitopology, multiprotocol
capabilities and standards-based solutions that work for these
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heterogeneous network environments. Network General has been able to compete
successfully due to the functional advantage and multivendor interoperability
of its products versus those of its competitors. Additional competitive
advantages include Network General's product name recognition, relationships
with other industry vendors to develop products that provide complementary
fault and performance management capabilities, services capabilities, strong
distribution channels and existing customer relations.
The LAN and WAN industries are characterized by rapid technological advances
and can be significantly affected by product introductions and market
activities of industry participants. In addition to its current principal
competitors, Network General expects substantial competition from established
and emerging computer, communications, intelligent network wiring, network
management, embedded systems and test instrument companies. There can be no
assurance Network General will be able to compete successfully in the future
with existing or anticipated competitors.
Competitive pressures from existing manufacturers who offer lower prices or
introduce new products have, in some instances, resulted in delayed or
deferred purchasing decisions by potential customers of Network General.
Purchase delays or deferrals by potential customers of Network General's
products may require Network General to reduce its prices. These competitive
scenarios could materially adversely affect Network General's revenues and
operating margins.
PRODUCT DEVELOPMENT
Network General believes its future success depends on its ability to
enhance existing products and develop new products that maintain technological
leadership and continue to meet a wider range of customer needs. Accordingly,
Network General intends to focus its product development efforts on complete
solutions for network fault and performance management, enabling network
managers to enhance performance of client/server applications, manage the
deployment of high-bandwidth technologies, leverage staff resources and
optimize overall network performance.
In order to successfully develop new products, Network General is dependent
upon timely access to information about new developments relating to such
technology and standards. There can be no assurance such information will
continue to be available, that Network General will be able to develop and
market new products successfully or that Network General will be able to
respond effectively to technological changes or new product announcements by
others.
In 1995, Network General shipped Network General Reporter, which collects
information gathered by the Sniffer and Distributed Sniffer System products
and generates reports for the end user. Network General also introduced in
1995 an add-on module for the Sniffer Network Analyzer to include Oracle
protocol decodes. In September 1995 Network General began shipping the Fast
Ethernet 10/100 Sniffer Network Analyzer, a fault and performance tool which
monitors and analyzes both 10 and 100 megabits per second (Mbps) Ethernet
networks. This product is the first analysis tool to provide visibility into
new 100 Mbps Fast Ethernet networks, as well as 10 Mbps legacy Ethernet LANs.
Other products released by Network General in 1995 include the Sniffer Server
for FDDI and Sniffer Reporter for use in Windows applications.
In 1996, Network General shipped the ATM Sniffer Network Analyzer which
monitors and analyzes 155 MB/s ATM networks. Network General's development
efforts in 1995 and 1996 led to the release of the ISDN Packages for the
Sniffer Internetwork Analyzers. The ISDN Packages are available for both Basic
Rate Interface and Primary Rate Interface and provide protocol decodes for
National ISDN 1 and 2 (United States), EuroISDN (Europe), AT&T Custom,
Northern Telecom and NTT ISNet (Japan) to support the various ISDN switch
standards.
In April 1996, Network General announced a new release of Sniffer Network
Analyzer--Version 5.0, which includes Banyan expert and Novell 4.0 protocol
decodes and incorporates enhancements which optimize Expert Analysis of high
speed technologies such as FDDI and Fast Ethernet. Also in Version 5.0,
Network General
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significantly enhanced the database analysis modules. Version 5.0 supports two
database analysis modules, Oracle and Sybase/Microsoft, and adds significant
Expert analysis to both of these modules, including Expert analysis of the
actual Structured Query Language (SQL) statements. Network General was the
first company to release Expert analysis of network SQL requests for Oracle,
Sybase and Microsoft SQL databases.
In June 1996, Network General started shipping Version 4.0 of its
Distributed Sniffer System which included the new capabilities found in
Version 5.0 of the Sniffer Network Analyzer. Network General also released the
UNIX version of its Reporter product line, which reports on statistics
gathered by Distributed Sniffer System servers.
During fiscal 1997, Network General announced the new Service Level Manager
product (SLM), based on Network General's three-tier Total Network Visibility
architecture. The SLM product, which began shipping in February 1997, quickly
won several important awards, including the award for Best of Show (Network
Management category) at the Networld & Interop industry conference in Atlanta,
Georgia.
In February 1997, Network General announced a new Sniffer WAN product, the
WAN Sniffer Analyzer NB for notebook computers. The WAN Sniffer Analyzer NB,
which extends WAN Sniffer product functionality to the laptop market, began
shipping in March 1997.
In March 1997, Network General completed its acquisition of 3DV Technology,
Inc., a privately held, New Hampshire-based provider of software tools for
evaluating and managing the performance of heterogeneous enterprise networks.
The 3DV products include RouterPM, SwitchPM and HubPM. These three products
provide superior visibility into router, switch and hub environments. The 3DV
products, when combined with Network General's Service Level Manager, will
create a suite of applications that can be used by network managers to further
the goals of Total Network Visibility into their networks.
In June 1997, Network General began shipping its Fast Ethernet Notebook
Sniffer Analyzer, the first notebook PC-based analyzer for 10 and 100 Mbps
Ethernet networks. The Fast Ethernet Notebook uses a PCMCIA CardBus standard
interface card in conjunction with the Expert Sniffer Analyzer software to
provide a lightweight, convenient solution for analyzing Fast Ethernet
networks.
In August 1997, Network General acquired Cinco Networks, Inc., a privately-
held, Pleasanton, California-based developer and provider of entry-level
network analysis products. Cinco's NetXRay and Distributed NetXRay products
are Windows-based network analysis software applications which provide fault
and performance management capabilities for front-line network troubleshooters
and complement Network General's Sniffer Network Analyzer and Distributed
Sniffer System family of products.
During fiscal 1995, 1996 and 1997, research and development expenses were
approximately $20.0 million, $27.4 million and $30.9 million, respectively.
THIRD PARTY PRODUCTS
To expand its product line into additional areas of network management,
Network General announced a partnership with Ganymede Software Inc.
("Ganymede") in October 1996. This agreement enables Network General and its
distributors to resell Ganymede's Chariot network performance testing software
worldwide. Furthering Network General's commitment to deliver Total Network
Visibility, Chariot generates realistic application traffic, stress tests
network links and provides a true portrait of network performance so network
managers can make intelligent changes to their network while minimizing risk
of disruption to service. In March 1996, Network General took an equity
position in Ganymede. This equity investment will allow Ganymede and Network
General to further the integration of the Sniffer and Chariot product lines.
In July 1996, Network General announced a distribution agreement with
Frontier Software Development (now known as NetScout Systems, Inc.). The
agreement allows Network General to resell the entire NetScout RMON product
line and complement its other product offerings for Total Network Visibility.
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MANUFACTURING AND SUPPLIERS
Network General's manufacturing operations consist primarily of final
assembly, testing and quality control of materials, components, subassemblies
and systems. Network General believes its quality control procedures have been
instrumental in achieving the high performance and reliability of its
products. To date, Network General has experienced minimal return of its
products by users. Network General's manufacturing operations do not require
any capital expenditures for environmental control facilities or any special
activities for protection of the environment.
Network General's product line is designed to work with a variety of network
topologies and computer platforms available from multiple manufacturers.
Network General relies on a limited number of suppliers for certain critical
components of its products. Some of Network General's products are designed
around a specific computer platform available only from certain manufacturers.
In the case of Network General's Analyzer products, customers purchase the
required platform either from Network General or from suppliers. As a result
of product transitions by its computer platform vendors, Network General has
found it necessary to purchase and inventory computer platforms for resale to
customers. Any significant shortage of computer platforms or other critical
components for Network General's products could lead to cancellations or
delays of purchases of Network General's products, which would materially and
adversely affect Network General's results of operations. If purchases of
computer platforms or other components exceed demand, Network General could
incur expenses for disposing of excess inventory, which would also adversely
affect Network General's results of operations.
While the total time elapsed from first contact with a potential customer to
receipt of a valid purchase order is typically three to six months, Network
General attempts to ship its products to customers within two weeks of receipt
of a purchase order. Consequently, Network General typically operates with
very little backlog, and most of its revenues in each quarter result from
orders received in that quarter. Backlog of orders generally represents less
than one month's revenues and, as such, is not considered significant.
Network General establishes its expenditure levels based upon its
expectations as to future revenues and, if revenue levels were below
expectations, this could cause expenses to be disproportionately high.
Therefore, a decrease in near-term demand would adversely affect Network
General's results of operations.
PROPRIETARY RIGHTS AND LICENSES
Network General holds one patent in the WAN protocol analysis field (which
Network General believes is not material to its business) and relies primarily
upon copyright, trademark and trade secret laws to establish its proprietary
rights in its products. Because the LAN and WAN industry is characterized by
rapid technological change, Network General relies principally upon innovative
management, technical expertise, business partnerships and marketing skills to
develop, enhance and market its products.
EMPLOYEES
As of September 30, 1997, Network General employed a total of 937 persons,
including 520 in sales, marketing and services, 259 in product development and
technical support, 32 in manufacturing and 126 in management, administration
and finance. During fiscal year 1997, the vast majority of research and
development efforts and sales have been performed by Company employees rather
than outside consultants or resellers. None of Network General's employees is
represented by a labor union. Network General has experienced no work
stoppages and believes its employee relations are good.
Competition in the recruiting of personnel in the computer and
communications industry is intense, particularly in the research and
development and sales arenas. Network General believes its future success will
depend, in part, on its continued ability to hire and retain qualified
management, marketing, sales and technical employees.
PROPERTIES
Network General's principal administrative, marketing, manufacturing and
product development facilities consist of approximately 170,000 square feet in
buildings in Menlo Park, California. Network General occupies
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this space under lease agreements that expire no later than June 2002 (with a
five year extension option). In addition, Network General leases development
facilities in Oak Brook, Illinois and Beaverton, Oregon. Network General also
maintains sales offices in the United States and Canada and sales offices in
Belgium, France, Germany, Italy, Switzerland, the United Kingdom, Singapore,
Australia and Hong Kong. Total rent expense was approximately $4,115,000,
$4,785,000 and $6,092,000 in fiscal years 1995, 1996 and 1997, respectively.
LEGAL PROCEEDINGS
From time to time Network General has been, or may become, involved in
litigation proceedings incidental to the conduct of its business. Network
General does not believe any such proceedings presently pending will have a
material adverse affect on Network General's financial position or its results
of operations.
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SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF INCOME DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,(1)(2) SEPTEMBER 30,
------------------------------------------- -----------------
1993(3) 1994 1995 1996(4) 1997(5) 1996 1997(6)
------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $86,483 $114,900 $139,755 $188,845 $240,668 $107,225 $122,923
Income (loss) from
operations............. 10,415 13,915 31,768 35,438 38,577 23,338 (5,321)
Net income (loss)....... 8,645 11,276 25,411 27,425 25,093 18,511 (8,885)
Earnings (loss) per
share.................. $ 0.22 $ 0.27 $ 0.57 $ 0.60 $ 0.55 $ 0.41 $ (0.21)
Weighted average common
and common equivalent
shares outstanding..... 39,614 42,346 44,626 45,822 45,703 45,735 42,731
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
-------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Working capital......... $ 41,014 $ 65,457 $101,536 $125,841 $124,018 $101,501
Total assets............ 132,033 160,846 196,190 223,330 263,271 221,699
Deferred revenue and
taxes.................. 1,555 2,134 2,225 3,248 3,860 4,801
Total stockholders'
equity................. 109,562 132,283 165,587 180,117 179,396 153,588
</TABLE>
QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)(2)
---------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995(4) 1995 1996 1996 1996 1996 1997(5) 1997 1997(6)
-------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND STOCK PRICE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $39,740 $43,729 $51,590 $53,786 $51,680 $55,545 $65,438 $68,005 $58,323 $64,600
Gross margin............ 30,619 33,655 39,430 41,220 38,707 41,438 48,326 50,505 42,633 47,573
Income (loss) from 8,601 1,650 12,057 13,130 10,805 12,533 17,189 (1,950) 7,905 (13,226)
operations.............
Income (loss) before
provision for income
taxes.................. 10,347 3,510 13,776 14,891 12,496 14,138 18,715 (685) 10,487 (11,915)
Net income (loss)....... 7,191 310 9,574 10,350 8,685 9,826 13,007 (6,425) 6,974 (15,859)
Earnings (loss) per 0.16 0.01 0.21 0.22 0.19 0.22 0.28 (0.15) 0.16 (0.37)
share..................
Price range of common 14.28- 21.87- 22.12- 22.00- 27.00- 26.31- 30.25- 29.75- 21.88- 19.53-
stock.................. 11.53 12.81 16.31 15.06 18.19 16.06 22.19 19.63 13.75 13.13
</TABLE>
- -------
(1) All periods reflect combined results for Network General Corporation and
its subsidiaries, including ProTools, Inc. ("ProTools"), a wholly owned
subsidiary of Network General Corporation. ProTools was acquired in
January 1994 and the merger was accounted for as a pooling of interests.
Accordingly, the financial statements for prior periods have been restated
to include the results of ProTools. Total charges related to the merger
were approximately $4,903,000, or $0.09 per share, and were recorded in
the fourth quarter of fiscal year 1994.
(2) Fiscal year 1996 and prior periods reflect the 2-for-1 stock split, in the
form of a stock dividend, approved by Network General's Board of Directors
which was effective May 1996.
(3) Amounts for fiscal year 1993 have been restated in order to comply with
Statement of Position 91-1, "Software Revenue Recognition."
(4) Results of operations for the three months ended September 30, 1995
include charges of $7,153,000, or $0.17 per share, related to acquired in-
process research and development in connection with the acquisition of AIM
Technology ("AIM") in a transaction in September 1995 accounted for as a
purchase. Accordingly, the results of operations of AIM have been included
in the results of the Company from the date of acquisition.
(5) Results of operations for the three months ended March 31, 1997 include
charges of $19,504,000, or $0.43 per share, related to acquired in-process
research and development in connection with the acquisition of
3DV Technology, Inc. ("3DV") in a transaction on March 31, 1997 accounted
for as a purchase. Accordingly, the results of operations of 3DV have been
included in the results of the Company from the date of acquisition.
(6) Results of operations for the three months ended September 30, 1997
include charges of $23,688,000, or $0.56 per share, primarily related to
acquired in-process research and development in connection with the
acquisition of Cinco Networks, Inc. ("Cinco") in a transaction on August
5, 1997 accounted for as a purchase. Accordingly, the results of
operations of Cinco have been included in the results of the Company from
the date of acquisition.
125
<PAGE>
NETWORK GENERAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect Network General's
current judgment on those issues. Because such statements apply to future
events, they are subject to risks and uncertainties and, therefore, actual
results may differ materially. Important factors which could cause actual
results to differ materially are described in the following paragraphs and are
particularly noted under "Risk Factors."
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
Revenues. Revenues for the quarter ended September 30, 1997 increased 16% to
$64.6 million compared to revenues of $55.5 million for the quarter ended
September 30, 1996. Revenues for the six months ended September 30, 1997
increased 15% to $122.9 million compared to revenues of $107.2 million for the
six months ended September 30, 1996. Revenue growth was attributable to
continued acceptance of Network General's tool and system products and services
offerings, as well as expansion into indirect channels and international
markets. Network General currently plans to continue expansion into indirect
channels and international markets.
Domestic revenues increased 14% to $48.3 million for the quarter ended
September 30, 1997 compared to $42.4 million for the quarter ended September
30, 1996. Domestic revenues increased 13% to $91.6 million for the six months
ended September 30, 1997 compared to $81.3 million for the six months ended
September 30, 1996. International revenues increased 24% to $16.3 million for
the quarter ended September 30, 1997 compared to $13.2 million for the same
period in 1996. International revenues increased 21% to $31.3 million for the
six months ended September 30, 1997 compared to $25.9 million for the six
months ended September 30, 1996. European revenues grew 33% and 29% for the
quarter and six months ended September 30, 1997, respectively, compared to the
same periods in fiscal year 1997, as a result of Network General's European
sales strategy involving both direct and indirect sales channels. Pacific Rim,
Latin American and Canadian revenues increased 18% and 16% for the quarter and
six months ended September 30, 1997, respectively, compared to the same periods
in fiscal year 1997, due to increased sales volumes by Network General's
exclusive partner in Japan and increased Canadian sales.
126
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SOURCES OF REVENUES
<S> <C> <C> <C> <C>
Tool products(1)......................... $ 30,000 $ 28,092 $ 56,904 $ 55,128
System products(2)....................... 18,852 15,534 34,965 29,137
--------- --------- -------- --------
Subtotal product revenues.............. 48,852 43,626 91,869 84,265
Services(3).............................. 15,748 11,919 31,054 22,960
--------- --------- -------- --------
Total revenues........................... $ 64,600 $ 55,545 $122,923 $107,225
========= ========= ======== ========
PERCENTAGES OF REVENUES
Tool products............................ 47% 51% 46% 52%
System products.......................... 29% 28% 29% 27%
--------- --------- -------- --------
Subtotal product revenues.............. 76% 79% 75% 79%
Services................................. 24% 21% 25% 21%
--------- --------- -------- --------
Total revenues........................... 100% 100% 100% 100%
========= ========= ======== ========
</TABLE>
- --------
(1) Tool products revenues were derived principally from sales of the Sniffer
Network Analyzer local area network and wide area network analysis
products and the NetXRay analysis products. In addition, Network General
derived tool products revenues from the resale of third party products,
including Ganymede Software, Inc.'s Chariot network performance test
tools.
(2) System products revenues were derived principally from the Distributed
Sniffer System analysis products. In addition, Network General derived
system products revenues from its Service Level Manager monitoring
products and the 3DV Proactive Management (PM) analysis products, as well
as third party remote monitoring products.
(3) Services revenues include first-year warranty revenues as defined by
Statement of Position 91-1, "Software Revenue Recognition" and revenues
from Sniffer product rentals, software support, maintenance contracts and
education and consulting services.
Network General's tool products revenues were $30.0 million for the quarter
ended September 30, 1997, a 7% increase compared to $28.1 million for the
quarter ended September 30, 1996. Tool products revenues were $56.9 million
for the six months ended September 30, 1997, a 3% increase compared to $55.1
million for the six months ended September 30, 1996. The increases are due to
higher Sniffer and NetXRay product sales as well as increased sales of third
party products. Revenues from Sniffer product sales accounted for
substantially all of Network General's tool products revenues in both the
three and six month periods ended September 30, 1997 and 1996, respectively.
127
<PAGE>
Revenues for the quarter ended September 30, 1997 included $18.9 million of
system products revenues, a 21% increase compared to $15.5 million for the
quarter ended September 30, 1996. For the six months ended September 30, 1997,
system products revenues were $35.0 million, a 20% increase compared to $29.1
million for the six months ended September 30, 1996. The Distributed Sniffer
System analysis products accounted for a majority of these increases and the
majority of Network General's system products revenues in both the three and
six month periods ended September 30, 1997 and 1996, respectively. Sales of
third party products also contributed to the increases in systems revenues.
Services revenues include revenues from software support, maintenance
contracts and education and consulting services, as well as those revenues
from the first-year warranty period of customer support which have been
deferred and recognized in accordance with SOP 91-1, "Software Revenue
Recognition." For the quarter ended September 30, 1997, services revenues
increased 32% to $15.7 million compared to $11.9 million for the quarter ended
September 30, 1996. For the six months ended September 30, 1997, services
revenues increased 35% to $31.1 million compared to $23.0 million for the six
months ended September 30, 1996. The increases in services revenues resulted
from growth in all categories of services revenues, but were principally due
to the growth of the installed customer base and the resulting renewal of
maintenance contracts. In addition, Network General experienced increased
demand for its education and consulting services.
Gross Margin. Cost of revenues consists of manufacturing costs, cost of
services, royalties and warranty expenses. Gross margin as a percentage of
revenues decreased to 74% for the quarter ended September 30, 1997 from 75%
for the quarter ended September 30, 1996. For the six months ended September
30, 1997, gross margin decreased to 73% compared to 75% for the six months
ended September 30, 1996. These decreases resulted from higher growth in
services revenues, which have historically lower gross margins than Network
General's products, and changes in the mix of products sold (increased sales
of third party products and platforms which have a higher cost of revenue than
Network General's own products). Network General expects to continue offering
third party products and platforms and to grow its services business, but also
intends to increase its sales and licensing of internally developed products
and reduce certain of its platform resale activities.
Sales and Marketing Expenses. Sales and marketing expenses increased 27% to
$22.8 million for the quarter ended September 30, 1997, compared to $17.9
million for the same period in fiscal year 1997. For the six months ended
September 30, 1997, sales and marketing expenses increased 25% to $43.6
million compared to $34.9 million for the six months ended September 30, 1996.
These increases were due primarily to increases in staffing, sales programs
and commission expenses required to support increased sales volumes. As a
percentage of revenues, sales and marketing expenses increased to 35% for the
quarter ended September 30, 1997 compared to 32% for the quarter ended
September 30, 1996 and 36% for the six months ended September 30, 1997
compared to 33% for the six months ended September 30, 1996. These increases
are primarily due to revenues being lower than anticipated, resulting in
higher expenses relative to revenues.
Research and Development Expenses. Research and development expenses
increased 34% to $10.0 million for the quarter ended September 30, 1997
compared to $7.4 million for the quarter ended September 30, 1996. For the six
months ended September 30, 1997, research and development expenses increased
33% to $19.4 million compared to $14.6 million for the same period in fiscal
year 1997. These increases in spending were the result of increased staffing
and equipment expense to support the development of new products expected to
be released in the second half of fiscal year 1998 and beyond. As a percentage
of revenues, research and development expenses increased to 15% for the
quarter ended September 30, 1997 compared to 13% for the quarter ended
September 30, 1996 and 16% for the six months ended September 30, 1997
compared to 14% for the six months ended September 30, 1996. Network General
believes continued commitment to research and development is required to
remain competitive and, as such, expects continued greater research and
development expenses in absolute dollars in fiscal year 1998.
General and Administrative Expenses. General and administrative expenses for
the quarter ended September 30, 1997 increased 21% to $4.4 million compared to
$3.6 million for the quarter ended September 30, 1996. For the six months
ended September 30, 1997, general and administrative expenses increased 20% to
128
<PAGE>
$8.8 million compared to $7.3 million for the six months ended September 30,
1996. These increases in general and administrative expenses were primarily
due to increased staffing and related expenses to support operations. General
and administrative expenses as a percentage of revenues were 7% for the three
and six months ended September 30, 1997 and 1996, respectively.
Acquired In-Process Research and Development and Other Non-Recurring
Charges. Acquired in-process research and development and other non-recurring
charges were $23.7 million for the quarter and six months ended September 30,
1997. Acquired in-process research and development charges of $23.0 million
reflect the value of development projects in process at the time of the
acquisition of Cinco and were charged to operations on August 5, 1997, the
effective date of the acquisition. The amount allocated to acquired in-process
research and development related to projects which had not reached
technological feasibility and had no probable alternative future uses. (See
Unaudited Note 12 of Network General's Notes to Consolidated Financial
Statements). Other non-recurring charges for the three and six months ended
September 30, 1997 include $0.7 million associated with management
reorganizations and relocations, as well as office relocations in connection
with the Cinco acquisition. There were no acquired in-process research and
development charges or other non-recurring charges for the three and six
months ended September 30, 1996.
Interest and Other Income, Net. Interest and other income, net decreased to
$1.3 million for the quarter ended September 30, 1997 compared to $1.6 million
for the quarter ended September 30, 1996. For the six months ended September
30, 1997, interest and other income, net increased to $3.9 million compared to
$3.3 million for the six months ended September 30, 1996. The decrease in
interest and other income, net for the quarter ended September 30, 1997 was
the result of lower invested cash balances due to payments made for the
acquisition of 3DV Technology, Inc. ("3DV") on March 31, 1997 and Cinco on
August 5, 1997. The increase in interest and other income, net for the six
months ended September 30, 1997 compared to the six months ended September 30,
1996 was primarily the result of gains on the sale of investments.
Provision for Income Taxes. Excluding the impact of the Cinco acquisition,
the provision for income taxes was 33.5% for the quarter and six months ended
September 30, 1997, compared to 30.5% for the three and six months ended
September 30, 1996. Substantially all of Network General's operating loss
carryforwards were utilized at the end of fiscal year 1997, resulting in a
higher tax rate in fiscal year 1998.
Earnings (Loss) Per Share. Earnings (loss) per share for the quarter ended
September 30, 1997 was a loss of $0.37 per share compared to earnings of $0.22
per share for the same period in fiscal year 1997. For the six months ended
September 30, 1997, earnings (loss) per share was a loss of $0.21 per share
compared to earnings per share of $0.41 for the six months ended September 30,
1996. Excluding the non-recurring charges of $23.7 million, earnings per share
would have been $0.18 and $0.34 for the quarter and six months ended
September 30, 1997, respectively. Excluding the non-recurring charges, the
decrease in earnings per share for the quarter and six months ended September
30, 1997 was due to higher operating expenses relative to the increased
revenues and gross margin dollars.
FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
-------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SOURCES OF REVENUE
Domestic............................... $175,056 21% $144,144 33% $108,773
International.......................... 65,612 47% 44,701 44% 30,982
-------- --- -------- --- --------
Total revenues......................... $240,668 27% $188,845 35% $139,755
======== === ======== === ========
</TABLE>
Revenues. Revenues for the fiscal year ended March 31, 1997 increased 27% to
$240.7 million compared to fiscal year 1996 revenues of $188.8 million. Fiscal
year 1996 revenues increased 35% over fiscal year 1995 revenues. In both
fiscal years, revenue growth was fueled by continued acceptance of Network
General's tool
129
<PAGE>
and system products and services offerings, as well as expansion into indirect
channels and international markets. Network General plans to continue
expansion into indirect channels and international markets in fiscal year
1998.
Domestic revenues increased 21% to $175.1 million for fiscal year 1997
compared to $144.1 million for fiscal year 1996. The decrease in the domestic
growth rate from fiscal year 1996 to fiscal year 1997 was the result of
Network General's focus on growth in international markets, especially Europe,
and increased competition in domestic markets. Fiscal year 1996 domestic
revenues increased 33% compared to $108.8 million for fiscal year 1995.
International revenues increased 47% for fiscal year 1997 compared to fiscal
1996. European revenues grew 54% from fiscal year 1996 to fiscal year 1997 as
a result of Network General's European sales strategy involving both direct
and indirect sales channels. Pacific Rim, Latin American and Canadian revenues
increased 42% from fiscal year 1996 to fiscal year 1997 as a result of
increased sales volumes by Network General's exclusive partner in Japan as
well as increased sales volumes in Australia, Canada and Korea. Fiscal year
1996 international revenues increased 44% over fiscal year 1995 international
revenues.
<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
-------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SOURCES OF REVENUES
Tool products(1)...................... $121,199 27% $ 95,310 30% $ 73,114
System products(2).................... 68,433 19% 57,346 44% 39,872
-------- ---- -------- ---- --------
Subtotal product revenues........... 189,632 24% 152,656 35% 112,986
Services(3)........................... 51,036 41% 36,189 35% 26,769
-------- ---- -------- ---- --------
Total revenues........................ $240,668 27% $188,845 35% $139,755
======== ==== ======== ==== ========
PERCENTAGES OF REVENUES
Tool products......................... 50% 51% 52%
System products....................... 29% 30% 29%
-------- -------- --------
Subtotal product revenues........... 79% 81% 81%
Services.............................. 21% 19% 19%
-------- -------- --------
Total revenues........................ 100% 100% 100%
======== ======== ========
</TABLE>
- --------
(1) Tool products revenues were derived principally from sales of the Sniffer
Network Analyzer ("Sniffer") local area network and wide area network
analysis products. In addition, Network General derived tool products
revenues from the resale of third party products, including Ganymede
Software, Inc.'s line of Chariot network performance test tools. In both
fiscal years 1996 and 1995, tool products revenues also include Sniffer
product rentals.
(2) System products revenues were derived principally from the Distributed
Sniffer System analysis products. In addition, Network General derived
system products revenues from its Service Level Manager monitoring
products as well as third party remote monitoring products.
(3) Services revenues include first-year warranty revenues as defined by
Statement of Position 91-1, "Software Revenue Recognition," and revenues
from software support, maintenance contracts and education and consulting
services. In fiscal year 1997, services revenues also include Sniffer
product rentals.
Network General's tool products revenues increased 27% for fiscal year 1997
to $121.2 million from $95.3 million for fiscal year 1996. Fiscal year 1996
tool products revenues increased 30% from $73.1 million in fiscal year 1995.
The growth in both periods reflects continued expansion in the customer base
for Network General's Sniffer Network Analyzer products which accounted for
substantially all of Network General's tool products revenue in fiscal years
1997, 1996 and 1995. Tool products revenues represented 50% of total revenues
in fiscal year 1997 compared to 51% in fiscal year 1996 and 52% in fiscal year
1995.
130
<PAGE>
Revenues for fiscal year 1997 included $68.4 million of system products
revenues, a 19% increase, compared to $57.3 million for fiscal year 1996. The
decrease in the growth rate of system products revenues from fiscal year 1996
to fiscal year 1997 was due to increased competition and the growth in
indirect channel sales which are comprised primarily of tool products and
services. Fiscal year 1996 system products revenues increased 44% from $39.9
million in fiscal year 1995. The Distributed Sniffer System analysis products
accounted for the majority of Network General's systems product revenues in
fiscal years 1997, 1996 and 1995.
Services revenues include revenues from software support, maintenance
contracts, and education and consulting services, as well as those revenues
from the first year warranty period of customer support which have been
deferred and recognized in accordance with Statement of Position 91-1,
"Software Revenue Recognition." For fiscal year 1997, services revenues
increased 41% to $51.0 million compared to $36.2 million for fiscal year 1996.
Fiscal year 1996 services revenues increased 35% from $26.8 million in fiscal
year 1995. The increase in services revenues resulted from growth in all
categories of services revenues but principally due to the growth of the
installed customer base and the resulting renewal of maintenance contracts. In
addition, demand increased for Network General's education and consulting
services. As a percentage of total revenues, services revenues represented 21%
of revenues in fiscal year 1997 and 19% of revenues in each of fiscal years
1996 and 1995.
Gross Margin. Gross margin as a percentage of revenues decreased to 74% for
fiscal year 1997 from 77% in each of fiscal years 1996 and 1995. The decrease
resulted from: changes in the mix of products sold (increased sales of third
party products and platforms which have a lower gross margin than Network
General's own products); higher growth in services revenues which have
historically lower gross margins than those of Network General's products; and
increased market pressure to reduce prices or offer higher price discounts on
Network General's products. During fiscal year 1997, Network General was able
to offset the impact of reduced gross margins with a reduction in operating
expenses as a percentage of revenues. There can be no assurance Network
General will be able to offset future reduced gross margins through continued
cost management.
Sales and Marketing Expenses. Sales and marketing expenses increased 19% to
$74.6 million in fiscal year 1997 compared to $62.5 million in fiscal year
1996. Fiscal year 1996 sales and marketing expenses increased 33% compared to
fiscal year 1995 sales and marketing expenses of $47.0 million. The increases
in fiscal years 1997 and 1996 were due primarily to increased staffing,
commission expenses and promotional activities required to support increased
sales volumes. As a percentage of revenues, sales and marketing expenses
decreased to 31% in fiscal year 1997 compared to 33% and 34% in fiscal years
1996 and 1995, respectively. The decrease is attributable to the increased use
of indirect distribution channels to sell Network General's products and
services, thereby reducing the amount of direct selling costs related to such
sales of Network General's products and services.
Research and Development Expenses. Research and development expenses were
$30.9 million in fiscal year 1997 compared to $27.4 million in fiscal year
1996 and $20.0 million in fiscal year 1995. As a percentage of revenues,
research and development expenses decreased to 13% for fiscal year 1997,
compared to 15% and 14% in fiscal years 1996 and 1995, respectively. The
percentage decrease between fiscal year 1997 and 1996 resulted from
significant expenses incurred in fiscal year 1996 to support accelerated
development efforts of high speed network technology products. The increase in
actual spending was a result of increased staffing and equipment expense to
support growth in Network General's breadth of product and services offerings.
General and Administrative Expenses. General and administrative expenses for
fiscal year 1997 increased 24% to $15.4 million compared to $12.4 million for
fiscal year 1996. Fiscal year 1996 expenses increased 35% compared to expenses
of $9.2 million for fiscal year 1995. The increase in general and
administrative expenses in both fiscal years was primarily due to increased
staffing to support operations. General and administrative expenses as a
percentage of revenues were 6% in fiscal year 1997 and 7% for each of fiscal
years 1996 and 1995, respectively.
131
<PAGE>
Acquired In-Process Research and Development. Acquired in-process research
and development was $19.5 million in fiscal year 1997 and $7.2 million in
fiscal year 1996. Acquired in-process research and development in 1997
reflects the value of development projects in process at the time of the
acquisition of 3DV which was charged to operations on March 31, 1997, the
effective date of the acquisition. Acquired in-process research and
development in fiscal year 1996 reflects the value of development projects in
process at the time of the acquisition of AIM which was charged to operations
in the second quarter of fiscal year 1996. In both fiscal years, the amount
allocated to acquired in-process research and development related to projects
which had not reached technological feasibility and had no probable
alternative future uses. (See Note 2 of Notes to Network General's
Consolidated Financial Statements.)
There were no acquired in-process research and development charges in fiscal
year 1995.
Interest Income, Net. Interest income, net decreased 14% to $6.1 million in
fiscal year 1997 compared to $7.1 million in fiscal year 1996. The decrease in
interest income is primarily the result of the repositioning of a portion of
Network General's investment portfolio from taxable U.S. debt to tax-exempt
municipal securities which paid lower pre-tax interest income. Interest
income, net increased 33% in fiscal year 1996 compared to $5.3 million in
fiscal year 1995 as a result of higher balances of cash equivalents and
marketable securities, as well as an investment diversification from tax-free
municipal to taxable U.S. debt securities which paid higher pre-tax interest
during fiscal year 1996. Due to Network General's continued commitment to its
systematic share repurchase program and the reduction in cash balances
available for investment as a result of the 3DV acquisition at the end of
fiscal 1997, interest income is expected to decline in fiscal 1998.
Provision For Income Taxes. The provision for income taxes was 43.8% for
fiscal year 1997, compared to 35.5% for fiscal year 1996 and 31.5% for fiscal
year 1995. Excluding the impact of the 3DV acquisition during fiscal year 1997
and the impact of the AIM acquisition during fiscal year 1996, the provision
for income taxes would have been 30.5% in each of fiscal years 1997 and 1996.
Excluding the impact of the 3DV acquisition, the fiscal year 1997 provision
rate of 30.5% resulted from Network General's ability to utilize certain
operating loss carryforwards.
Earnings Per Share. Earnings per share for fiscal year 1997 decreased 8% to
$0.55 per share compared to $0.60 per share in fiscal year 1996. Excluding
non-recurring charges to write-off acquired in-process research and
development related to 3DV in fiscal year 1997 and AIM in fiscal year 1996,
earnings per share would have been $0.98 and $0.77 in fiscal years 1997 and
1996, respectively. Excluding these non-recurring charges, the increase in
earnings per share from fiscal year 1996 to fiscal year 1997 was due to
increased revenues and gross margin dollars and lower operating expenses as a
percentage of revenues. Excluding the effect of AIM, earnings per share for
fiscal year 1996 increased 35% over fiscal year 1995 earnings per share of
$0.57.
Impact of Recently Issued Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") which is required to be
adopted by Network General in its third quarter of fiscal 1998. At that time,
Network General will be required to change the method currently used to
compute earnings per share and to restate earnings per share amounts for all
prior periods. Under the new requirements for calculating earnings per share,
primary earnings per share will be replaced with basic earnings per share and
fully diluted earnings per share will be replaced with diluted earnings per
share. Under basic earnings per share, the dilutive effect of stock options
will be excluded. Network General does not expect the effect of adopting SFAS
128 to have a material impact on earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, marketable securities and long-term investments
decreased by $42.1 million during the six months ended September 30, 1997 to
$122.8 million from $164.9 million at March 31, 1997. This decrease resulted
primarily from: the $20.0 million payment in April 1997 for the 3DV
acquisition in April 1997; the $25.1 million (net of cash acquired) payment
for the Cinco acquisition in August 1997; and $23.4 million in
132
<PAGE>
common stock repurchases. These decreases were partially offset by $29.1
million of cash provided by operating activities.
The net cash provided by operating activities was $29.1 million for the six
months ended September 30, 1997 compared to net cash provided by operating
activities of $11.8 million for the six months ended September 30, 1996. For
the period ended September 30, 1997, the primary source of these funds was
income from operations, adjusted for the write-off of acquired in-process
research and development related to the acquisition of Cinco and other non-
recurring charges, depreciation and amortization and net changes in certain
assets and liabilities, offset by increased deferred taxes, net and the gain
on the sale of investments. For the same period in fiscal year 1997, the
source of these funds was net income adjusted for depreciation and
amortization, offset by net changes (uses) in certain assets and liabilities.
The net cash used in investing activities was $38.3 million for the six
months ended September 30, 1997 compared to net cash provided by investing
activities of $2.2 million for the six months ended September 30, 1996. Net
cash used in investing activities during the first six months of fiscal year
1998 reflects the payment of $20.0 million for the March 31, 1997 acquisition
of 3DV, $25.1 million (net of cash acquired) for the acquisition of Cinco in
August 1997, purchases of investments and net additions to property and
equipment, offset by proceeds from sales/maturities of investments. Net cash
provided by investing activities during the first six months of fiscal year
1997 reflects proceeds from sales/maturities of held-to-maturity and
available-for-sale investments, net of property and equipment and investment
purchases.
The net cash used in financing activities was $18.8 million for the six
months ended September 30, 1997 and $11.6 million for the six months ended
September 30, 1996. During the first six months of fiscal year 1998,
repurchases of common stock totaled $23.4 million, offset by proceeds of $4.6
million from the issuance of common stock under Network General's stock option
plans. Net cash used in financing activities during the first six months of
fiscal year 1997 reflects stock repurchases totaling $21.3 million, offset by
proceeds of $9.6 million from stock issuances under Network General's stock
option plans. As of September 30, 1997, Network General was authorized to
repurchase up to an additional 5,910,000 of its shares on the open market.
Network General anticipates it will continue its systematic share repurchase
program.
Cash, cash equivalents and marketable securities increased $16.8 million,
$22.7 million, and $37.4 million in fiscal years 1997, 1996 and 1995,
respectively. The primary source of these funds in all periods was cash
provided by operating activities, as well as proceeds from the issuance of
common stock under Network General's stock option and employee stock purchase
plans.
Net cash generated from operations in fiscal year 1997 was $52.8 million
compared to $39.9 million in fiscal year 1996 and $33.1 million in fiscal year
1995. The primary source of these funds was net income before depreciation and
amortization for all periods. The net increase in 1997, after adjustments
related to depreciation, amortization and acquired in-process research and
development, reflects increases in accounts payable and accrued liabilities
and deferred revenue, offset by increases in accounts receivable and deferred
taxes, net. The net increase in fiscal year 1996, after adjustments related to
depreciation, amortization and acquired in-process research and development,
reflects increases in accounts payable and accrued liabilities and deferred
revenue, offset by an increase in accounts receivable. The net increase in
fiscal year 1995, after adjustments related to depreciation and amortization,
reflects a decrease in deferred taxes, net, an increase in deferred revenue
and reductions in accounts receivable, partially offset by an increase in
inventories and prepaid expenses and other assets.
Net cash used in investing activities was $12.0 million, $11.7 million, and
$26.4 million during fiscal years 1997, 1996 and 1995, respectively. Net cash
used in investing activities during fiscal 1997, 1996 and 1995 reflects
purchases of investments and net additions to property and equipment, offset
by proceeds from the sales/maturities of investments reinvested in cash and
cash equivalents. Additionally, Network General used cash of $6.5 million to
complete the purchase of AIM in fiscal 1996.
133
<PAGE>
Net cash used in financing activities during fiscal 1997 was $26.2 million.
The primary use of those funds was to repurchase 2,200,000 shares of Network
General's common stock at an average price of $24.07 per share, partially
offset by proceeds from the issuance of common stock under Network General's
stock option and employee stock purchase plans. Net cash used in financing
activities was $12.9 million for fiscal year 1996. The primary use of those
funds was to repurchase 1,700,000 shares of Network General's common stock at
an average price of $18.16, which was partially offset by proceeds from the
issuance of common stock under Network General's stock option and employee
stock purchase plans. Net cash provided by financing activities was $7.9
million for fiscal year 1995. The primary source of those funds was proceeds
from the issuance of common stock under Network General's stock option and
employee stock purchase plans, partially offset by repurchases of 790,000
shares of Network General's common stock at an average price of $11.08.
Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each
of Network General and McAfee has agreed that if the Merger is not consummated
as a result of certain specified events, it will pay to the other party a
termination fee of $30.0 million. Payment of the fees described in this
paragraph shall not be in lieu of damages incurred in the event of material
and willful breach of the Reorganization Agreement.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break-up" fees described above)
could have a material adverse effect on Network General's results of
operations.
Network General currently has no outstanding bank borrowings or any
established lines of credit. Network General believes cash generated from
operations, together with existing cash and investment balances, will be
sufficient to satisfy operating cash and capital expenditure requirements
through at least the next twelve months.
134
<PAGE>
NETWORK GENERAL MANAGEMENT
EXECUTIVE OFFICERS OF NETWORK GENERAL
The executive officers and the Chairman of the Board of Network General and
their ages as of October 13, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Leslie G. Denend................. 56 President, Chief Executive Officer
and Director
Harry J. Saal.................... 53 Chairman of the Board
David M. Carver.................. 50 Executive Vice President, Chief
Operating Officer
James T. Richardson.............. 49 Senior Vice President, Chief
Financial Officer and Assistant
Secretary
John R. Stringer................. 50 Senior Vice President, Worldwide
Field Operations
Scott C. Neely................... 48 Vice President, General Counsel and
Secretary
Michael M. Cully................. 55 Vice President and Controller
</TABLE>
Mr. Denend was promoted to President and Chief Executive Officer of Network
General and was elected a director of Network General in June 1993. He served
as Network General's Senior Vice President of Products from February 1993 to
June 1993. Prior to joining Network General, he was President of Vitalink, a
manufacturer of internetworking products, from October 1990 to December 1992.
From 1989 to 1990, Mr. Denend served in a variety of positions at 3Com
Corporation, a data networking company, most recently as Executive Vice
President for Product Operations. From 1983 to 1989, he was a principal with
McKinsey & Company, a management consulting firm.
Dr. Saal, a founder of Network General, has served as Chairman of the Board
of Directors since its inception. Dr. Saal served as President of Smart
Valley, Inc., a trade association, from September 1993 until December 1995. He
served as President and Chief Executive Officer of Network General from its
inception in May 1986 until June 1993. He was also Network General's Chief
Financial Officer from May 1986 until November 1987. Dr. Saal is also a
director of Personal Computer Products, Inc., Borland International, Inc., and
Globalnet Systems, Limited and serves as a director of several privately-held
companies and non-profit associations.
Mr. Carver was promoted to Executive Vice President and Chief Operating
Officer in January 1997. He served as Vice President of Services from November
1995 through January 1997. Prior to joining Network General, Mr. Carver was an
independent consultant affiliated with Institutional Venture Partners, from
April 1994 to October 1995. From 1974 to March 1994, Mr. Carver held various
positions in marketing and general management functions at Hewlett Packard
Company, most recently as Software Business Manager responsible for Hewlett
Packard Customer Support business unit.
Mr. Richardson was named Senior Vice President, Corporate Operations, Chief
Financial Officer and Secretary in April 1994. Prior to joining Network
General, Mr. Richardson was Vice President, Chief Financial Officer and
Secretary for Logic Modeling Corporation, a simulation modeling software
company, from July 1992 to April 1994. From 1989 to July 1992, he served as
Vice President of Finance and Administration, Chief Financial Officer,
Treasurer and Secretary of Advanced Logic Research, a microcomputer company.
From 1977 to 1989, Mr. Richardson held various positions at Floating Point
Systems, Inc., a scientific computer company, the last one of which was as
Vice President of Finance and Administration and Chief Financial Officer.
Mr. Stringer was promoted to Senior Vice President, Worldwide Field
Operations in October 1996. He served as Network General's Vice President,
North American Sales from January 1995 to October 1996. Prior to joining
Network General, Mr. Stringer served from July 1992 to December 1994 as Vice
President and General Manager, Worldwide Marketing and Sales, for IT
Corporation of America, a provider of computer outsourcing services to
financial institutions in South America. From November 1990 to June 1992, Mr.
Stringer was a consultant advising with respect to alternative sales channels
of distribution, new business development and acquisitions.
135
<PAGE>
Mr. Neely was named Vice President, General Counsel and Secretary in
February 1997. From November 1994 until joining Network General, Mr. Neely
held similar positions for Phoenix Technologies Ltd., a supplier of standards-
based system enabling software for the personal computer and information
appliance industries. For more than three years prior to that, Mr. Neely
served as Vice President, General Counsel and Assistant Secretary of The ASK
Group, Inc., a developer of application software and relational database
software products.
Mr. Cully was named Vice President and Controller in August 1997. From March
1995 until joining Network General, Mr. Cully served as Vice President and
Corporate Controller of Adobe Systems Incorporated, a leading supplier of
software products in the print and electronic media markets. For more than
three years prior to that, Mr. Cully was Vice President, Finance--Corporate
Controller for Maxtor Corporation, a manufacturer of disk drives.
136
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF NETWORK GENERAL
The following table sets forth as of October 13, 1997 (except as noted in
the footnotes to the table) certain information with respect to the beneficial
ownership of Network General's Common Stock by (i) all persons known by
Network General to be the beneficial owners of more than 5% of the outstanding
Common Stock of Network General, (ii) each director of Network General, (iii)
the Chief Executive Officer and the other executive officers of the Network
General named in the Summary Compensation Table under the section headed
"Executive Compensation and Other Matters," and (iv) all executive officers
and directors of Network General as of October 13, 1997, as a group.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF NETWORK
NATURE OF GENERAL COMMON
NAME OF BENEFICIAL OWNER(1) SHARES STOCK OUTSTANDING
- --------------------------- ---------- ------------------
<S> <C> <C>
A I M Management Group Inc.(2).................. 4,008,500 9.4%
11 Greenway Plaza, Suite 1919
Houston, Texas 77046
T. Rowe Price Associates, Inc.(3)............... 3,247,450 7.6%
100 E. Pratt Street
Baltimore, MD 94111
RCM Capital Management, L.L.C.(4)............... 3,043,300 7.2%
Four Embarcadero Center, Suite 2900
San Francisco, CA 94111
McAfee Associates, Inc.(13)..................... 2,725,484 6.4%
2805 Bowers Avenue
Santa Clara, CA 95051
Harry J. Saal(5)................................ 1,845,400 4.3%
Leslie G. Denend(6)............................. 423,694 *
Laurence R. Hootnick(7)......................... 58,666 *
Gregory M. Gallo(8)............................. 56,166 *
David M. Carver(9).............................. 78,750 *
James T. Richardson(9).......................... 78,123 *
Howard Frank(9)................................. 41,666 *
John R. Stringer(9)............................. 55,020 *
Charles J. Abbe(10)............................. 36,833 *
Douglas C. Chance(11)........................... 24,500 *
Janet L. Hyland(9).............................. 24,166 *
All executive officers and directors as a group
(13 persons)(12)............................... 2,725,484 6.3%
</TABLE>
- --------
* Less than 1%
(1) The persons named in the table above have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them, subject to community property laws where applicable and
except as otherwise disclosed in the footnotes to this table. Unless
otherwise indicated, the business address of each of the beneficial
owners listed is 4200 Bohannon Drive, Menlo Park, California 94025.
(2) Based on Amendment No. 1 dated February 12, 1997 to a Schedule 13G filed
by A I M Management Group Inc. with the SEC.
(3) Based on a Schedule 13G dated February 14, 1997 filed with the SEC by T.
Rowe Price Associates, Inc. ("Price Associates"). These securities are
owned by various individual and institutional investors for whom Price
Associates serves as investment adviser with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, Price Associates is
deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner
of such securities.
137
<PAGE>
(4) Based on an amendment to Schedule 13G dated January 30, 1997 and filed
with the SEC by RCM Capital Management, L.L.C., its Managing Agent (RCM
Limited L.P.) and RCM Limited L.P.'s general partner (RCM General
Corporation).
(5) Represents shares held in the Harry J. Saal Trust dated July 19, 1972 of
which Mr. Saal and his wife are the trustees.
(6) Includes 410,416 shares subject to options exercisable within 60 days of
October 13, 1997.
(7) Includes 2,000 shares held by the Laurence R. Hootnick Trust dated April
22, 1976, for which Mr. Hootnick and his wife are trustees, and 56,666
shares subject to options exercisable within 60 days of October 13, 1997.
(8) Includes 2,000 shares held by the Gallo Family Trust, for which Mr. Gallo
and his wife are trustees, and 54,166 shares subject to options
exercisable within 60 days of October 13, 1997.
(9) Represents shares subject to options exercisable within 60 days of
October 13, 1997.
(10) Includes 35,833 shares subject to options exercisable within 60 days of
October 13, 1997.
(11) Includes 22,500 shares subject to options exercisable within 60 days of
October 13, 1997.
(12) Includes 859,806 shares subject to options exercisable within 60 days of
October 13, 1997. See also notes 4, 7 and 8.
(13) Based on a Schedule 13D dated October 23, 1997 and filed with the SEC by
McAfee. Pursuant to the Network General Voting Agreements, the McAfee
Board has the power to vote all shares held by the executive officers and
directors of Network General in favor of the approval of the Merger; the
McAfee Board has no other voting rights with respect to such shares and
has no dispositive rights.
138
<PAGE>
NETWORK GENERAL EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of Network General and the three other current
executive officers of Network General who were most highly compensated as of
March 31, 1997 and whose total salary and incentive compensation for the
fiscal year ended March 31, 1996 exceeded $100,000, for services in all
capacities to Network General, earned during the fiscal years ended March 31,
1997, March 31, 1996, and March 31, 1995:
NETWORK GENERAL SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
------------------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL FISCAL OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS(2) (SHARES) COMPENSATION(3)
- ------------------ ------ ----------- ------------------------ ---------------
<S> <C> <C> <C> <C> <C>
Leslie G. Denend....... 1997 $315,000 $255,000 -- $ 5,021
President and Chief 1996 300,000 252,883 340,000 7,285
Executive Officer 1995 265,008 190,598 100,000 7,043
James T. Richardson.... 1997 210,000 79,000 30,000 60,369
Senior Vice President 1996 203,000 81,653 50,000 39,658
and Chief Financial
Officer 1995 184,808 74,523 170,000 39,032
John R. Stringer....... 1997 155,045 92,945 30,000 3,790
Senior Vice President, 1996 120,000 106,386 32,000 59,622
Worldwide Field
Operations 1995 40,000 17,265 100,000 --
David M. Carver........ 1997 156,000 74,750 30,000 1,525
Executive Vice
President 1996 50,250 20,903 120,000 488
and Chief Operating
Officer 1995 -- -- -- --
</TABLE>
- --------
(1) Includes all amounts paid to the named person by Network General for the
fiscal year indicated, whether in the capacity of an executive officer or
otherwise. Mr. Stringer joined Network General in January 1995 and Mr.
Carver in November 1995.
(2) Reflects amounts paid with respect to the fiscal year indicated. Bonuses
are based on performance and the amounts are for the fiscal year
indicated. Includes commissions earned for Mr. Stringer of $62,695,
$78,151 and $9,156 in fiscal years 1997, 1996 and 1995, respectively.
(3) Amounts include 401(k) employer matching funds, car allowance, payment for
attendance at Presidents Club, payment of relocation expenses and certain
living and travel expenses. Mr. Denend's amounts include 401(k) employer
matching funds in fiscal 1997, 1996 and 1995 of $1,614, $1,985 and $2,451,
respectively, and payments for attendance at Presidents Club in fiscal
1997, 1996 and 1995 of $3,407, $5,300 and $4,592, respectively. Mr.
Richardson's amounts include 401(k) employer matching funds in fiscal
years 1997, 1996 and 1995 of $1,888, $1,574 and $750, respectively; and
payment of certain living and travel expenses in fiscal 1997, 1996 and
1995 of $58,480, $38,084 and $38,282, respectively. Mr. Stringer's amounts
include: 401(k) employer matching funds in fiscal 1997 and 1996 of $1,550
and $900, respectively; payments for attendance at President's Club in
fiscal 1997 and 1996 of $2,240 and $4,827, respectively; payment of
certain living and travel expenses in fiscal 1996 of $33,895, and payment
of a special $20,000 relocation bonus in fiscal 1996. Mr. Carver's amounts
include 401(k) employer matching funds in fiscal 1997 and 1996 of $1,525
and $488, respectively.
139
<PAGE>
STOCK OPTIONS GRANTED BY NETWORK GENERAL
DURING THE FISCAL YEAR ENDED MARCH 31, 1997
The following table provides the specified information concerning grants of
options to purchase Network General's Common Stock made during the fiscal year
ended March 31, 1997 to the persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
OPTIONS GRANTED TO
GRANTED EMPLOYEES IN EXERCISE EXPIRATION
NAME (SHARES)(2) FISCAL YEAR PRICE(3) DATE 5%(1) 10%(1)
- ---- ----------- ------------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leslie G. Denend........ -- N/A N/A N/A N/A N/A
James T. Richardson..... 30,000 1.64 $16.0625 09/11/06 $303,049 $767,985
John R. Stringer........ 30,000 1.64 16.0625 09/11/06 303,049 767,985
David M. Carver......... 30,000 1.64 16.0625 09/11/06 303,049 767,985
</TABLE>
- --------
(1) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on the SEC rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Common
Stock, overall market conditions and the option holders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved. One share of stock purchased at $16.0625
in 1997 would yield profits of $10.10 per share at 5% appreciation over 10
years, or $25.60 per share at 10% appreciation over the same period.
(2) Initial grants for new hires and initial grants for new officers generally
vest at the rate of one-quarter at the end of one year, and then 1/48 per
month thereafter for each full month of the optionee's continuous
employment with Network General until fully vested at the end of four
years. Subsequent option grants generally vest monthly at a rate of 1/48
per month for each full month of the optionee's continuous employment with
Network General until fully vested at the end of four years. All of the
option grants listed in the table were subsequent option grants. Under the
1989 Stock Option Plan, the Board retains discretion to modify the terms
of outstanding options, subject to the provisions of that plan. For
additional information regarding options, see "--Network General
Employment, Severance and Change in Control Arrangements" below.
(3) All options were granted at market value on the date of grant.
140
<PAGE>
NETWORK GENERAL OPTION EXERCISES AND YEAR-END VALUES
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
The following table provides the specified information concerning exercises
of options to purchase Network General's Common Stock in the fiscal year ended
March 31, 1997, and unexercised options held as of March 31, 1997, by the
persons named in the Summary Compensation Table:
AGGREGATE NETWORK GENERAL OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT 3/31/97 MONEY OPTIONS AT 3/31/97
------------------------------- -------------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED(1) EXERCISABLE(2) UNEXERCISABLE(2) EXERCISABLE(3) UNEXERCISABLE(3)
- ---- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Leslie G. Denend........ 155,000 $2,953,282 160,416 454,584 $2,268,742 $2,217,821
James T. Richardson..... 58,958 894,370 25,207 105,835 94,649 793,897
John R. Stringer........ 36,000 375,819 17,916 94,084 132,611 665,066
David M. Carver......... 10,000 98,125 31,250 108,750 163,047 570,703
</TABLE>
- --------
(1) Value realized by the optionee prior to the payment of taxes.
(2) Company stock options granted in fiscal 1997 generally vest over a four
year period from the date of grant, and are exercisable only to the extent
vested.
(3) The value of the unexercised in-the-money options is based on the closing
sales price of Network General's Common Stock on March 31, 1997 ($21.50
share).
NETWORK GENERAL COMPENSATION OF DIRECTORS
During the fiscal year ended March 31, 1997, Network General's non-employee
directors received $1,000 for each meeting of the Board of Directors they
attended, $500 for each committee meeting they attended and a $1,000 per month
retainer. Non-employee directors who travel more than four hours to attend
Board meetings receive an additional $2,000 per meeting. Network General's
non-employee directors also received options under Network General's 1989
Outside Directors Stock Option Plan (the "Directors Plan"). Since November 1,
1993, an option to purchase 20,000 shares of Common Stock has been granted
upon a non-employee director's initial eligibility under the Directors Plan,
with an additional option to purchase 5,000 shares granted at the completion
of each year of service. Mr. Frank and Ms. Hyland are also reimbursed for out-
of-pocket travel expenses related to Board and Committee meetings. Network
General also makes available health and medical coverage to any non-employee
Board member who elects to participate under the same plans as it provides its
U.S. employees generally. A director participating in this program pays for
his or her premium coverage through deductions from the standard monthly
retainer. Network General's directors who are also officers of Network General
did not receive any compensation for their services as members of the Board of
Directors. No options will be granted pursuant to the Directors Plan after
consummation of the Merger.
Pursuant to the Reorganization Agreement, the Network General Board intends
to authorize compensation in the amounts of $100,000 and $50,000 to Mr.
Hootnick and Mr. Gallo, respectively, for their efforts in negotiating the
Merger. See "Approval of the Merger and Related Transactions--Material
Contacts and Board Deliberations."
141
<PAGE>
NETWORK GENERAL EMPLOYMENT, SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
Options granted to certain executive officers of Network General under its
1989 Stock Option Plan (the "1989 Option Plan") will become immediately
exercisable and vested under certain circumstances, as explained below, upon a
"change of control" as defined under the 1989 Option Plan. In the event of a
transfer of control of Network General, the Board shall provide that the
unexercisable and/or unvested portions of any outstanding option shall become
immediately exercisable and vested as of a date prior to the transfer of
control if the acquiring or successor corporation does not elect to either
assume the options or provide substitute options for such outstanding options.
Any outstanding options which are not exercised, assumed or replaced will
terminate effective as of the date of the transfer of control.
All options granted to Network General's non-employee directors pursuant to
the Directors Plans will immediately vest and become exercisable in full in
connection with the Merger. See "Terms of the Merger--Interests of Certain
Persons."
In April 1994, Network General entered into employment agreements with key
executive officers Leslie G. Denend, James T. Richardson and Richard H. Lewis.
Network General entered into similar employment agreements with Michael H.
Kremer in August 1995 and with David M. Carver and John R. Stringer in April
1997. These agreements provide that, in the event the officer is terminated,
including a "constructive termination" by demoting or reducing the salary of
the officer, within two years after a "change of control" of Network General,
the officer would be entitled to continued salary, bonus and commission
payments and immediate acceleration of all options to purchase shares of
Network General's Common Stock granted to that officer prior to the "change of
control." In the event of such termination, Mr. Denend would be entitled to
continuation of his salary, bonus and commission payments until the date two
years after such termination; the remaining officers would be entitled to such
continuation until the date one year after such termination (respectively, the
"Severance Periods"). Each executive would be entitled to continued medical
coverage by Network General during the Severance Period, unless the executive
is covered by another employer's group health plan. See "Terms of the Merger--
Interests of Certain Persons."
In July 1996, the Board established a relocation loan program for officers.
Pursuant to that program, Network General agreed to loan Mr. Stringer $500,000
in two installments to assist in his relocation from Georgia to California as
part of his promotion to Senior Vice President, Worldwide Field Operations.
The loan is evidenced by a full recourse promissory note under which principal
is repayable on the fifth anniversary of the close of escrow for the
California residence being purchased by Mr. Stringer (the "Principal Due
Date"). Interest is payable semi-annually at the simple annual rate of 6.6%
and the source of interest payments is first from bonuses, if any, otherwise
payable to Mr. Stringer. Mr. Stringer's obligations as to the first
installment of the loan are secured by a security interest in any Company
stock options granted Mr. Stringer and any proceeds from the sale of the
underlying shares. When Network General funds the balance of the loan, the
collateral securing the loan is replaced with the California land and
residence being purchased. If Mr. Stringer's employment with Network General
is terminated for any reason other than for certain specified reasons
following a change of control involving Network General, all outstanding
principal and interest is due on the earlier of nine months after such
termination or the Principal Due Date. If termination is for certain specified
reasons following a change of control involving Network General, interest
accruing for the first year following termination is borne by Network General
or its successor and principal remains due on the Principal Due Date. As of
March 31, 1997, $200,000 principal and $5,570 of accrued interest was
outstanding under Mr. Stringer's note.
In December 1996, Network General entered into an agreement with Mr. Lewis
under which Mr. Lewis retired from his position as Senior Vice President,
Worldwide Field Operations, but would remain a consulting vice president until
December 31, 1997. Under the agreement, until such time as Mr. Lewis accepted
employment elsewhere or provided services to a competitor (but not later than
December 31, 1997), Network General will continue paying Mr. Lewis' then
current base salary ($14,166.67 per month), $5,000 per month for June through
December 1997, any amounts earned as commissions through the period ended
March 31, 1997,
142
<PAGE>
and any executive bonus earned for the second half of fiscal 1997. In January
1997, Network General entered into an agreement with Mr. Kremer under which
Mr. Kremer resigned from his position as Senior Vice President, Product
Development, but would remain an employee of Network General through the end
of calendar 1997. Under the agreement, until such time as Mr. Kremer accepted
employment elsewhere or provided services to a competitor (but not later than
December 31, 1997), Network General will continue paying Mr. Kremer's then
current base salary of $10,000 per month.
CERTAIN TRANSACTIONS OF PARTIES RELATED TO NETWORK GENERAL
In December 1994, Network General committed to make charitable donations in
the amount of one million dollars ($1,000,000) in value of goods, services and
grants over three years to the Santa Clara and San Mateo Counties schools in
connection with the Smart Valley Challenge 2000. Dr. Saal, Chairman of the
Board of Directors, served as President of Smart Valley, Inc. from September
1993 until December 1995. The disinterested directors of the Board unanimously
ratified the charitable donation.
Pursuant to provisions of the Delaware General Corporation Law, Network
General has adopted provisions in its Certificate of Incorporation which
eliminate the personal liability of its directors to Network General and its
stockholders for monetary indemnification of its directors, officers,
employees and agents to the full extent permitted by the Delaware General
Corporation Law, including those circumstances in which indemnification would
otherwise be discretionary. The Bylaws expressly authorize the use of
indemnity agreements, and with the approval of its stockholders, Network
General has entered into such agreements with each of its directors and
executive officers.
LEGAL MATTERS
The validity of the shares of McAfee Common Stock to be issued pursuant to
the Reorganization Agreement and the federal income tax consequences of the
Merger will be passed upon for McAfee by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with the Reorganization Agreement and the federal income tax
consequences of the Merger will be passed upon for Network General by Gray
Cary Ware & Freidenrich, A Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of McAfee Associates, Inc. at December
31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, have been included in this Joint Proxy Statement/Prospectus
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in auditing and
accounting. Representatives of Coopers & Lybrand L.L.P. are expected to be
present at the McAfee Special Meeting and will have the opportunity to make a
statement and are expected to be available to respond to appropriate
questions.
The audited consolidated financial statements of Network General Corporation
as of March 31, 1996 and 1997 and for each of the three years in the period
ended March 31, 1997 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included in this Joint Proxy Statement/Prospectus in reliance upon the
authority of said firm as experts in giving said reports. Representatives of
Arthur Andersen LLP are expected to be present at the Network General Special
Meeting and said representatives will have the opportunity to make a statement
if they should desire to do so and they are expected to be available to
respond to appropriate questions.
143
<PAGE>
STOCKHOLDER PROPOSAL
Pursuant to Rule 14a-8 under the Exchange Act, McAfee stockholders may
present proper proposals for inclusion in McAfee's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
such proposals to McAfee in a timely manner. As noted in McAfee's proxy
statement relating to its 1996 Annual Meeting of Stockholders, in order to be
so included for the 1997 annual meeting, stockholder proposals must be
received by McAfee no later than December 19, 1997, and must otherwise comply
with the requirements of Rule 14a-8.
Pursuant to Rule 14a-8 under the Exchange Act, Network General stockholders
may present proper proposals for inclusion in Network General's proxy
statement and for consideration at the next annual meeting of its stockholders
by submitting such proposals to Network General in a timely manner. As noted
in Network General's proxy statement relating to its 1997 Annual Meeting of
Stockholders, in order to be so included for the 1998 annual meeting, in the
event that the Merger has not been consummated prior thereto, stockholder
proposals must have been received by Network General no later than March 9,
1998, and must otherwise have complied with the requirements of Rule 14a-8.
144
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MCAFEE ASSOCIATES, INC.
Report of Independent Accountants......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995............ F-3
Consolidated Statements of Income for the three years in the period
ended December 31, 1996................................................ F-4
Consolidated Statements of Stockholders' Equity for the three years in
the period ended December 31, 1996..................................... F-5
Consolidated Statements of Cash Flows for the three years in the period
ended December 31, 1996................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 ..................................... F-17
Condensed Consolidated Statements of Income for the three and nine month
periods ended September 30, 1997 and 1996 (unaudited).................. F-18
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996 (unaudited).................. F-19
Notes to Condensed Consolidated Financial Statements (unaudited).......... F-20
NETWORK GENERAL CORPORATION
Report of Independent Public Accountants.................................. F-23
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and 1996 and September
30, 1997 (unaudited)................................................... F-24
Consolidated Statements of Income for the three years in the period
ended March 31, 1997 and the six month periods ended September 30, 1997
and 1996 (unaudited)................................................... F-25
Consolidated Statements of Stockholders' Equity for the three years in
the period ended
March 31, 1997......................................................... F-26
Consolidated Statements of Cash Flows for the three years in the period
ended March 31, 1997 and for the six month periods ended September 30,
1996 and 1997 (unaudited).............................................. F-27
Notes to Consolidated Financial Statements................................ F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
McAfee Associates, Inc.
Santa Clara, California
We have audited the accompanying consolidated balance sheets of McAfee
Associates, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of McAfee
Associates, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Jose, California
January 20, 1997, except for the
matters discussed in Note 11 for
which the date is March 1, 1997
F-2
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 76,363 $ 30,299
Short term investments............................. 50,368 25,058
Accounts receivable, net of allowance for doubtful
accounts and returns of $3,027 in 1996 and $2,279
in 1995........................................... 25,930 20,892
Prepaids and other current assets.................. 5,097 3,373
Prepaid income taxes............................... 1,869 6,064
Deferred taxes..................................... 4,321 4,999
-------- --------
Total current assets............................. 163,948 90,685
Long term investments................................ 14,021 --
Fixed assets, net.................................... 7,486 3,399
Deferred taxes....................................... 7,719 6,513
Intangible assets, net............................... 1,001 3,129
Other assets......................................... 310 294
-------- --------
Total assets..................................... $194,485 $104,020
======== ========
LIABILITIES
Current liabilities:
Accounts payable................................... $ 5,379 $ 2,214
Accrued liabilities................................ 15,734 8,844
Deferred revenue................................... 20,182 24,795
-------- --------
Total current liabilities........................ 41,295 35,853
Deferred revenue, less current portion............... 3,663 4,625
-------- --------
Total liabilities................................ 44,958 40,478
-------- --------
Commitments (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: none
Common stock, $.01 par value:
Authorized: 100,000,000 shares;
Issued and outstanding: 48,662,489 shares in 1996
and 46,129,887 shares in 1995..................... 488 461
Additional paid-in capital........................... 77,259 30,889
Retained earnings.................................... 71,780 32,192
-------- --------
Total stockholders' equity....................... 149,527 63,542
-------- --------
Total liabilities and stockholders' equity..... $194,485 $104,020
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Net revenue........................................... $181,126 $90,065 $52,937
Operating costs and expenses:
Cost of net revenue................................. 11,057 4,801 4,684
Research and development............................ 22,191 9,354 6,857
Marketing and sales................................. 51,326 29,762 17,798
General and administrative.......................... 14,949 7,751 5,733
Amortization of intangibles......................... 3,169 1,356 792
Acquisition and other unusual costs................. 11,165 12,783 13,788
-------- ------- -------
Total operating costs and expenses................ 113,857 65,807 49,652
-------- ------- -------
Income from operations............................ 67,269 24,258 3,285
Interest and miscellaneous income, net................ 3,461 1,713 873
-------- ------- -------
Income before provision for income taxes.......... 70,730 25,971 4,158
Provision for income taxes............................ 31,713 11,055 1,553
-------- ------- -------
Net income........................................ $ 39,017 $14,916 $ 2,605
======== ======= =======
Net income per share.................................. $ 0.73 $ 0.30 $ 0.06
======== ======= =======
Shares used in per share calculation.................. 53,207 49,365 46,175
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS'
EQUITY
-------------
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993.... 41,148 $411 $ 5,728 $14,797 $ 20,936
Issuance of common stock..... 1,271 13 10,040 -- 10,053
Issuance of common stock upon
exercise of stock options... 1,625 16 1,172 -- 1,188
Tax benefit from exercise of
nonqualified stock options.. -- -- 2,129 -- 2,129
Accretion of Saber preferred
stock prior to conversion... -- -- 134 (134) --
Net income................... -- -- -- 2,605 2,605
------ ---- ------- ------- --------
Balances, December 31, 1994.... 44,044 440 19,203 17,268 36,911
Issuance of common stock upon
exercise of stock options... 1,987 20 3,514 -- 3,534
Issuance of common stock from
Employee Stock Purchase
Plan........................ 99 1 231 -- 232
Tax benefit from exercise of
nonqualified stock options.. -- -- 8,386 -- 8,386
Secondary offering costs..... -- -- (445) -- (445)
Foreign currency translation. -- -- -- 8 8
Net income................... -- -- -- 14,916 14,916
------ ---- ------- ------- --------
Balances, December 31, 1995.... 46,130 461 30,889 32,192 63,542
Net assets of FSA acquired in
issuance of common stock
upon pooling transaction.... -- -- -- 387 387
------ ---- ------- ------- --------
Restated balances, December 31,
1995.......................... 46,130 461 30,889 32,579 63,929
Issuance of common stock upon
exercise of stock options... 2,632 27 13,548 -- 13,575
Issuance of common stock from
Employee Stock Purchase
Plan........................ 75 -- 715 -- 715
Fractional shares returned
upon stock split............ (175) -- -- -- --
Tax benefit from exercise of
nonqualified stock options.. -- -- 32,107 -- 32,107
Unrealized gain on
investments................. -- -- -- 184 184
Net income................... -- -- -- 39,017 39,017
------ ---- ------- ------- --------
Balances, December 31, 1996.... 48,662 $488 $77,259 $71,780 $149,527
====== ==== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 39,017 $ 14,916 $ 2,605
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 5,960 2,998 2,305
Provision for doubtful accounts receivable
and sales returns.......................... 748 809 902
Deferred taxes.............................. (528) (939) (7,064)
Compensation related to stock options....... -- -- 237
Write-off of acquired in-process technology. -- -- 12,569
Charge for purchased R&D.................... -- -- 962
Unrealized gain on investments.............. 184 -- --
Changes in assets and liabilities:
Accounts receivable....................... (5,786) (5,143) (7,543)
Refundable income taxes................... 4,195 (5,228) (836)
Prepaids and other assets................. (1,740) (789) (1,364)
Accounts payable and accrued liabilities.. 10,055 6,067 2,391
Income taxes payable...................... -- -- (522)
Deferred revenue.......................... (5,575) (2,129) 10,317
--------- -------- --------
Net cash provided by operating
activities............................. 46,530 10,562 14,959
--------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............ (164,147) (30,800) (85,961)
Sales of marketable securities................ 124,816 20,784 87,919
Additions to fixed assets..................... (7,243) (1,608) (2,046)
Acquired assets, net of cash acquired......... -- -- (16,892)
Purchases and capitalization of software
development costs............................ -- -- (1,853)
Purchased intangibles......................... (676) (803) --
Net assets of FSA acquired under pooling
transaction.................................. 387 -- --
Net liabilities of Jade acquired under pooling
transaction.................................. -- -- --
Net assets of SHBV acquired under pooling
transaction.................................. -- -- --
Proceeds from sale of equipment............... -- -- 16
--------- -------- --------
Net cash used in investing activities... (46,863) (12,427) (18,817)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
offering costs............................... -- 232 10,053
Proceeds from exercise of stock options....... 14,290 3,534 991
Tax benefit from exercise of nonqualified
stock options................................ 32,107 8,386 2,129
Cost of secondary security offering........... -- (445) --
Payments of long-term debt.................... -- -- (238)
--------- -------- --------
Net cash provided by financing
activities............................. 46,397 11,707 12,935
--------- -------- --------
Effect of exchange rate fluctuations on cash
and cash equivalents......................... -- 8 --
--------- -------- --------
Net increase in cash and cash equivalents....... 46,064 9,850 9,077
Cash and cash equivalents at beginning of year.. 30,299 20,449 11,372
--------- -------- --------
Cash and cash equivalents at end of year........ $ 76,363 $ 30,299 $ 20,449
========= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for income taxes.... $ 754 $ 9,033 $ 7,891
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
McAfee Associates, Inc. (the "Company") develops, markets, distributes and
supports network security and management software products. Development
facilities are located in California and New Jersey, sales facilities are
located in California, Texas, New Jersey and Virginia and products are
distributed to corporate, governmental, and institutional users as well as
resellers and distributors throughout the world. Products and updates are
delivered primarily through electronic distribution under two-year
subscription licenses and as boxed product sold through the retail channel.
International sales and support are provided by subsidiaries in principal
European markets and independent agents and distributors elsewhere
internationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
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's product revenues are concentrated in the personal computer
software industry which is highly competitive and rapidly changing.
Significant technological changes in the industry or customer requirements, or
the emergence of competitive products with new capabilities or technologies
could adversely affect operating results. In addition, a significant portion
of the Company's revenue and net income is derived from international sales
and independent agents and distributors. Fluctuations of the U.S. dollar
against foreign currencies, changes in local regulatory or economic
conditions, piracy or nonperformance by independent agents could adversely
affect operating results.
The Company maintains the majority of cash balances and all of its short-
term investments with four financial institutions. The Company invests with
high credit quality financial institutions and, by policy, limits the amount
of credit exposure to any one financial institution. The Company has
significant amounts receivable from customers across a broad demographic base.
Management of the Company performs ongoing credit evaluations of its customers
and maintains allowances for doubtful accounts.
Foreign Currency Translation:
The Company considers the local currency to be the functional currency for
its international subsidiaries. Assets and liabilities denominated in foreign
currencies are translated using the exchange rate on the balance sheet date.
Translation adjustments resulting from this process are charged or credited to
equity. Revenues and expenses are translated at average exchange rates
prevailing during the year. Foreign currency transaction gains and losses
which to date have not been material have been included in the determination
of net income.
Revenue Recognition:
Revenue from product licenses is generally recognized when a customer
purchase order has been received, a license agreement has been delivered, the
software has been shipped (or electronically delivered), remaining
F-7
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
obligations are insignificant, and collection of the resulting account
receivable is probable. Maintenance revenue for providing product updates and
customer support is deferred and recognized ratably over the service period.
For subscription sales that have the maintenance fee included with the
licensing fee, maintenance revenue is derived based upon the amount charged
for such services when they are sold separately.
Revenue generated from products sold through traditional channels where the
right of return exists is reduced by reserves for estimated sales returns.
Such reserves are based on estimates developed by management. As unsold
products in these distribution channels are exposed to rapid changes in
consumer preferences or technological obsolescence due to new operating
environments, product updates or competing products, it is reasonably possible
that these estimates will change in the near term.
Historically, revenue from subscription licenses for anti-virus software was
generally recognized ratably over a two year period as the Company did not
separately value the product license and the maintenance agreement. Effective
July 1, 1995, the Company established separate prices for each of these
components and currently recognizes, upon the initial sale, 80% of the total
fee as product license revenue and defers 20% of the fee as maintenance. The
maintenance fee is recognized over the service period, generally two years.
The effect of this change was to increase 1995 net income by $7,708,000.
Earnings per share were increased by $0.16.
Cost of net revenue consists of the cost of materials associated with
delivery of boxed product which is not distributed electronically and royalty
costs associated with licensed technology. Cost of customer support is
included in sales and marketing.
Research and Development:
Research and development expenditures are charged to operations as incurred.
Under the Company's development process, technological feasibility is
established on completing a working model. Subsequent costs for McAfee have
not been significant and all software development costs have been expensed.
Cash and Cash Equivalents:
Cash equivalents are comprised of highly liquid debt instruments with
original maturities of 90 days or less.
Marketable Securities:
All marketable securities are classified as available-for-sale and are
carried at fair value in accordance with SFAS 115. Short term marketable
securities are those with maturities greater than 90 days but less than one
year. Long term marketable securities have original maturities greater than
one year. Unrealized gains and losses on marketable securities classified as
available-for-sale, when material, are reported net of related taxes as a
separate component of stockholders' equity. Realized gains and losses on sales
of all such investments are reported in earnings and computed using the
specific identification cost method.
Fixed Assets:
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets is provided using the straight-line method over the estimated useful
lives of the assets (3 to 5 years).
Intangible Assets:
Intangible assets include the estimated fair market values of purchased
technology when the related products or products under development are
considered technologically feasible, goodwill arising from acquisitions, and
Saber costs of internally developed software for which capitalization was
appropriate. Intangibles are amortized over their estimated useful lives
(typically three years to five years).
F-8
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments:
Carrying amounts of the Company's financial instruments including cash and
cash equivalents, investments, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to their short maturities.
Net Income Per Share:
Net income per share is computed using the weighted average common and
common equivalent shares outstanding during the period.
Stock Dividend:
During both April and October, 1996, the Company declared and paid stock
dividends of one share of common stock for every two shares of common stock
outstanding. All per share data contained herein has been restated to reflect
the increased number of shares outstanding.
3. BUSINESS COMBINATIONS AND ACQUISITIONS:
FSA Corporation
During 1996, the Company acquired a controlling interest in FSA Corporation
of Calgary, Canada for an aggregate of approximately 534,000 shares and
options to purchase shares of McAfee common stock. The acquisition was
accounted for as a pooling of interests, however, the 1995 balance sheet was
not restated as the effect was not material.
Vycor Corporation
On March 21, 1996, the Company acquired Vycor Corporation, a developer of
help desk software for $9.0 million in cash. The acquisition was accounted for
as a purchase. Of the total purchase price, $7.8 million of in-process
technology was charged to operations and approximately $0.4 million of
transaction and restructuring costs were expensed in the quarter ended March
31, 1996.
Saber Software Corporation
In August 1995, the Company acquired Saber Software Corporation ("Saber")
for approximately 2.1 million shares of common stock. Saber, formerly a
publicly held company based in Dallas, Texas, designs, develops, and licenses
computer software for local area networks and had total assets of $17.4
million at December 31, 1994.
Net revenue and net income of the separate companies for the period prior to
the merger (six months ended June 30, 1995) and reconciliation for the results
of the operations previously reported by the separate companies for the year
ended December 31, 1994 is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995 1994
---------------- ------------
<S> <C> <C>
Net Revenue:
McAfee.......................................... $24,440 $32,900
Saber........................................... 10,650 20,037
------- -------
Combined...................................... $35,090 $52,937
======= =======
Net Income:
McAfee.......................................... $ 6,817 $ 1,387
Saber........................................... 359 1,218
------- -------
Combined...................................... $ 7,176 $ 2,605
======= =======
</TABLE>
F-9
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the acquisition of Saber, the Company incurred
acquisition related charges of approximately $6.8 million. In addition, the
Company accrued approximately $1.7 million for the settlement and legal costs
associated with a lawsuit involving Saber.
Acquisition of distributors:
During the third quarter of 1995, the Company acquired its former
distributors in the UK and France and received a fully paid up perpetual
license to certain in-process technology from an affiliate of the French
distributor for approximately $3.3 million in cash and earnout arrangements
providing for additional payments of up to approximately $0.8 million. These
transactions were accounted for as purchases. Approximately $2.6 million
including legal costs was charged to operations in 1995 in connection with
these transactions. During the fourth quarter of 1995, the Company repurchased
distribution rights and customer lists from its three major German
distributors for approximately $1.9 million including legal fees. The entire
amount was expensed during the fourth quarter.
Acquisition of Brightwork Development, Inc.:
Effective March 30, 1994, the Company acquired substantially all of the
assets and liabilities of Brightwork Development, Inc. (Brightwork), an
unrelated corporation, for $10.3 million in cash and related acquisition costs
of approximately $0.5 million. This transaction was accounted for as a
purchase. Approximately $7.1 million, representing in-process technology, was
charged to operations in 1994.
Purchase of Software Products:
The Company acquired certain in-process remote desktop technology from
Interactive Distributed Systems Software GmbH of Linz, Austria during the
three month period ended June 30, 1996. The purchase price and related
transaction costs of approximately $2.1 million were charged to operations
during the period.
Effective May 6, 1994, the Company acquired technology relating to two
software products of Automated Design Systems, Inc. ("ADS"), an unrelated
corporation, for approximately $5.0 million in cash and related acquisition
costs of approximately $0.7 million. An additional amount of approximately
$0.3 million was paid to ADS in 1995 based on sales of products developed with
the purchased technology. Approximately $5.5 million, representing in-process
technology, was charged to operations in 1994.
4. MARKETABLE SECURITIES:
At December 31, 1996 and 1995, all marketable securities were classified as
available-for-sale and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
--------------- ---------------
MARKET COST MARKET COST
VALUE BASIS VALUE BASIS
------- ------- ------- -------
<S> <C> <C> <C> <C>
US Government debt securities $ 1,000 $ 1,002 $ -- $ --
Municipal debt securities...................... 58,244 58,364 25,085 25,058
Corporate debt securities...................... 5,145 5,128 -- --
------- ------- ------- -------
$64,389 $64,494 $25,085 $25,058
======= ======= ======= =======
</TABLE>
At December 31, 1996, all marketable debt securities have scheduled
maturities of less than three years. In 1995, Marketable securities were not
adjusted to market value due to the immateriality of the net difference from
cost. Gross realized gains and losses on sales of available-for-sale
securities were immaterial in 1996 and 1995.
F-10
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. BALANCE SHEET DETAIL (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Fixed assets:
Furniture and fixtures................................... $ 4,804 $ 1,949
Computers and equipment.................................. 8,916 4,869
Leasehold improvements................................... 341 --
------- -------
14,061 6,818
Less accumulated depreciation and amortization........... (6,575) (3,419)
------- -------
$ 7,486 $ 3,399
======= =======
Intangibles assets(see Note 3):
Purchased technology..................................... $ 3,516 $ 2,993
Software development costs (1)........................... 1,261 1,261
Goodwill................................................. 2,046 1,893
------- -------
6,823 6,147
Less accumulated amortization............................ (5,822) (3,018)
------- -------
$ 1,001 $ 3,129
======= =======
Accrued liabilities:
Accrued compensation..................................... $ 3,390 $ 1,070
Capital lease obligations -- 137
Accrued acquisition costs................................ 582 2,573
Other accrued expenses................................... 11,762 5,064
------- -------
$15,734 $ 8,844
======= =======
</TABLE>
- --------
(1) Related to Saber acquisition.
6. COMMITMENTS:
The Company leases its operating facilities under non-cancelable operating
leases through December 2001. In addition, the Company has leased certain
equipment under various leases which expire no later than 1998.
At December 31, 1996, future minimum payments under non-cancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER 31,
------------
<S> <C>
1997............................................................. $2,012
1998............................................................. 1,942
1999............................................................. 1,846
2000............................................................. 1,689
2001 and thereafter.............................................. 627
------
$8,116
======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted
to $1,191,000, $1,148,000 and $583,000, respectively.
F-11
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company expects to enter into a lease agreement in April 1997 for
property in Santa Clara, California of 105,000 square feet with a total value
of approximately $6.0 million over four years. The Company has also agreed to
purchase personal property in connection with this lease for approximately
$3.0 million.
7. EMPLOYEE BENEFIT PLANS:
401(k) and Profit Sharing Plan
Under the Company's 401(k) and Profit Sharing Plans, the Board of Directors,
at its discretion, can match employee contributions in an amount not to exceed
20% of total compensation. During fiscal 1996, 1995, and 1994 the Company
contributed $249,000, $104,000 and $86,000 respectively.
Employee Stock Purchase Plan:
Under the 1994 Employee Qualified Stock Purchase Plan, the Company can grant
stock purchase rights to all eligible employees during one year offering
periods with exercise dates approximately every six months (beginning each
August and February). The Company has reserved 506,250 shares of common stock
for issuance under the plan. Shares are purchased through employees' payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company'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.
8. STOCKHOLDERS' EQUITY:
Preferred Stock:
The Company has authorized 5,000,000 shares of preferred stock, par value
$.01 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.
Stock Option Plans:
Under the 1995 Stock Incentive Plan, the Company has reserved 15,525,000
shares for issuance to employees, officers, directors, third-party contractors
and consultants. 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 (110%
of the fair market value in the case of holders of more than 10% of the voting
rights of the Company's common stock) 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 option plan expire ten
years after grant.
Under the Stock Option Plan for Outside Directors, the Company has reserved
421,875 shares for issuance under the amended plan to certain members of its
Board who are not employees of the Company or any affiliated corporation. The
plan provides for an option price at fair market value of the Company's common
stock on the date of grant. The initial grant to each outside director
generally vests ratably over a three-year period. Subsequent option grants
will vest after three years from the date of grant. All options under the
option plan expire ten years after grant.
F-12
<PAGE>
MCAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate activity under stock option plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF PRICE PER AGGREGATE AVG. EX.
FOR GRANT SHARES SHARE PRICE PRICE
---------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Balances, December 31,
1993................... 3,680,505 5,244,149 $ .00-$ 6.62 $ 6,047,660 $ 1.15
Shares granted.......... (2,870,017) 3,175,162 $2.22-$ 7.57 10,211,490 $ 3.22
Shares exercised........ -- (1,624,442) $ .00-$ 6.62 (892,592) $ .55
Shares canceled......... 1,215,180 (1,283,182) $ .00-$ 6.62 (2,692,047) $ 2.10
---------- ---------- ------------
Balances, December 31,
1994................... 2,025,668 5,511,688 $ .00-$ 7.57 12,674,511 $ 2.30
Additional shares
authorized............. 6,750,000 -- -- -- --
Shares granted.......... (6,138,178) 6,136,178 $5.48-$19.44 58,581,772 $ 9.55
Shares exercised........ -- (1,985,787) $ .00-$ 6.65 (3,534,462) $ 1.78
Shares canceled......... 1,167,503 (1,278,929) $1.70-$11.11 (6,870,032) $ 5.36
---------- ---------- ------------
Balances, December 31,
1995................... 3,804,993 8,383,120 $ .00-$19.44 60,851,789 $ 7.26
Shares granted.......... (3,368,003) 3,368,003 $1.13-$51.75 97,526,769 $28.96
Shares exercised........ -- (2,631,865) $ .01-$19.44 (13,574,615) $ 5.16
Shares canceled......... 1,219,764 (1,219,764) $1.70-$46.00 (17,335,041) $14.21
---------- ---------- ------------
Balances, December 31,
1996................... 1,656,754 7,899,494 $ .01-$51.75 $127,468,902 $16.14
========== ========== ============
</TABLE>
At December 31, 1996, a total of 983,034 options to purchase common stock
were exercisable at an aggregate exercise price of $5,924,222.
The following information regarding the stock option program and employee
stock purchase programs is provided in compliance with SFAS 123, "Accounting
for Stock Based Compensation". The company has elected to continue accounting
for such plans in accordance with APB No. 25.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISABLE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE (YRS) PRICE AT 12/31/96 PRICE
--------------- ----------- ---------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.13--$ 6.03 1,697,662 7.55 $ 3.44 640,217 $ 3.29
$ 8.37--$16.22 3,463,016 8.56 $10.41 313,661 $10.38
$19.00--$24.89 1,537,054 9.16 $22.29 29,156 $19.28
$32.38--$51.75 1,201,762 9.73 $42.60 0 N/A
$ 1.13--$46.00 7,899,494 8.64 $16.12 983,034 $ 6.03
</TABLE>
The fair market value of options granted under the McAfee non-qualified
stock option plan was calculated using the Black-Scholes option pricing model
using the multiple option approach. A typical option grant vests over a four
year period. Parameters for the option analysis are listed below.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Risk free interest rate...................................... 5.85% 5.50%
Expected life (yrs).......................................... 4 4
Volatility................................................... 0.66 0.66
Dividend yield............................................... 0 0
</TABLE>
The weighted average expected life of the option grants was estimated based
on examination of previously exercised options over the life of the program.
Volatility was estimated on a monthly basis since the company
F-13
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
became public in October of 1992. The average volatility for the twelve months
ending December 1996 and 24 month period from January 1995 through December
1996 was 66%. Since the volatility has been relatively stable one value was
selected for all segments. McAfee does not pay a dividend and has no plans to
pay a dividend.
The weighted average fair value of options granted in 1996 and 1995 was
$13.15 and $6.24.
The company has also estimated the fair value of purchase rights issued
under the Employee Stock Purchase Program. Rights under this plan were also
evaluated using the Black-Scholes option pricing model. The company's plan is
described in Note 7. Purchase periods occur twice yearly and each effectively
contains a 6 and 12 month option.
<TABLE>
<CAPTION>
FEB. 1995 AUG. 1995 FEB. 1996 AUG. 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Risk Free Interest Rate................. 6.06% 5.47% 4.84% 5.73%
Expected Life........................... 6, 12 mos 6, 12 mos 6, 12 mos 6, 12 mos
Volatility.............................. 0.66 0.66 0.66 0.66
Dividend Yield.......................... -- -- -- --
</TABLE>
The weighted average fair value of options granted pursuant to the Employee
Stock Purchase Program in 1996 and 1995 was $6.80 and $4.34.
The following pro forma income information has been prepared following the
provisions of SFAS 123.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net income--pro forma (thousands)....................... $24,802 $11,550
Net income per share--pro forma......................... $ 0.47 $ 0.23
</TABLE>
The impact on pro forma earnings per share and net income in the table above
may not be indicative of the effect in future years. The company continues to
grant stock options to new employees. This policy may or may not continue.
Warrants:
Pursuant to the 1995 acquisition of a foreign distributor, the Company
issued a warrant to purchase 33,750 shares of common stock at a price of
$11.19 which expires June 30, 1999. This warrant was canceled during 1996.
9. PROVISION FOR INCOME TAXES:
The components of the provision for income taxes consist of the following
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ 25,046 $ 9,124 $ 6,584
State...................................... 6,053 2,800 1,829
Foreign.................................... 1,132 70 204
Deferred:
Federal.................................... (1,190) (1,090) (6,144)
State...................................... 672 151 (920)
-------- -------- --------
Provision for income taxes................... $ 31,713 $ 11,055 $ 1,553
======== ======== ========
</TABLE>
F-14
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax benefits from the exercise of non-qualified stock options and the
disqualifying dispositions of employee stock purchase plan stock of
$32,107,000, $8,386,000 and $2,129,000 for the years ended December 31, 1996,
1995 and 1994, respectively, are included in stockholders' equity.
The Company's effective tax rate on income before income taxes differs from
the U.S. Federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory income tax rate................... 35.0% 35.0% 34.0%
State taxes, net of federal income tax benefit........... 6.2 7.4 4.1
Non deductible acquisition and other costs............... 4.0 4.5 --
Other, net............................................... (0.3) (4.3) (0.7)
---- ---- ----
44.9% 42.6% 37.4%
==== ==== ====
</TABLE>
Significant components of net deferred tax assets at December 31, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Deferred revenue......................................... $ 906 $ 3,695
In-process technology.................................... 6,355 6,349
State taxes.............................................. 1,484 195
Accrued liabilities and reserves......................... 3,096 1,415
Depreciation and amortization............................ 412 164
Other.................................................... (213) (306)
------- -------
$12,040 $11,512
======= =======
Current portion.......................................... $ 4,321 $ 4,999
Non-current portion...................................... 7,719 6,513
------- -------
$12,040 $11,512
======= =======
</TABLE>
10. BUSINESS SEGMENT INFORMATION:
The Company operates in one industry segment and markets and services its
products in the United States and in foreign countries through its own direct
sales organization and through independent agents and distributors. In 1996,
foreign operations accounted for approximately 19% of the Company's net
revenue, but less than 10% of the Company's net income, and identifiable
assets. One customer, Ingram Micro Devices, accounted for 17%, 12% and 12% of
net revenue during fiscal 1996, 1995 and 1994, respectively.
Net revenue information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
North America..................................... $145,945 $64,351 $40,697
International..................................... 35,181 25,714 12,240
-------- ------- -------
$181,126 $90,065 $52,937
======== ======= =======
</TABLE>
F-15
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS:
On January 20, 1997, the Board of Directors approved an interim stock option
plan for non-officers, to be in place through July 1997. A total of 2,000,000
shares of common stock have been reserved for issuance thereunder.
On February 28, 1997, the Company acquired Jade KK of Japan for 336,071
shares of common stock. Jade is a developer and distributor of anti-virus
software in Japan. The combination will be accounted for as a pooling of
interests.
Also on February 28, 1997 the Company acquired the Dutch distributor,
Schuijers Holding B.V. for 63,721 shares of common stock. The combination will
be accounted for as a pooling of interests.
F-16
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $134,564 $ 76,363
Marketable securities............................. 34,987 50,368
Accounts receivable, net of allowance for doubtful
accounts and returns of $4,038 and $3,027 at
September 30, 1997 and December 31, 1996......... 63,271 25,930
Prepaids and other current assets................. 8,659 5,097
Prepaid income taxes -- 1,869
Deferred taxes.................................... 3,977 4,321
-------- --------
Total current assets............................ 245,458 163,948
Long term investments............................... 68,193 14,021
Fixed assets, net................................... 17,532 7,486
Intangible assets, net.............................. 3,369 1,001
Deferred taxes...................................... 6,840 7,719
Other assets........................................ 1,101 310
-------- --------
Total assets.................................... $342,493 $194,485
======== ========
LIABILITIES
Current liabilities:
Accounts payable.................................. $ 9,455 $ 5,379
Accrued liabilities............................... 18,348 15,734
Income taxes payable 3,028 --
Deferred revenue.................................. 31,479 20,182
-------- --------
Total current liabilities....................... 62,310 41,295
Deferred revenue, less current portion.............. 6,129 3,663
-------- --------
Total liabilities............................... 68,439 44,958
-------- --------
STOCKHOLDERS EQUITY
Preferred stock, $.01 par value:
authorized: 5,000,000 shares;
Common stock, $.01 par value:
authorized: 100,000,000 shares; and outstanding:
51,259,448 shares at September 30, 1997 and
48,662,489 at December 31, 1996.................... 509 488
Additional paid-in capital.......................... 134,087 77,259
Retained earnings................................... 139,458 71,780
-------- --------
Total stockholders' equity...................... 274,054 149,527
-------- --------
Total liabilities and stockholders' equity...... $342,493 $194,485
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-17
<PAGE>
McAFEE ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net revenue............................... $ 88,332 $ 47,290 $247,960 $121,902
Operating costs and expenses:
Cost of net revenue..................... 6,528 2,703 18,864 7,220
Research and development................ 12,268 5,650 33,804 14,212
Marketing and sales..................... 25,599 13,485 72,878 34,664
General and administrative.............. 6,472 4,202 18,327 9,876
Amortization of intangibles............. 271 646 588 2,295
Acquisition and other unusual costs -- -- -- 11,165
--------- --------- -------- --------
Total operating costs and expenses.... 51,138 26,686 144,461 79,432
--------- --------- -------- --------
Income from operations................ 37,194 20,604 103,499 42,470
Other income.............................. 2,290 922 5,936 2,164
--------- --------- -------- --------
Income before income taxes............ 39,484 21,526 109,435 44,634
Provision for income taxes................ 15,004 8,628 41,585 21,253
--------- --------- -------- --------
Net income............................ $ 24,480 $ 12,898 $ 67,850 $ 23,381
--------- --------- -------- --------
Net income per share...................... $ 0.45 $ 0.24 $ 1.26 $ 0.44
--------- --------- -------- --------
Shares used in per share calculation...... 54,267 54,020 54,012 52,810
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-18
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 67,850 $ 23,381
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 4,130 5,097
Provision for doubtful accounts receivable and allowance
for returns............................................. 1,011 288
Unrealized gain on investments........................... 279 --
Deferred taxes........................................... 1,223 924
Changes in assets and liabilities:
Accounts receivable..................................... (38,352) 1,250
Prepaids and other assets............................... (4,353) (377)
Refundable income taxes................................. 4,897 --
Accounts payable and accrued liabilities................ 6,690 5,790
Prepaid income taxes.................................... -- 2,148
Deferred revenue........................................ 13,763 (6,964)
-------- --------
Net cash provided by operating activities.............. 57,138 31,537
-------- --------
Cash flows from investing activities:
Purchases of intangibles................................. (253)
Purchase of Compusul..................................... (2,709) --
Purchase of investment securities, net................... (38,791) (20,538)
Additions to fixed assets................................ (13,582) (5,466)
Net liabilities of Jade K.K. acquired under pooling
transaction............................................. (1,122) --
Net assets of SHBV acquired under pooling transaction.... 925 --
-------- --------
Net cash used in investing activities.................. (55,532) (26,004)
-------- --------
Cash flows from financing activities:
Effect of exchange rate fluctuations..................... (254) 92
Stock option exercises................................... 21,721 9,630
Tax benefit from exercise of nonqualified stock options.. 35,128 22,692
-------- --------
Net cash provided by financing activities.............. 56,595 32,414
-------- --------
Net increase in cash and cash equivalents................. 58,201 37,947
Cash and cash equivalents at beginning of period.......... 76,363 30,299
-------- --------
Cash and cash equivalents at end of period................ $134,564 $ 68,246
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-19
<PAGE>
McAFEE ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by the
Company without audit in accordance with instructions to Form 10-Q and Article
10 of Regulation S-X. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
considered necessary for a fair presentation, have been included. The results
of operations for the three and nine month periods ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year
or for any future periods. The accompanying consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements contained in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 28, 1997. The balance sheet at
December 31, 1996 has been derived from the audited financial statements as of
and for the year ended December 31, 1996, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share",
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion
No. 15 and is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 128 requires restatement of all prior-period
earnings per share data presented after the effective date. FAS 128 will not
have a material impact on the Company's financial position, results of
operations or cash flows.
In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income,"
which requires a separate financial statement showing changes in comprehensive
income is effective for financial statements issued for fiscal years beginning
after December 15, 1997. SFAS 130 requires reclassification of all prior-
period financial statements for comparative purposes.
In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
certain information about operating segments, including certain information
about their products, services, the geographic areas in which they operate and
their major customers. This statement supersedes FASB Statements Nos. 14, 18,
24 and 30. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997.
3. DERIVATIVES
During the quarter ended September 30, 1997, the Company began using forward
foreign exchange contracts to hedge certain assets denominated in foreign
currencies. For these instruments, risk reduction is assessed on a transaction
basis and the instruments are designated as, and effective as a hedge and are
highly inversely correlated to the hedged item as required by generally
accepted accounting principles. Gains and losses on these hedges are included
in the carrying amount of the assets and are ultimately recognized in income.
If a hedging instrument ceases to qualify as a hedge, any subsequent gains and
losses are recognized currently in income. The Company does not use any
derivatives for trading or speculative purposes. If a derivative ceases to
qualify for hedge accounting, it is accounted for on a mark to market basis.
F-20
<PAGE>
McAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. LITIGATION
On April 24, 1997, the Company was served by Symantec Corporation
("Symantec") with a suit filed in the United States District Court, Northern
District of California, San Jose Division, alleging copyright infringement and
unfair competition by McAfee. Symantec alleges that the Company's computer
software program called "PC Medic 1997" copied portions of Symantec's computer
software program entitled "CrashGuard." Symantec's complaint sought injunctive
relief and unspecified money damages. On July 20, 1997, Symantec sought leave
to amend its complaint to include additional allegations of copyright
infringement and trade secret misappropriation pertaining to the Company's
"VirusScan" product. Symantec sought injunctive relief and unspecified money
damages. On October 6, 1997, the Court issued an order granting Symantec's
motion to amend its complaint and enjoining McAfee from shipping any product
containing either an approximately 30-line routine found in one Symantec
product or an approximately 100-line routine found in a Symantec DLL. The
Court's order expressly stated that "the court is not enjoining the sale or
distribution of McAfee's current product." Trial is set for September 1998.
On May 13, 1997, Trend Micro Inc. ("Trend") filed suit in United States
District Court for the Northern District of California against both the
Company and Symantec Corporation. Trend alleges that the Company's "WebShield"
and "GroupShield" products infringe a Trend patent which issued on April 22,
1997. Trend's complaint seeks injunctive relief and unspecified money damages.
On June 6, 1997, the Company filed its answer denying any infringement. The
Company also filed a counterclaim accusing Trend of unfair competition, false
advertising, trade libel, and interference with prospective economic
advantage. The case is in the initial stages of discovery. A patent claim
interpretation hearing before the Court is set for April 28, 1998. The Court
has not yet set a date for trial.
On September 15, 1997, the Company was named as a defendant in a patent
infringement action filed by Hilgraeve Corporation ("Hilgraeve") in the United
States District Court Eastern District of Michigan. Hilgraeve alleges that a
product (not yet disclosed) of the Company infringes a Hilgraeve patent which
was issued on June 7, 1994. On October 13, 1997, the Company filed an answer
and counterclaim to the Hilgraeve complaint. Hilgraeve's action seeks
injunctive relief and unspecified money damages. The case is in initial stages
of discovery. The Court has not yet set a trial date.
5. SUBSEQUENT EVENTS
On October 13, 1997, the Company entered into an Agreement and Plan of
Reorganization pursuant to which a wholly owned subsidiary of the Company will
merge (the "Merger") with and into Network General Corporation ("Network
General"), a provider of network fault and performance management solutions.
In the Merger, each outstanding share of common stock of Network General will
be converted into 0.4167 shares of common stock of the Company. The Company
will also assume all outstanding options, warrants and other rights to acquire
Network General common stock. The Merger is subject to approval by the
stockholders of both companies and certain other conditions, including the
receipt of opinions that the Merger may be accounted for as a pooling of
interests.
F-21
<PAGE>
MCAFEE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
If Merger is accounted for under the pooling of interests method, historical
financial data in future reports will be restated to include Network General
data. The following unaudited pro forma summary presents the combined
consolidated results of operations as if the Merger had been completed on
January 1, 1994.
(unaudited pro forma)
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1996 1995 1994 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue........................ $421,794 $278,910 $192,692 $438,888 $282,913
Net income......................... 64,110 42,341 28,016 52,540 52,242
Net income per share............... $ 0.89 $ 0.62 $ 0.43 $ 0.73 $ 0.73
</TABLE>
Network General has a fiscal year that ends on March 31 of each year. For
purposes of the pro forma summary financial data, Network General's
consolidated statement of income (loss) for each of the three fiscal years
ended March 31, 1997, and for the nine month periods ended September 30, 1997
and 1996, have been combined with the Company's consolidated statement of
income for each of the three fiscal years ended December 31, 1996 and the nine
month periods ended September 30, 1997 and 1996 (as a result Network General's
results of operations for the three month period ended March 31, 1997 are
included in the pro forma combined statements of income for both the twelve
months ended December 31, 1996 and the nine months ended September 30, 1997,
and the results of operations for the three months ended March 31, 1996 are
included in the pro forma combined statements of income for both the twelve
months ended December 31, 1995 and the nine months ended September 30, 1996.
The Company and Network General estimate they will incur direct transaction
costs of approximately $15,000,000 associated with the Merger, consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing and other related charges. These nonrecurring transaction costs will
be charged to operations upon consummation of the Merger. It is expected that
following the Merger, the Company and Network General will incur an additional
significant charge to operations, which is not currently reasonably estimable,
to reflect costs associated with integrating the two companies. This charge
has not been reflected in the pro forma financial data. There can be no
assurance that the combined company will not incur additional charges to
reflect costs associated with the Merger or that management will be successful
in its efforts to integrate the operations of the two companies.
Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each
of McAfee and Network General has agreed that if the Merger is not consummated
as a result of certain specified events, it will pay to the other party a
termination fee of $30.0 million. Payment of the fees described in this
paragraph shall not be in lieu of damages incurred in the event of material
and willful breach of the Reorganization Agreement.
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break up" fees described above)
could have a material adverse effect on McAfee's results of operations.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Network General Corporation:
We have audited the accompanying consolidated balance sheets of Network
General Corporation (a Delaware corporation) and subsidiaries as of March 31,
1996 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of
Network General Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Network General
Corporation and subsidiaries as of March 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1997 in conformity with generally accepted accounting
principles.
San Jose, California /s/ Arthur Andersen LLP
April 18, 1997 ARTHUR ANDERSEN LLP
F-23
<PAGE>
NETWORK GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
------------------ SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 34,180 $ 48,778 $ 20,799
Marketable securities...................... 81,417 83,661 78,866
Accounts receivable, net of allowances of
$2,445 and $3,411 at March 31, 1996 and
1997, respectively, and $4,409 at
September 30, 1997........................ 34,043 51,461 43,434
Inventories................................ 4,863 5,307 6,350
Prepaid expenses and deferred tax assets... 11,303 14,826 15,362
-------- -------- --------
Total current assets..................... 165,806 204,033 164,811
Property and Equipment:
Demonstration and rental equipment......... 9,968 10,500 10,053
Office and development equipment........... 27,443 34,732 39,411
Leasehold improvements..................... 2,771 5,680 6,321
-------- -------- --------
40,182 50,912 55,785
Less accumulated depreciation and
amortization.............................. (23,006) (30,035) (33,381)
-------- -------- --------
Net property and equipment............... 17,176 20,877 22,404
Long-term investments........................ 37,139 32,462 23,138
Other assets................................. 3,209 5,899 11,346
-------- -------- --------
$223,330 $263,271 $221,699
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................... $ 4,300 $ 28,173 $ 8,957
Accrued liabilities........................ 14,749 20,626 23,164
Deferred revenue........................... 20,916 31,216 31,189
-------- -------- --------
Total current liabilities................ 39,965 80,015 63,310
Long-term deferred revenue and taxes......... 3,248 3,860 4,801
Stockholders' Equity:
Preferred stock--$.01 par value
Authorized--2,000,000 shares
Outstanding--none........................ -- -- --
Common stock--$.01 par value
Authorized--100,000,000 shares
Issued--46,068,302 shares at March 31,
1996; 43,248,588 shares at March 31,
1997; and 42,389,485 shares at September
30, 1997................................ 461 432 424
Additional paid-in capital................. 127,482 62,072 45,157
Retained earnings.......................... 91,799 116,892 108,007
Less treasury stock, at cost--2,490,000
shares at March 31, 1996.................. (39,625) -- --
-------- -------- --------
Total stockholders' equity............... 180,117 179,396 153,588
-------- -------- --------
$223,330 $263,271 $221,699
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
NETWORK GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPT. 30,
-------------------------- -----------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Product........................ $112,986 $152,656 $189,632 $ 84,265 $ 91,869
Services....................... 26,769 36,189 51,036 22,960 31,054
-------- -------- -------- -------- --------
Total revenues................... 139,755 188,845 240,668 107,225 122,923
Cost of Revenues:
Product........................ 23,437 33,072 46,493 20,769 22,806
Services....................... 8,362 10,849 15,199 6,311 9,911
-------- -------- -------- -------- --------
Total cost of revenues........... 31,799 43,921 61,692 27,080 32,717
-------- -------- -------- -------- --------
Gross margin................... 107,956 144,924 178,976 80,145 90,206
Operating Expenses:
Sales and marketing............ 47,049 62,533 74,638 34,879 43,645
Research and development....... 19,968 27,417 30,891 14,594 19,385
General and administrative..... 9,171 12,383 15,366 7,334 8,809
Acquired in-process research
and development and other non-
recurring changes............. -- 7,153 19,504 -- 23,688
-------- -------- -------- -------- --------
Total operating expenses......... 76,188 109,486 140,399 56,807 95,527
-------- -------- -------- -------- --------
Income (loss) from operations.. 31,768 35,438 38,577 23,338 (5,321)
Interest income, net............. 5,328 7,086 6,087 3,296 3,893
-------- -------- -------- -------- --------
Income (loss) before provision
for income taxes.............. 37,096 42,524 44,664 26,634 (1,428)
Provision for income taxes....... 11,685 15,099 19,571 8,123 7,457
-------- -------- -------- -------- --------
Net income(loss)................. $ 25,411 $ 27,425 $ 25,093 $ 18,511 $ (8,885)
======== ======== ======== ======== ========
Earnings (loss) per share........ $ 0.57 $ 0.60 $ 0.55 $ 0.41 $ (0.21)
======== ======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding..................... 44,626 45,822 45,703 45,735 42,731
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
NETWORK GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- ------ ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE MARCH 31, 1994.. 41,919,530 $420 $92,900 $ 38,963 $ -- $132,283
Issuance of common stock
under the Employee
Stock Purchase Plan at
$6.80-$6.85 per share.. 239,778 2 1,635 -- -- 1,637
Exercise of stock
options at $.01-$10.25
per share.............. 2,291,106 23 10,106 -- -- 10,129
Tax benefit of stock
options................ -- -- 4,882 -- -- 4,882
Repurchase of common
stock at $8.37-$14.44
per share.............. -- -- -- -- (8,755) (8,755)
Net income.............. -- -- -- 25,411 -- 25,411
---------- ---- ------- -------- ------- --------
BALANCE MARCH 31, 1995.. 44,450,414 445 109,523 64,374 (8,755) 165,587
Issuance of common stock
under the Employee
Stock Purchase Plan at
$10.57-$13.97 per
share.................. 176,584 2 2,155 -- -- 2,157
Exercise of stock
options at $2.19-$16.31
per share.............. 1,441,304 14 9,459 -- -- 9,473
Tax benefit of stock
options................ -- -- 6,345 -- -- 6,345
Repurchase of common
stock at $11.87-$21.81
per share.............. -- -- -- -- (30,870) (30,870)
Net income.............. -- -- -- 27,425 -- 27,425
---------- ---- ------- -------- ------- --------
BALANCE MARCH 31, 1996.. 46,068,302 461 127,482 91,799 (39,625) 180,117
Issuance of common stock
under the Employee
Stock Purchase Plan at
$14.98-$15.09 per
share.................. 198,518 2 2,984 -- -- 2,986
Exercise of stock
options at $0.33-$20.00
per share.............. 1,671,768 16 15,259 -- -- 15,275
Tax benefit of stock
options................ -- -- 8,874 -- -- 8,874
Repurchase of common
stock at $17.63-$28.13
per share.............. -- -- -- -- (52,949) (52,949)
Retirement of treasury
stock.................. (4,690,000) (47) (92,527) -- 92,574 --
Net income.............. -- -- -- 25,093 -- 25,093
---------- ---- ------- -------- ------- --------
BALANCE MARCH 31, 1997.. 43,248,588 $432 $62,072 $116,892 $ -- $179,396
========== ==== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-26
<PAGE>
NETWORK GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPT. 30,
---------------------------- -----------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............. $ 25,411 $ 27,425 $ 25,093 $ 18,511 $(8,885)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization................ 6,837 9,201 11,524 6,093 7,057
Deferred taxes, net.......... 2,599 (516) (4,278) (802) (2,433)
Gain on sale of investments.. -- -- -- -- (556)
Net change in certain assets
and liabilities, net of
effects from acquisitions... -- -- -- (12,021) 10,258
Acquired in-process research
and development and other
non-recurring charges....... -- 7,153 19,504 -- 23,688
Changes in operating assets
and liabilities, net of
effects from acquisitions:
Accounts receivable........ 1,638 (14,896) (16,993) -- --
Inventories................ (2,194) (637) (444) -- --
Prepaid expenses and other
assets.................... (3,405) 1,058 (663) -- --
Accounts payable and
accrued liabilities....... 202 3,609 8,222 -- --
Deferred revenue........... 2,056 7,476 10,829 -- --
-------- -------- -------- -------- -------
Net cash provided by
operating activities.... 33,144 39,873 52,794 11,781 29,129
-------- -------- -------- -------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of held-to-
maturity investments........ (114,264) (204,626) (112,062) (79,858) (20,622)
Purchases of available-for-
sale investments............ -- -- (35,707) (24,461) (39,791)
Proceeds from maturities of
held-to-maturity
investments................. 96,643 213,262 112,977 87,917 35,017
Proceeds from
sales/maturities of
available-for-sale
investments................. -- -- 37,516 24,816 40,546
Cash used to purchase AIM
Technology.................. -- (6,501) -- -- --
Cash used to purchase 3DV
Technology, Inc. ........... -- -- -- -- (20,000)
Cash used to purchase Cinco
Networks, Inc., net of cash
acquired.................... -- -- -- -- (25,079)
Net additions to property
and equipment............... (8,752) (13,883) (14,738) (6,218) (8,413)
-------- -------- -------- -------- -------
Net cash (used in) provided
by investing activities... (26,373) (11,748) (12,014) 2,196 (38,342)
-------- -------- -------- -------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock................ 16,648 17,975 26,767 9,644 4,594
Repurchases of common stock.. (8,755) (30,870) (52,949) (21,253) (23,360)
-------- -------- -------- -------- -------
Net cash (used in) provided
by financing activities... 7,893 (12,895) (26,182) (11,609) (18,766)
-------- -------- -------- -------- -------
Net increase (decrease) in
cash and cash equivalents.... 14,664 15,230 14,598 2,368 (27,979)
Cash and cash equivalents at
beginning of period.......... 4,286 18,950 34,180 34,180 48,778
-------- -------- -------- -------- -------
Cash and cash equivalents at
end of period................ $ 18,950 $ 34,180 $ 48,778 $ 36,548 $20,799
======== ======== ======== ======== =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year
for:
Income taxes............... $ 5,368 $ 9,042 $ 11,856 $ 8,371 $ 7,156
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Network General Corporation ("Network General") designs, manufactures,
markets and supports software-based fault and performance solutions for
managing computer networks. Network General also provides software update and
maintenance, education and consulting services. Network General's markets are
worldwide and include the communications, banking, finance, insurance,
manufacturing, services and government industries. Network General was
incorporated in 1986 as a California corporation and changed its state of
incorporation to Delaware in fiscal year 1988.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of
Network General and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.
UNAUDITED INTERIM FINANCIAL DATA. The unaudited interim financial statements
for the six months ended September 30, 1996 and 1997 have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes the results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACQUISITIONS. On March 31, 1997, Network General acquired all of the
outstanding capital stock and options of 3DV Technology, Inc. ("3DV") for
$20,000,000. The acquisition was funded with existing cash and was accounted
for using the purchase method of accounting. The purchase price was paid
subsequent to fiscal year 1997 and, as such, the purchase price is included in
accounts payable and other related acquisition costs are included in accrued
liabilities at March 31, 1997.
A portion of the purchase price was allocated to the net assets acquired and
liabilities assumed based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $1,180,000 and $216,000,
respectively. In addition, $19,504,000 of the purchase price was allocated to
in-process research and development projects that had not reached
technological feasibility and had no probable alternative future uses, which
Network General expensed at the date of acquisition. The remainder of the
acquisition purchase price was allocated to goodwill and will be amortized
over four years.
The following table reflects the unaudited pro forma combined results of
operations of Network General and 3DV on the basis that the acquisition had
taken place at the beginning of the fiscal year for each of the periods
presented:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues............................................... $189,528 $242,250
Net income............................................. 27,190 24,225
Earnings per share..................................... $ 0.59 $ 0.53
Shares used in computation............................. 45,822 45,703
</TABLE>
F-28
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 1995, Network General acquired all of the remaining 90% voting
interest of AIM Technology ("AIM"), which it did not own, for approximately
$7,101,000, including $600,000 invested by Network General in fiscal year 1995
for 10% of the voting interest of AIM. The acquisition was funded with
existing cash and was accounted for using the purchase method of accounting.
Accordingly, the results of AIM's operations have been included with those of
Network General since the date of acquisition.
A portion of the purchase price was allocated to the net assets acquired and
liabilities assumed based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $1,385,000 and
$1,437,000, respectively. In addition, $7,153,000 of the purchase price was
allocated to in-process research and development projects that had not reached
technological feasibility and had no probable alternative future uses, which
Network General expensed at the date of acquisition.
The following table reflects the unaudited pro forma combined results of
operations of Network General and AIM on the basis that the acquisition had
taken place at the beginning of the fiscal year for each of the periods
presented:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues............................................... $142,537 $190,740
Net income............................................. 25,327 27,526
Earnings per share..................................... $ 0.57 $ 0.60
Shares used in computation............................. 44,626 45,822
</TABLE>
REVENUES. Network General recognizes product revenues upon shipment of
systems or software and defers and recognizes warranty revenue in accordance
with Statement of Position 91-1, "Software Revenue Recognition." Revenues on
rental units under operating leases and service agreements are recognized
ratably over the term of the rental or service period. Revenues for education
courses are recognized once the course has been completed by the customer.
Payments received in advance under such contracts are recorded as deferred
revenues. Royalty income is recognized based on the number of copies of
software sold to the licensees of software products.
Export revenues as a percentage of revenues were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Europe.................................................... 12% 9% 11%
Asia/Americas/Canada...................................... 10% 15% 16%
--- --- ---
Total export revenues..................................... 22% 24% 27%
=== === ===
</TABLE>
CASH AND CASH EQUIVALENTS. Network General considers certificates of
deposits, commercial paper and money market funds with an original maturity
date of three months or less to be cash equivalents.
MARKETABLE DEBT AND EQUITY SECURITIES AND LONG-TERM INVESTMENTS. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when Network General
has the positive intent and ability to hold the securities to maturity.
Marketable debt and equity securities and long-term investments not classified
as held-to-maturity are classified as available-for-sale. Held-to-maturity
investments are stated at cost, adjusted for amortization of premiums and
accretion of discounts to maturity. Available-for-sale debt and equity
securities are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, if significant. No
debt or equity securities were classified as available-for-sale at March 31,
1996.
F-29
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of March 31, the following is a summary of held-to-maturity and
available-for-sale securities:
HELD-TO-MATURITY SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
AGGREGATE
AMORTIZED FAIR UNREALIZED
COST VALUE GAINS (LOSSES)
1996: --------- --------- -------------
<S> <C> <C> <C>
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies............................ $ 41,071 $ 41,053 $(18)
Debt securities issued by states of
the United States and political
subdivisions of the states.......... 77,485 77,962 477
-------- -------- ----
$118,556 $119,015 $459
======== ======== ====
</TABLE>
HELD-TO-MATURITY SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR VALUE GAINS
1997: --------- ---------- -------------
<S> <C> <C> <C>
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies............................ $ 9,955 $ 9,955 $ --
Debt securities issued by states of
the United States and political
subdivisions of the states.......... 74,784 74,890 106
------- ------- -----
$84,739 $84,845 $ 106
======= ======= =====
AVAILABLE-FOR-SALE SECURITIES
(IN THOUSANDS)
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR VALUE GAINS (LOSSES)
1997: --------- ---------- -------------
<S> <C> <C> <C>
Debt securities issued by states of
the United States and political
subdivisions of the states.......... $26,720 $26,770 $ 50
Equity securities issued by
corporations........................ 5,043 4,614 (429)
------- ------- -----
$31,763 $31,384 $(379)
======= ======= =====
</TABLE>
FOREIGN EXCHANGE FORWARD CONTRACTS. Network General enters into foreign
exchange forward contracts as a hedge against foreign accounts receivable and
cash. Gains and losses on foreign exchange forward contracts are included in
net income.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-
out) or market and include material and related manufacturing overhead. As of
March 31, inventories consist of:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Purchased parts............................................. $2,650 $1,386
Finished goods.............................................. 2,213 3,921
------ ------
$4,863 $5,307
====== ======
</TABLE>
Certain of Network General's products contain critical components supplied
by a single or a limited number of third parties. Network General has been
required to purchase and inventory certain of the computer platforms
F-30
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
around which it designs its products so as to ensure an available supply of
the product for its customers. Any significant shortage of these platforms or
other components or the failure of the third party supplier to maintain or
enhance these products could materially adversely affect Network General's
results of operations.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed by the straight-line method for financial reporting
purposes. Estimated useful lives range from two to five years for
demonstration, rental, office and developmental equipment. Leasehold
improvements are amortized over the corresponding lease term.
SOFTWARE DEVELOPMENT COSTS. Network General anticipates capitalizing
eligible computer software development costs upon the establishment of
technological feasibility, which Network General has defined as completion of
a working model. The period of time beginning with the establishment of a
working model and ending when a product is offered for sale is typically very
short. Accordingly, costs which were eligible for capitalization are
insignificant and, thus, Network General has charged all software development
costs to research and development expense in the accompanying consolidated
statements of income.
EARNINGS PER SHARE. Earnings per share are computed using the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Fully diluted earnings per share are the same
as primary earnings per share.
The Board of Directors authorized a 2-for-1 stock split in the form of a
stock dividend of Network General's $0.01 par value common stock which was
effective May 1996. All references in the accompanying consolidated financial
statements to the number of common shares and per share amounts for fiscal
year 1996 and prior periods presented have been restated to reflect the stock
split.
PRESENTATION. Fiscal year 1995 financial statement balances have been
reclassified to conform to fiscal year 1997 and 1996 presentations.
3. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject Network General to
concentrations of credit risk consist principally of cash investments and
trade receivables. Network General has investment policies that limit the
amount of credit exposure with any one issuer and restrict placement of these
investments to issuers evaluated as creditworthy. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising Network General's customer base and their dispersion
across many different industries and geographies. No single customer accounted
for more than 10% of revenues in fiscal years 1995, 1996 or 1997.
4. FOREIGN EXCHANGE FORWARD CONTRACTS
During fiscal year 1997, Network General began hedging its exposure to
foreign currency fluctuations through foreign exchange forward contracts.
Gains and losses associated with currency rate changes on foreign exchange
forward contracts are recorded currently in income as they offset
corresponding gains and losses on the foreign currency denominated assets
being hedged.
F-31
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED LIABILITIES
As of March 31, accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related taxes................... $ 5,583 $ 7,197
Accrued acquisition and merger costs..................... 293 2,126
Accrued commissions...................................... 1,126 1,636
Accrued income taxes..................................... 1,157 1,198
Other accrued expenses................................... 6,590 8,469
------- -------
$14,749 $20,626
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Network General leases its facilities and certain equipment under
noncancelable operating lease agreements. As of March 31, 1997, the minimum
future lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- -------------
<S> <C>
1998....................................................... $ 5,707
1999....................................................... 5,302
2000....................................................... 5,194
2001....................................................... 4,001
2002....................................................... 1,470
-------
$21,674
=======
</TABLE>
Total rent expense was $4,115,000, $4,785,000 and $6,092,000 in fiscal years
1995, 1996 and 1997, respectively.
Network General is a defendant in various suits and is subject to various
claims which arise in the normal course of business. In the opinion of
management, the ultimate disposition of these claims will not have a material
adverse effect on the consolidated financial position, liquidity or results of
operations of Network General.
7. SHARE REPURCHASE PROGRAM
In July 1993, Network General's Board of Directors authorized Network
General to repurchase up to 4,000,000 shares of its common stock on the open
market to satisfy commitments under its stock option and stock purchase plans.
In fiscal year 1996, up to an additional 4,000,000 shares of Network General's
common stock were authorized for repurchase for the same purpose. As of March
31, 1997, Network General had repurchased and retired 4,690,000 shares at an
aggregate cost of $92,574,000.
8. COMPENSATION AND BENEFIT PROGRAMS
STOCK OPTION PLANS. Under Network General's 1989 Employee Stock Option Plan,
key employees and consultants may be granted either incentive or non-qualified
options to purchase common stock at the discretion of the Board of Directors.
Network General currently has authorized a total of 16,000,000 shares for
issuance under this plan. The exercise price of the stock options may not be
less than the fair market value of the common stock on the date of the grant.
Employees can receive an initial option grant upon joining Network General and
F-32
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees may be granted subsequent options based upon performance. Prior to
July 19, 1993, initial option grants vested ratably each year over a three-
year period from the grant date, while subsequent option grants generally
vested in a lump sum amount three years after the date on which each
subsequent option was granted. In fiscal year 1994, the vesting schedules were
amended for any options granted on or after July 19, 1993. Generally, initial
option grants vest 25% at the end of the first year and then ratably each
month for an additional three years, while subsequent option grants vest
ratably each month beginning one month after the grant date for four years.
Options issued prior to July 19, 1993, not submitted for repricing in fiscal
year 1994, continue to vest according to their original schedule.
In April 1989, Network General established the 1989 Outside Directors Stock
Option Plan, whereby outside directors may be granted non-qualified options to
purchase common stock. The number of shares of common stock authorized for
issuance under this plan is 1,020,000. The exercise price of the stock option
may not be less than the fair market value of the common stock on the date of
the grant. Each outside director is granted an initial option grant of 40,000
shares upon election to the Board and an option grant of 5,000 shares each
subsequent year. Prior to July 19, 1993, initial option grants vested ratably
each year over a three-year period from the grant date, while subsequent
option grants generally vested in a lump sum amount three years after the date
on which each subsequent option was granted. In fiscal year 1994, the vesting
schedules were amended for any options granted on or after July 19, 1993.
Generally, initial option grants now vest 25% at the end of the first year and
then ratably each month for an additional three years, while subsequent option
grants now vest ratably each month between the third and fourth year after the
grant date. Directors were excluded from participating in both the fiscal year
1994 and the fiscal year 1993 option repricing. Options issued prior to
July 19, 1993, continue to vest either ratably over a three-year period or in
a lump sum amount at the end of three years.
In connection with the acquisition of ProTools, Inc. ("ProTools") in January
1994, Network General assumed the outstanding stock options of ProTools. At
the time of the merger, 545,660 equivalent ProTools incentive stock options
were outstanding. As of March 31, 1997, 7,042 incentive stock options remain
outstanding, all of which are fully vested and exercisable at $0.33 per share.
EMPLOYEE STOCK PURCHASE PLAN. Network General has authorized 1,500,000
shares of common stock for issuance under the 1989 Employee Stock Purchase
Plan. Employees may elect to withhold up to 10% of their compensation for the
purchase of Network General's common stock. The amounts withheld are used to
purchase Network General's common stock at a price equal to 85% of the fair
market value of the stock on the first or last day of a six-month offering
period, whichever is lower. Network General issued 239,778 shares at an
average price of $6.82 per share in fiscal 1995, 176,584 shares at an average
price of $12.21 per share in fiscal 1996 and 198,518 shares at an average
price of $15.04 per share in fiscal 1997.
Network General has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its stock options and employee stock
purchase plan because, as discussed below, the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of Network General's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if Network General had
accounted for its stock options and employee stock purchase plan under the
fair value method of SFAS 123. The fair value for the stock options was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for fiscal years
F-33
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996 and 1997: risk-free interest rates in the range of 5.20% to 6.61%;
dividend yields of zero; an expected volatility factor of the market price of
Network General's common stock of 0.60; and an expected life of the option of
0.59 years after vest date. The weighted-average estimated fair value of
options granted during fiscal 1996 and 1997 was $7.68 and $8.61 per share,
respectively. The fair value of the employees' purchase rights was also
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1996 and 1997: risk-free
interest rates in the range of 5.09% to 6.10%; dividend yields of zero; an
expected volatility factor of the market price of Network General's stock of
0.60; and an expected life of 6 months. The weighted-average estimated fair
value of shares issued under the employee stock purchase plan for fiscal years
1996 and 1997 was $4.72 and $5.12, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility
and expected option life. Because Network General's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. Network
General's pro forma net income would have been $21,950,000 and $13,055,000 for
fiscal years 1996 and 1997, respectively. Pro forma net income per common and
common equivalent share would have been $0.48 and $0.29 for fiscal years 1996
and 1997, respectively. A summary of Network General's stock option activity,
and related information for the years ended March 31 follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year................... 7,120,678 $5.53 6,763,141 $7.60 7,590,559 $11.65
Granted................. 3,429,076 9.27 3,329,670 16.92 1,889,050 18.85
Exercised............... (2,291,106) 4.36 (1,441,304) 6.61 (1,671,768) 8.97
Forfeited............... (1,495,507) 6.57 (1,060,948) 9.19 (758,135) 13.76
---------- ---------- ----------
Outstanding-end of year. 6,763,141 7.60 7,590,559 11.65 7,049,706 13.99
Exercisable-end of year. 900,062 6.27 1,540,331 7.73 2,066,709 10.60
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 3/31/97 LIFE (IN YEARS) PRICE AT 3/31/97 PRICE
--------------- ----------- -------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.33 7,042 5.77 $0.33 7,042 $0.33
3.88 -- 6.44 860,600 5.15 5.26 536,352 5.35
6.81 -- 10.25 1,677,970 7.15 8.77 761,850 8.76
11.53 -- 17.38 2,477,889 8.80 15.30 526,604 14.77
17.75 -- 25.13 2,009,205 8.98 20.41 234,861 19.50
$27.38 17,000 9.75 27.38 -- --
</TABLE>
COMMON STOCK AWARD PLAN. In June 1989, the Board of Directors approved the
1989 Common Stock Award Plan and reserved 240,000 shares for issuance
thereunder. Under this plan, awards are made to
F-34
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
independent sales representatives and consultants based upon individual sales
performance criteria. The shares are issued at fair market value and the
related value of the shares is charged to sales and marketing expense over the
vesting period. The shares generally vest over three years and Network General
can reacquire any unvested shares upon termination of the individual's
relationship with Network General. No shares of common stock were awarded
under this plan in fiscal years 1995, 1996 or 1997. As of March 31, 1997, the
number of shares that has been awarded under this plan is 58,936, all of which
are fully vested.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE.
<TABLE>
<S> <C>
As of March 31, 1997:
1989 Employee Stock Option Plan................................ 9,076,958
1989 Outside Directors Stock Option Plan....................... 517,500
1989 Employee Stock Purchase Plan.............................. 247,198
1989 Common Stock Award Plan................................... 181,064
1990 ProTools, Inc. Stock Option Plan.......................... 7,042
----------
10,029,762
==========
</TABLE>
EMPLOYEE SAVINGS PLAN. In September 1988, the Board of Directors approved an
employee savings plan (the "Plan") which is intended to be qualified and
exempt from tax under Section 401(k) of the Internal Revenue Code. Under the
Plan, employees may elect to contribute up to 15% of their gross compensation,
subject to annual I.R.S. limitations. Network General contributes to the Plan
in amounts determined at the discretion of the Board of Directors. All
contributions by Network General are funded currently and vest ratably over
three years. All employee contributions are fully vested. Annual amounts
provided by Network General under the Plan to date have not been material.
9. INCOME TAXES
Pre-tax income from continuing operations for the years ended March 31 was
taxed in the following jurisdictions:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................................... $36,535 $42,119 $43,243
Foreign........................................... 561 405 1,421
------- ------- -------
$37,096 $42,524 $44,664
======= ======= =======
</TABLE>
F-35
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current payable............................... $11,311 $13,990 $18,291
Deferred tax asset............................ (605) (1,399) (1,433)
Non-current deferred.......................... (1,673) (503) (1,233)
------- ------- -------
Total federal................................. 9,033 12,088 15,625
------- ------- -------
State
Current payable............................... 2,876 2,730 3,825
Non-current deferred.......................... (489) (189) (617)
------- ------- -------
Total state................................... 2,387 2,541 3,208
------- ------- -------
Foreign........................................ 265 470 738
------- ------- -------
Total provision................................ $11,685 $15,099 $19,571
======= ======= =======
</TABLE>
Deferred tax assets are comprised of the following at March 31:
<TABLE>
<CAPTION>
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Deferred revenue currently recognized for tax purposes.. $1,058 $ 959
Reserves and accruals not currently deductible for tax
purposes................................................ 4,183 5,807
State taxes not currently deductible for federal tax
purposes................................................ 307 147
Depreciation and amortization........................... 2,763 3,456
Operating loss carryover of ProTools, AIM and 3DV....... 2,472 968
------ -------
Total deferred tax asset................................ 10,783 11,337
Valuation allowance..................................... (2,472) (968)
------ -------
Net deferred tax asset.................................. $8,311 $10,369
====== =======
</TABLE>
The valuation allowance consists of the operating losses of ProTools, a
wholly owned subsidiary, acquired in January 1994 in a transaction accounted
for as a pooling of interests, AIM, a wholly owned subsidiary, acquired in
September 1995 in a transaction accounted for as a purchase and 3DV, a wholly
owned subsidiary, acquired March 31, 1997 in a transaction accounted for as a
purchase. The operating losses are subject to certain annual limitations as a
result of the acquisitions and may expire before Network General can utilize
them. Network General believes sufficient uncertainty exists regarding the
realizability of these losses on a separate entity basis, and accordingly, a
valuation allowance has been established.
Realization of the remaining net deferred tax asset of $10,369,000 as of
March 31, 1997 is dependent on generating sufficient taxable income to offset
future deduction of the related items. Although realization is not assured,
management believes it is more likely than not that all of the net deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
U.S. income taxes were not provided for on a cumulative total of
approximately $1,846,000 of undistributed earnings for certain non-U.S.
subsidiaries. Network General intends to reinvest these earnings indefinitely
in operations outside the United States.
F-36
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rates........................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit........ 5.1 5.2 5.5
Permanent differences................................. (8.6) (10.4) (11.2)
Change in valuation allowance......................... -- -- (4.3)
Merger, acquisition and related costs................. -- 5.7 18.8
---- ----- -----
31.5% 35.5% 43.8%
==== ===== =====
</TABLE>
10.RELATED PARTY TRANSACTION
In connection with the acquisition of ProTools, Network General assumed
certain royalty obligations to a company whose principal stockholder was also
an officer of Network General. The royalty obligations called for royalty
payments through December 31, 1999 or until $920,000 in aggregate royalties
had been paid. In fiscal 1995, Network General negotiated a lump sum payment
of $572,000 to this company in full settlement of all royalties owed under
this agreement. The prepaid royalty was being expensed as a cost of goods sold
as related revenues were recognized and was fully expensed as of March 31,
1996.
11.RECENTLY ISSUED ACCOUNTING STANDARD (UNAUDITED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which is required to be adopted by Network General in its third quarter of
fiscal year 1998. At that time, Network General will be required to change the
method currently used to compute earnings per share and to restate earnings
per share for all prior periods. Under the new requirements for calculating
earnings per share, primary earnings per share will be replaced with basic
earnings per share and fully diluted earnings per share will be replaced with
diluted earnings per share. Under basic earnings per share, the dilutive
effect of stock options will be excluded. No change is expected for basic loss
per share compared to reported primary loss per share for the three months and
six months ended September 30, 1997, respectively. For the quarter and six
months ended September 30, 1996, basic earnings per share is expected to be
$0.01 higher than reported primary earnings per share. No change is expected
for diluted earnings (loss) per share compared to fully diluted earnings
(loss) per share for the three months ended September 30, 1997 or for the six
months ended September 30, 1996 and 1997. For the quarter ended September 30,
1996, diluted earnings per share is expected to be $0.01 higher than fully
diluted earnings per share.
12.ACQUISITION OF CINCO NETWORKS, INC. (UNAUDITED)
On August 5, 1997 Network General acquired all of the outstanding common
stock of Cinco Networks, Inc. ("Cinco") for cash consideration of $26.3
million. Cinco is a three year-old Pleasanton, California-based developer and
provider of entry-level network analysis products. In addition, the purchase
agreement provides for contingent payments aggregating up to $13.0 million to
be paid, in part, after the first and second year following the acquisition
based on the achievement of certain performance milestones, including product
development and revenue levels. The contingent payments are automatically
forfeited if employment terminates for specified reasons before the end of the
respective earn-out periods and, accordingly, will be accounted for as
compensation expense. The compensation expense will be recognized in the
periods such payments are earned and become probable based on the achievement
of such milestones. Network General accounted for the transaction as a
purchase and, accordingly, has reflected the results of Cinco in its
consolidated financial statements since the date of acquisition.
F-37
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as determined by an independent
valuation. The fair value of tangible assets acquired was $1.9 million and
liabilities assumed was $1.9 million. In addition, $23.0 million of the
purchase price was allocated to in-process research and development projects
that had not reached technological feasibility and had no probable alternative
future uses, which Network General expensed at the date of acquisition. The
remainder of the purchase price was allocated to goodwill and will be
amortized over six years.
Cinco's in-process research and development projects relate primarily to the
development of significant enhancements and expansion of their current entry-
level network analysis offering as well as the planned development of various
derivative products. These new offerings, if successfully completed, will
integrate portions of both Cinco's current and in-process entry-level
technologies and Network General's high-end network management solution. The
efforts to complete the acquired in-process projects will primarily consist of
internally-staffed engineering costs over the next two years, which are
expected to cost in excess of $8 million.
The following table reflects the unaudited pro forma combined results of
operations of Network General and Cinco on the basis that the acquisition had
taken place at the beginning of the fiscal year for each of the periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues............................................. $110,240 $125,560
Net income (loss).................................... 19,018 (9,515)
Earnings (loss) per share............................ $ 0.42 $ (0.22)
Shares used in computation........................... 45,735 42,731
</TABLE>
13. SUBSEQUENT EVENT (UNAUDITED)
Network General and McAfee Associates, Inc. ("McAfee") have entered into an
Agreement and Plan of Reorganization, dated as of October 13, 1997, as amended
by the First Amendment dated October 22, 1997, among Network General, McAfee
and Merger Sub. Pursuant to the Reorganization Agreement, Merger Sub will
merge with and into Network General, Network General will continue as the
surviving corporation and will become a wholly-owned subsidiary of McAfee, and
each outstanding share of Common Stock of Network General, $0.01 par value,
will be converted into 0.4167 of a share (the "Exchange Ratio") of the common
stock of McAfee (all such actions collectively, the "Merger"). In addition,
subject to the approval of McAfee stockholders and the consummation of the
Merger, the corporate name of McAfee will be changed to "Network Associates,
Inc." (the "Combined Company"). All outstanding options to purchase Network
General common stock will be assumed by McAfee and will become options to
purchase shares of the Combined Company's common stock. The transaction is
intended to be accounted for as a pooling of interests and qualify as a tax-
free reorganization. The Merger has been approved by the Boards of Directors
of Network General and McAfee, but is still subject to regulatory review and
approval, stockholder approval and other conditions to closing.
Pursuant to Section 7.3 of the Reorganization Agreement, the Reorganization
Agreement may be terminated by either party under certain circumstances. Each
of Network General and McAfee has agreed that if the Merger is not consummated
as a result of certain specified events, it will pay to the other party a
termination fee of $30.0 million. Payment of the fees described in this
paragraph shall not be in lieu of damages incurred in the event of material
and willful breach of the Reorganization Agreement.
F-38
<PAGE>
NETWORK GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If the Merger is not consummated, expenses incurred in connection with the
proposed combination (including the possible "break up" fees described above)
could have a material adverse effect on Network General's results of
operations.
F-39
<PAGE>
INDEX OF ANNEXES
<TABLE>
<C> <S>
ANNEX A --Agreement and Plan of Reorganization, dated as of October 13, 1997,
as amended by the First Amendment thereto dated as of October 22,
1997, among McAfee Associates Inc., Network General Corporation and
Mystery Acquisition Corp.
ANNEX B --Opinion of Morgan Stanley & Co. Incorporated
ANNEX C --Opinion of Hambrecht & Quist LLC
</TABLE>
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
McAFEE ASSOCIATES, INC.
MYSTERY ACQUISITION CORP.
AND
NETWORK GENERAL CORPORATION
DATED AS OF OCTOBER 13, 1997
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I THE MERGER..................................................... A-5
1.1 The Merger.................................................... A-5
1.2 Effective Time; Closing....................................... A-5
1.3 Effect of the Merger.......................................... A-6
1.4 Certificate of Incorporation; Bylaws.......................... A-6
1.5 Directors and Officers........................................ A-6
1.6 Effect on Capital Stock....................................... A-6
1.7 Surrender of Certificates..................................... A-7
1.8 No Further Ownership Rights in Company Common Stock........... A-8
1.9 Lost, Stolen or Destroyed Certificates........................ A-8
1.10 Tax and Accounting Consequences............................... A-9
1.11 Taking of Necessary Action; Further Action.................... A-9
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY..................... A-9
2.1 Organization of Company....................................... A-9
2.2 Company Capital Structure..................................... A-9
2.3 Obligations With Respect to Capital Stock..................... A-10
2.4 Authority..................................................... A-10
2.5 SEC Filings; Company Financial Statements..................... A-11
2.6 Absence of Certain Changes or Events.......................... A-12
2.7 Taxes......................................................... A-12
2.8 Title to Properties; Absence of Liens and Encumbrances........ A-13
2.9 Intellectual Property......................................... A-14
2.10 Compliance; Permits; Restrictions............................. A-15
2.11 Litigation.................................................... A-16
2.12 Brokers' and Finders' Fees.................................... A-16
2.13 Employment Matters............................................ A-16
2.14 Environmental Matters......................................... A-19
2.15 Agreements, Contracts and Commitments......................... A-20
2.16 Pooling of Interests.......................................... A-21
2.17 Certain Payments.............................................. A-21
2.18 Registration Statement; Joint Proxy Statement/Prospectus...... A-21
2.19 Board Approval................................................ A-21
2.20 Fairness Opinion.............................................. A-21
2.21 Section 203 of the Delaware General Corporation Law Not
Applicable; Company Rights Plan.............................. A-21
2.22 Customs....................................................... A-22
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...... A-22
3.1 Organization of Parent........................................ A-22
3.2 Parent and Merger Sub Capital Structure....................... A-22
3.3 Obligations With Respect to Capital Stock..................... A-23
3.4 Authority..................................................... A-23
3.5 SEC Filings; Parent Financial Statements...................... A-24
3.6 Absence of Certain Changes or Events.......................... A-24
3.7 Taxes......................................................... A-25
3.8 Title to Properties; Absence of Liens and Encumbrances........ A-25
3.9 Intellectual Property......................................... A-25
3.10 Compliance; Permits; Restrictions............................. A-26
3.11 Litigation.................................................... A-27
3.12 Brokers' and Finders' Fees.................................... A-27
</TABLE>
A-2
<PAGE>
TABLE OF CONTENTS--CONTINUED
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.13 Statements; Joint Proxy Statement/Prospectus.................. A-27
3.14 Valid Issuance................................................ A-27
3.15 No Ownership of Company Common Stock.......................... A-27
3.16 Pooling of Interests.......................................... A-27
3.17 Board Approval................................................ A-28
3.18 Fairness Opinion.............................................. A-28
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME........................... A-28
4.1 Conduct of Business by Company................................ A-28
4.2 Conduct of Business by Parent................................. A-30
ARTICLE V ADDITIONAL AGREEMENTS.......................................... A-30
5.1 Joint Proxy Statement/Prospectus; Registration Statement;
Other Filings; Board Recommendations......................... A-30
5.2 Meetings of Stockholders...................................... A-31
5.3 Confidentiality; Access to Information........................ A-31
5.4 No Solicitation............................................... A-32
5.5 Public Disclosure............................................. A-34
5.6 Reasonable Efforts; Notification.............................. A-34
5.7 Third Party Consents.......................................... A-35
5.8 Stock Options and Employee Benefits........................... A-35
5.9 Form S-8...................................................... A-36
5.10 Indemnification............................................... A-36
5.11 Nasdaq Listing................................................ A-36
5.12 Affiliate Agreements.......................................... A-36
5.13 Regulatory Filings; Reasonable Efforts........................ A-37
5.14 Board of Directors of Parent Following the Merger............. A-37
ARTICLE VI CONDITIONS TO THE MERGER...................................... A-37
6.1 Conditions to Obligations of Each Party to Effect the Merger.. A-37
6.2 Additional Conditions to Obligations of Company............... A-38
6.3 Additional Conditions to the Obligations of Parent and Merger A-38
Sub..........................................................
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER............................ A-39
7.1 Termination................................................... A-39
7.2 Notice of Termination; Effect of Termination.................. A-40
7.3 Fees and Expenses............................................. A-40
7.4 Amendment..................................................... A-42
7.5 Extension; Waiver............................................. A-42
ARTICLE VIII GENERAL PROVISIONS.......................................... A-43
8.1 Non-Survival of Representations and Warranties................ A-43
8.2 Notices....................................................... A-43
8.3 Interpretation; Knowledge..................................... A-43
8.4 Counterparts.................................................. A-44
8.5 Entire Agreement; Third Party Beneficiaries................... A-44
8.6 Severability.................................................. A-44
8.7 Other Remedies; Specific Performance.......................... A-44
8.8 Governing Law................................................. A-44
8.9 Rules of Construction......................................... A-45
8.10 Assignment.................................................... A-45
8.11 Waiver of Jury Trial.......................................... A-45
</TABLE>
A-3
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<C> <S>
Exhibit A-1 Form of Company Voting Agreement
Exhibit A-2 Form of Parent Voting Agreement
Exhibit B-1 Form of Company Affiliate Agreement
Exhibit B-2 Form of Parent Affiliate Agreement
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
October 13, 1997, among McAfee Associates, Inc., a Delaware corporation
("PARENT"), Mystery Acquisition Corp., a Delaware corporation and a wholly-
owned subsidiary of Parent ("MERGER SUB"), and Network General Corporation, a
Delaware corporation ("COMPANY").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("DELAWARE LAW"), Parent and Company intend to enter into a
business combination transaction.
B. The Boards of Directors of Company and Parent (i) have determined that
the Merger (as defined in Section 1.1) is consistent with and in furtherance
of their respective long-term business strategies and fair to, and in the best
interests of, their respective stockholders, (ii) have approved this
Agreement, the Merger and the other transactions contemplated by this
Agreement and (iii) have, in the case of Company, subject to the provisions of
this Agreement, determined to recommend that the stockholders of Company adopt
and approve this Agreement and approve the Merger and, in the case of Parent,
subject to the provisions of this Agreement, determined to recommend that the
stockholders of Parent approve the issuance of shares of Parent Common Stock
(as defined in Section 1.6(a)) pursuant to the Merger.
C. The Board of Directors of Merger Sub has approved this Agreement, the
Merger and the other transactions contemplated by this Agreement.
D. Concurrently with the execution of this Agreement, and as a condition and
inducement to Parent's and Company's respective willingness to enter into this
Agreement, certain stockholders of Company are entering into Voting Agreements
in substantially the form attached hereto as Exhibit A-1 (the "COMPANY VOTING
AGREEMENTS"), and certain stockholders of Parent are entering into Voting
Agreements in substantially the form attached hereto as Exhibit A-2 (the
"PARENT VOTING AGREEMENTS").
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "CODE").
F. It is also intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and
into Company (the "MERGER"), the separate corporate existence of Merger Sub
shall cease and Company shall continue as the surviving corporation. Company
as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware
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in accordance with the relevant provisions of Delaware Law (the "CERTIFICATE
OF MERGER") (the time of such filing (or such later time as may be agreed in
writing by Company and Parent and specified in the Certificate of Merger)
being the "EFFECTIVE TIME") as soon as practicable on or after the Closing
Date (as herein defined). The closing of the Merger (the "CLOSING") shall take
place at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, at a time and date to be specified by the parties, which shall be
no later than the second business day after the satisfaction or waiver of the
conditions set forth in Article VI, or at such other time, date and location
as the parties hereto agree in writing (the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation of the Surviving
Corporation; provided, however, that at the Effective Time the Certificate of
Incorporation of the Surviving Corporation shall be amended so that the name
of the Surviving Corporation shall be "Network General Corporation."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The directors of Company immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation
(together with such additional directors as may be elected by Parent effective
as of or after the Effective Time). For transition purposes, Parent intends
that such directors shall continue to serve as directors of the Surviving
Corporation for 180 days or more following the Effective Time. The initial
officers of the Surviving Corporation shall be the officers of Merger Sub
immediately prior to the Effective Time.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Company or the holders of
any of the following securities:
(a) Conversion of Company Common Stock. Each share of Common Stock, $0.01
par value per share, of Company (including, with respect to each such share
of Company Common Stock, the associated Rights (as defined in that certain
Rights Agreement (the "COMPANY RIGHTS PLAN") dated as of June 26, 1992,
between Company and Chemical Trust Company of California, as Rights Agent,
as amended))(the "COMPANY COMMON STOCK") issued and outstanding immediately
prior to the Effective Time, other than any shares of Company Common Stock
to be canceled pursuant to Section 1.6(b), will be canceled and
extinguished and automatically converted (subject to Sections 1.6(e) and
(f)) into the right to receive 0.4167 (the "EXCHANGE RATIO") shares of
Common Stock of Parent (the "PARENT COMMON STOCK") upon surrender of the
certificate representing such share of Company Common Stock in the manner
provided in Section 1.7 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the
manner provided in Section 1.9).
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock held by Company or owned by Merger Sub, Parent or any direct or
indirect wholly owned subsidiary of Company or of Parent immediately prior
to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Stock Options; Employee Stock Purchase Plans. At the Effective Time,
all options to purchase Company Common Stock then outstanding under
Company's 1989 Stock Option Plan (the "ISO PLAN"), Company's 1989 Outside
Directors Stock Option Plan (the "DIRECTORS' PLAN"), the Cinco Networks,
Inc.
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1997 Stock Option Plan (the "CINCO PLAN"), and options granted by ProTools,
Inc. and assumed by Company (the "PROTOOLS OPTIONS" and together with the
ISO Plan, the Directors' Plan and the Cinco Plan, the "COMPANY STOCK OPTION
PLANS") shall be assumed by Parent in accordance with Section 5.8 hereof.
Rights outstanding under Company's 1989 Employee Stock Purchase Plan (the
"ESPP") shall be treated as set forth in Section 5.8.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $0.001 par
value per share, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock,
$0.01 par value per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock
split, stock dividend (including any dividend or distribution of securities
convertible into Parent Common Stock or Company Common Stock),
reorganization, recapitalization, reclassification or other like change
with respect to Parent Common Stock or Company Common Stock occurring on or
after the date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock will
be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Company Common Stock who would otherwise be entitled to a
fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock that otherwise would be received
by such holder) shall receive from Parent an amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied
by (ii) the average closing price of one share of Parent Common Stock for
the five (5) most recent days that Parent Common Stock has traded ending on
the trading day immediately prior to the Effective Time, as reported on the
Nasdaq National Market System ("NASDAQ").
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent shall select a bank or trust company reasonably
acceptable to Company to act as the exchange agent (the "EXCHANGE AGENT") in
the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, the shares of Parent Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Company Common Stock, and
cash in an amount sufficient for payment in lieu of fractional shares pursuant
to Section 1.6(f) and any dividends or distributions to which holders of
shares of Company Common Stock may be entitled pursuant to Section 1.7(d).
(c) Exchange Procedures. As soon as practicable after the Effective Time,
and in no event later than five (5) business days thereafter, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES"), which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock whose shares were converted into shares of Parent Common Stock pursuant
to Section 1.6, cash in lieu of any fractional shares pursuant to Section
1.6(f) and any dividends or other distributions pursuant to Section 1.7(d),
(i) a letter of transmittal in customary form (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall contain such other provisions as Parent may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock, cash in
lieu of any fractional shares pursuant to Section 1.6(f) and any dividends or
other distributions pursuant to Section 1.7(d). Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto,
the holders of such Certificates shall be entitled to receive in exchange
therefor certificates representing the number of whole shares of Parent Common
Stock into which their shares of Company Common Stock were converted at the
Effective Time, payment in lieu of fractional shares which such holders have
the right to receive
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<PAGE>
pursuant to Section 1.6(f) and any dividends or distributions payable pursuant
to Section 1.7(d), and the Certificates so surrendered shall forthwith be
canceled. Until so surrendered, outstanding Certificates will be deemed from
and after the Effective Time, for all corporate purposes, subject to Section
1.7(d) as to the payment of dividends, to evidence only the ownership of the
number of full shares of Parent Common Stock into which such shares of Company
Common Stock shall have been so converted and the right to receive an amount
in cash in lieu of the issuance of any fractional shares in accordance with
Section 1.6(f) and any dividends or distributions payable pursuant to Section
1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect
to Parent Common Stock with a record date after the Effective Time will be
paid to the holders of any unsurrendered Certificates with respect to the
shares of Parent Common Stock represented thereby until the holders of record
of such Certificates shall surrender such Certificates. Subject to applicable
law, following surrender of any such Certificates, the Exchange Agent shall
deliver to the record holders thereof, without interest, certificates
representing whole shares of Parent Common Stock issued in exchange therefor
along with payment in lieu of fractional shares pursuant to Section 1.6(f)
hereof and the amount of any such dividends or other distributions with a
record date after the Effective Time payable with respect to such whole shares
of Parent Common Stock.
(e) Transfers of Ownership. If certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the
issuance of certificates representing shares of Parent Common Stock in any
name other than that of the registered holder of the Certificates surrendered,
or established to the satisfaction of Parent or any agent designated by it
that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, neither the Exchange Agent, Parent, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to Section 1.6(f) and 1.7(d)) shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Company Common Stock, and there shall be no further
registration of transfers on the records of the Surviving Corporation of
shares of Company Common Stock which were outstanding immediately prior to the
Effective Time. If after the Effective Time Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, certificates representing the
shares of Parent Common Stock into which the shares of Company Common Stock
represented by such Certificates were converted pursuant to Section 1.6, cash
for fractional shares, if any, as may be required pursuant to Section 1.6(f)
and any dividends or distributions payable pursuant to Section 1.7(d);
provided, however, that Parent may, in its discretion and as a condition
precedent to the issuance of such certificates representing shares of Parent
Common Stock, cash and other distributions, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Parent, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
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<PAGE>
1.10 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code, and each of the
parties hereto will use its commercially reasonable efforts to cause the
Merger to be treated as such a reorganization. The parties hereto adopt this
Agreement as a "plan of reorganization" within the meaning of Sections 1.368-
2(g) and 1.368-3(a) of the United States Income Tax Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify for
accounting treatment as a pooling of interests.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of Company and Merger Sub, the officers and directors of
Company and Merger Sub will take all such lawful and necessary action. Parent
shall cause Merger Sub to perform all of its obligations relating to this
Agreement and the transactions contemplated thereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Parent and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter and
referencing a specific representation supplied by Company to Parent dated as
of the date hereof and certified by a duly authorized officer of Company (the
"COMPANY SCHEDULES"), as follows:
2.1 Organization of Company.
(a) Company and each of its material subsidiaries (i) is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is organized; (ii) has the corporate
or other power and authority to own, lease and operate its assets and property
and to carry on its business as now being conducted; and (iii), except as
would not be material to Company, is duly qualified or licensed to do business
in each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary.
(b) Company has delivered to Parent a true and complete list of all of
Company's subsidiaries as of the date of this Agreement, indicating the
jurisdiction of organization of each subsidiary and Company's equity interest
therein.
(c) Company has delivered or made available to Parent a true and correct
copy of the Certificate of Incorporation and Bylaws of Company and similar
governing instruments of each of its material subsidiaries, each as amended to
date, and each such instrument is in full force and effect. Neither Company
nor any of its material subsidiaries is in violation of any of the provisions
of its Certificate of Incorporation or Bylaws or equivalent governing
instruments.
2.2 Company Capital Structure. The authorized capital stock of Company
consists of 100,000,000 shares of Common Stock, $0.01 par value per share, of
which there were 42,461,275 shares issued and outstanding as of October 10,
1997 (excluding shares held in treasury of which there are none), and
2,000,000 shares of Preferred Stock, $0.01 par value per share, of which no
shares are issued or outstanding. All outstanding shares of Company Common
Stock are duly authorized, validly issued, fully paid and nonassessable and
are not subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of Company or any agreement or document to which
Company is a party or by which it is bound. As of October 10, 1997, Company
had reserved an aggregate of 11,300,548 shares of Company Common Stock, net of
exercises, for issuance pursuant
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to the Company Stock Option Plans. As of October 10, 1997, there were options
outstanding to purchase an aggregate of 2,699,996 shares of Company Common
Stock pursuant to the Company Stock Option Plans. As of October 10, 1997,
Company had reserved an aggregate of 2,000,000 shares of Company Common Stock
for issuance pursuant to the ESPP. All shares of Company Common Stock subject
to issuance as aforesaid, upon issuance on the terms and conditions specified
in the instruments pursuant to which they are issuable, would be duly
authorized, validly issued, fully paid and nonassessable. The Company
Schedules list each person who holds options to acquire shares of Company
Common Stock of which the exercisability will be accelerated in any way by the
transactions contemplated by this Agreement as well as the number of shares
subject to such options and the extent of such acceleration.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Company, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities Company owns free and clear of all claims
and encumbrances, directly or indirectly through one or more subsidiaries, and
except for shares of capital stock or other similar ownership interests of
certain subsidiaries of Company that are owned by certain nominee equity
holders as required by the applicable law of the jurisdiction of organization
of such subsidiaries, as of the date of this Agreement, there are no equity
securities, partnership interests or similar ownership interests of any class
of any material subsidiary of Company, or any security exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Section 2.2, there are no options,
warrants, equity securities, partnership interests or similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which Company or any of its material
subsidiaries is a party or by which it is bound obligating Company or any of
its material subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of Company or any of its
material subsidiaries or obligating Company or any of its material
subsidiaries to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement.
As of the date of this Agreement, except as contemplated by this Agreement,
the Company Voting Agreement and the Company Affiliate Agreement (as defined
in Section 5.12), there are no registration rights and, to the knowledge of
Company, there are no voting trusts, proxies or other agreements or
understandings to which Company is a party or by which it is bound with
respect to any equity security of any class of Company or with respect to any
equity security, partnership interest or similar ownership interest of any
class of any of its material subsidiaries. Stockholders of Company will not be
entitled to dissenters rights under applicable state law in connection with
the Merger.
2.4 Authority.
(a) Company has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby, subject
only to the approval of the Merger and the approval and adoption of this
Agreement by the stockholders of Company. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Company,
subject only to the approval and adoption of this Agreement and the approval
of the Merger by Company's stockholders and the filing of the Certificate of
Merger pursuant to Delaware Law. A vote of the holders of a majority of the
outstanding shares of the Company Common Stock is sufficient for Company's
stockholders to approve and adopt this Agreement and approve the Merger. This
Agreement has been duly executed and delivered by Company and, assuming the
due authorization, execution and delivery by Parent and Merger Sub,
constitutes a valid and binding obligation of Company, enforceable against
Company in accordance with its terms, except as enforceability may be limited
by bankruptcy and other similar laws and general principles of equity. The
execution and delivery of this Agreement by Company do not, and the
performance of this Agreement by Company will not, (i) conflict with or
violate the Certificate of Incorporation or Bylaws of Company or the
equivalent organizational documents of any of its material subsidiaries, (ii)
subject to obtaining the approval and adoption of this Agreement and the
approval of the Merger
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by Company's stockholders as contemplated in Section 5.2 and compliance with
the requirements set forth in Section 2.4(b) below, conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to Company or
any of its material subsidiaries or by which Company or any of its material
subsidiaries or any of their respective properties is bound or affected, or
(iii) result in any material breach of or constitute a material default (or an
event that with notice or lapse of time or both would become a material
default) under, or materially impair Company's material rights or alter the
material rights or material obligations of any third party under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a material lien or encumbrance on any of the
material properties or assets of Company or any of its subsidiaries pursuant
to, any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Company
or any of its material subsidiaries is a party or by which Company or any of
its material subsidiaries or its or any of their respective properties are
bound or affected. The Company Schedules list all consents, waivers and
approvals under any of Company's or any of its material subsidiaries'
agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby,
which, if individually or in the aggregate not obtained, would result in a
material loss of benefits to Company, Parent or the Surviving Corporation as a
result of the Merger.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality, foreign or domestic
("GOVERNMENTAL ENTITY"), is required to be obtained or made by Company or any
of its material subsidiaries in connection with the execution and delivery of
this Agreement or the consummation of the Merger, except for (i) the filing of
the Certificate of Merger with the Secretary of State of the State of
Delaware, (ii) the filing of the Joint Proxy Statement/Prospectus (as defined
in Section 2.18) with the Securities and Exchange Commission ("SEC") in
accordance with the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), (iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal, foreign
and state securities (or related) laws and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT"), and the securities or
antitrust laws of any foreign country, and (iv) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not be material to Company or have a material adverse effect on the
ability of Company to consummate the Merger.
2.5 SEC Filings; Company Financial Statements.
(a) Company has filed all forms, reports and documents required to be filed
by Company with the SEC since September 1, 1994 and has made available to
Parent such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that Company may
file subsequent to the date hereof) are referred to herein as the "COMPANY SEC
REPORTS." As of their respective dates, the Company SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Company SEC
Reports and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading. None of Company's subsidiaries is required to
file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports (the "COMPANY
FINANCIALS"), including each Company SEC Report filed after the date hereof
until the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act) and (iii) fairly presented the
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consolidated financial position of Company and its subsidiaries as at the
respective dates thereof and the consolidated results of Company's operations
and cash flows for the periods indicated, except that the unaudited interim
financial statements may not contain footnotes and were or are subject to
customary year-end adjustments which will not have a Material Adverse Effect
(as defined in Section 8.3(c)) on Company. The balance sheet of Company
contained in Company SEC Reports as of June 30, 1997 is hereinafter referred
to as the "COMPANY BALANCE SHEET." Except as disclosed in the Company
Financials, since the date of the Company Balance Sheet neither Company nor
any of its subsidiaries has any liabilities required under GAAP to be set
forth on a balance sheet (absolute, accrued, contingent or otherwise) which
are, individually or in the aggregate, material to the business, results of
operations or financial condition of Company and its subsidiaries taken as a
whole, except for liabilities incurred since the date of the Company Balance
Sheet in the ordinary course of business consistent with past practices.
2.6 Absence of Certain Changes or Events. Since the date of the Company
Balance Sheet there has not been: (i) any Material Adverse Effect on Company,
(ii) any declaration, setting aside or payment of any dividend on, or other
distribution (whether in cash, stock or property) in respect of, any of
Company's or any of its material subsidiaries' capital stock, or any purchase,
redemption or other acquisition by Company of any of Company's capital stock
or any other securities of Company or its material subsidiaries or any
options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase
agreements, (iii) any split, combination or reclassification of any of
Company's or any of its material subsidiaries' capital stock, (iv) any
granting by Company or any of its subsidiaries of any increase in compensation
or fringe benefits, except for normal increases of cash compensation in the
ordinary course of business consistent with past practice, or any payment by
Company or any of its subsidiaries of any bonus, except for bonuses made in
the ordinary course of business consistent with past practice, or any granting
by Company or any of its subsidiaries of any increase in severance or
termination pay or any entry by Company or any of its subsidiaries into any
currently effective employment, severance, termination or indemnification
agreement or any agreement the benefits of which are contingent or the terms
of which are materially altered upon the occurrence of a transaction involving
Company of the nature contemplated hereby, (v) entry by Company or any of its
subsidiaries into any licensing or other agreement with regard to the
acquisition or disposition of any material Intellectual Property (as defined
in Section 2.9) other than licenses in the ordinary course of business
consistent with past practice or any amendment or consent with respect to any
licensing agreement filed or required to be filed by Company with the SEC,
(vi) any material change by Company in its accounting methods, principles or
practices, except as required by concurrent changes in GAAP, or (vii) any
material revaluation by Company of any of its assets, including, without
limitation, writing down the value of capitalized inventory or writing off
notes or accounts receivable other than in the ordinary course of business.
2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
liabilities relating to taxes, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements
or arrangements with any other person with respect to such amounts and
including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) Company and each of its subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, information statements and
reports ("RETURNS") relating to Taxes required to be filed by Company and each
of its subsidiaries with any Tax authority, except such Returns which are not
material to Company, and have paid all Taxes shown to be due on such Returns.
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(ii) Company and each of its material subsidiaries as of the Effective Time
will have withheld with respect to its employees all federal and state income
taxes, Taxes pursuant to the Federal Insurance Contribution Act ("FICA"),
Taxes pursuant to the Federal Unemployment Tax Act ("FUTA") and other Taxes
required to be withheld.
(iii) Neither Company nor any of its material subsidiaries has been
delinquent in the payment of any Tax nor is there any Tax deficiency
outstanding, proposed or assessed against Company or any of its material
subsidiaries, nor has Company or any of its material subsidiaries executed any
unexpired waiver of any statute of limitations on or extending the period for
the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of Company or any of its
material subsidiaries by any Tax authority is presently in progress, nor has
Company or any of its material subsidiaries been notified of any request for
such an audit or other examination.
(v) No adjustment relating to any Returns filed by Company or any of its
material subsidiaries has been proposed in writing formally or informally by
any Tax authority to Company or any of its material subsidiaries or any
representative thereof.
(vi) Neither Company nor any of its subsidiaries has any liability for
unpaid Taxes which has not been accrued for or reserved on the Company Balance
Sheet, whether asserted or unasserted, contingent or otherwise, which is
material to Company, other than any liability for unpaid Taxes that may have
accrued since the date of the Company Balance Sheet in connection with the
operation of the business of Company and its subsidiaries in the ordinary
course.
(vii) There is no contract, agreement, plan or arrangement to which Company
is a party as of the date of this Agreement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
Company or any of its subsidiaries that, individually or collectively, could
give rise to the payment of any amount that would not be deductible pursuant
to Sections 280G, 404 or 162(m) of the Code.
(viii) Neither Company nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Company.
(ix) Neither Company nor any of its material subsidiaries is party to or has
any obligation under any tax-sharing, tax indemnity or tax allocation
agreement or arrangement.
(x) Except as may be required as a result of the Merger, Company and its
material subsidiaries have not been and will not be required to include any
adjustment in Taxable income for any Tax period (or portion thereof) pursuant
to Section 481 or Section 263A of the Code or any comparable provision under
state or foreign Tax laws as a result of transactions, events or accounting
methods employed prior to the Closing.
(xi) None of Company's or its subsidiaries' assets are tax exempt use
property within the meaning of Section 168(h) of the Code.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company Schedules list the real property interests owned by Company
as of the date of this Agreement. The Company Schedules list all real property
leases to which Company is a party as of the date of this Agreement and which
provide for the lease, in each case, of not less than 10,000 square feet
("MATERIAL REAL PROPERTY LEASES"), and each amendment thereto that is in
effect as of the date of this Agreement. All such Material Real Property
Leases are in full force and effect, are valid and effective in accordance
with their respective terms, and there is not, under any of such leases, any
existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default) that would give rise to a claim in
an amount greater than $100,000.
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(b) Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
the Company Financials and except for liens for taxes not yet due and payable
and such Liens or other imperfections of title and encumbrances, if any, which
are not material in character, amount or extent, and which do not materially
detract from the value, or materially interfere with the present use, of the
property subject thereto or affected thereby.
2.9 Intellectual Property. For the purposes of this Agreement, the following
terms have the following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and
all documentation relating to any of the foregoing; (iii) all copyrights,
copyright registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs and
any registrations and applications therefor throughout the world; (v) all
trade names, logos, common law trademarks and service marks, trademark and
service mark registrations and applications therefor throughout the world;
(vi) all databases and data collections and all rights therein throughout
the world; (vii) all moral and economic rights of authors and inventors,
however denominated, throughout the world, and (viii) any similar or
equivalent rights to any of the foregoing anywhere in the world.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property that
is owned by, or exclusively licensed to, Company or any of its material
subsidiaries.
"REGISTERED INTELLECTUAL PROPERTY" means all United States, international
and foreign: (i) patents and patent applications (including provisional
applications); (ii) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and (iv) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
"COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, Company.
(a) No material Company Intellectual Property or product or service of
Company is subject to any proceeding or outstanding decree, order, judgment,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Company, or which may affect the validity, use or
enforceability of such Company Intellectual Property.
(b) Each material item of Company Registered Intellectual Property is valid
and subsisting, all necessary registration, maintenance and renewal fees
currently due in connection with such Registered Intellectual Property have
been made and all necessary documents, recordations and certificates in
connection with such Registered Intellectual Property have been filed with the
relevant patent, copyright, trademark or other authorities in the United
States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property.
(c) Company owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Company Intellectual
Property free and clear of any lien or encumbrance (excluding licenses and
related restrictions); and Company is the exclusive owner of all trademarks
and trade names used in connection with the operation or conduct of the
business of Company, including the sale of any products or the provision of
any services by Company.
(d) Company owns exclusively, and has good title to, all copyrighted works
that are Company products or which Company otherwise expressly purports to
own.
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(e) To the extent that any material Intellectual Property has been developed
or created by a third party for Company, Company has a written agreement with
such third party with respect thereto and Company thereby either (i) has
obtained ownership of, and is the exclusive owner of, or (ii) has obtained a
license (sufficient for the conduct of its business as currently conducted and
as proposed to be conducted) to all such third party's Intellectual Property
in such Intellectual Property by operation of law or by valid assignment.
(f) Company has not transferred ownership of, or granted any exclusive
license with respect to, any Intellectual Property that is or was material
Company Intellectual Property, to any third party.
(g) The Company Schedules list all material contracts, licenses and
agreements to which Company is a party (i) with respect to Company
Intellectual Property licensed or transferred to any third party (other than
end-user licenses in the ordinary course); or (ii) pursuant to which a third
party has licensed or transferred any material Intellectual Property to
Company.
(h) All material contracts, licenses and agreements relating to the Company
Intellectual Property are in full force and effect. The consummation of the
transactions contemplated by this Agreement will neither violate nor result in
the breach, modification, cancellation, termination, or suspension of such
contracts, licenses and agreements. Company is in material compliance with,
and has not materially breached any term any of such contracts, licenses and
agreements and, to the knowledge of Company, all other parties to such
contracts, licenses and agreements are in compliance with, and have not
materially breached any term of, such contracts, licenses and agreements.
Following the Closing Date, the Surviving Corporation will be permitted to
exercise all of Company's rights under such contracts, licenses and agreements
to the same extent Company would have been able to had the transactions
contemplated by this Agreement not occurred and without the payment of any
additional amounts or consideration other than ongoing fees, royalties or
payments which Company would otherwise be required to pay.
(i) The operation of the business of Company as such business currently is
conducted, including Company's design, development, manufacture, marketing and
sale of the products or services of Company (including with respect to
products currently under development) has not, does not and will not infringe
or misappropriate the Intellectual Property of any third party (provided that
with respect to patent rights, such representation is limited to Company's
knowledge) or, to its knowledge, constitute unfair competition or trade
practices under the laws of any jurisdiction.
(j) Company has not received notice from any third party that the operation
of the business of Company or any act, product or service of Company,
infringes or misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(k) To the knowledge of Company, no Person has or is infringing or
misappropriating any Company Intellectual Property.
(l) Company has taken reasonable steps to protect Company's rights in
Company's confidential information and trade secrets that it wishes to protect
or any trade secrets or confidential information of third parties provided to
Company, and, without limiting the foregoing, Company has and enforces a
policy requiring each employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Parent and all current and former employees and contractors of Company have
executed such an agreement, except where the failure to do so is not
reasonably expected to be material to Company.
2.10 Compliance; Permits; Restrictions.
(a) Neither Company nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Company or any of its
subsidiaries or by which Company or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Company or any of its subsidiaries is
a party or by which
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Company or any of its subsidiaries or its or any of their respective
properties is bound or affected, except for conflicts, violations and defaults
that (individually or in the aggregate) would not cause Company to lose any
material benefit or incur any material liability. No investigation or review
by any Governmental Entity is pending or, to Company's knowledge, has been
threatened in a writing delivered to Company against Company or any of its
subsidiaries, nor, to Company's knowledge, has any Governmental Entity
indicated an intention to conduct an investigation of Company or any of its
subsidiaries. There is no material agreement, judgment, injunction, order or
decree binding upon Company or any of its material subsidiaries which has or
could reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of Company or any of its material
subsidiaries, any acquisition of material property by Company or any of its
subsidiaries or the conduct of business by Company as currently conducted.
(b) Company and its subsidiaries hold, to the extent legally required, all
permits, licenses, variances, exemptions, orders and approvals from
governmental authorities that are material to and required for the operation
of the business of Company as currently conducted (collectively, the "COMPANY
PERMITS"). Company and its subsidiaries are in compliance in all material
respects with the terms of the Company Permits, except where the failure to
obtain any Company Permits or to be in compliance with the terms of the
Company Permits would not be material to Company.
2.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, and to Company's knowledge, no person has threatened in
a writing delivered to Company to commence any action, suit, proceeding,
claim, arbitration or investigation against Company or any of its subsidiaries
which would be likely to be material to Company. No Governmental Entity has at
any time challenged or questioned in a writing delivered to Company the legal
right of Company to design, manufacture, offer or sell any of its products in
the present manner or style thereof.
2.12 Brokers' and Finders' Fees. Except for fees payable to Hambrecht &
Quist LLC pursuant to an engagement letter dated September 22, 1997, a copy of
which has been provided to Parent, Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.13 Employment Matters.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.13(a)(i) below (which definition shall apply only to this
Section 2.13), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with Company within the meaning of Section 414(b), (c), (m) or (o)
of the Code and the regulations issued thereunder;
(ii) "COMPANY EMPLOYEE PLAN" shall mean (x) all employee benefit plans
(as defined in Section 3(3) of ERISA), (y) all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement,
severance and other similar employee benefit plans, and (z) all unexpired
severance agreements and arrangements, written or otherwise, for the
benefit of, or relating to, any current or former employee of Company or
any trade or business (whether or not incorporated) which is an Affiliate
or any subsidiary of Company;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended
(iv) "DOL" shall mean the Department of Labor;
(v) "EMPLOYEE" shall mean any current, former, or retired employee,
officer, or director of Company or any Affiliate;
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(vi) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or similar agreement or contract between Company or any Affiliate
and any individual entitled to receive annual compensation from Company or
any Affiliate with value equal to or greater than $75,000;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "INTERNATIONAL EMPLOYEE PLAN" shall mean each Company Employee Plan
that has been adopted or maintained by Company, whether informally or
formally, for the benefit of Employees outside the United States;
(x) "IRS" shall mean the Internal Revenue Service;
(xi) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
(xii) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xiii) "PENSION PLAN" shall mean each Company Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) Schedule. The Company Schedules contain an accurate and complete list of
each Company Employee Plan and each material Employee Agreement. Company does
not have any plan or commitment to establish any new Company Employee Plan, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as
previously disclosed to Parent in writing, or as required by this Agreement),
or to enter into any Company Employee Plan or material Employee Agreement, nor
does it have any intention or commitment to do any of the foregoing.
(c) Documents. Company has provided to Parent: (i) correct and complete
copies of each Company Employee Plan and each Employee Agreement including all
amendments thereto; (ii) the most recent annual actuarial valuations, if any,
prepared for each Company Employee Plan; (iii) the three (3) most recent
annual reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection with
each Company Employee Plan or related trust; (iv) if the Company Employee Plan
is funded, the most recent annual and periodic accounting of Company Employee
Plan assets; (v) the most recent summary plan description together with the
summary of material modifications thereto, if any, required under ERISA with
respect to each Company Employee Plan; (vi) all IRS determination, opinion,
notification and advisory letters, and rulings relating to Company Employee
Plans and copies of all applications and correspondence to or from the IRS or
the DOL with respect to any Company Employee Plan (and to the extent not
delivered are not material); (vii) all material written agreements and
contracts relating to each Company Employee Plan, including, but not limited
to, administrative service agreements, group annuity contracts and group
insurance contracts; (viii) forms of all COBRA forms and related notices; and
(ix) all registration statements and prospectuses prepared in connection with
each Company Employee Plan.
(d) Employee Plan Compliance. (i) Company has performed in all material
respects all obligations required to be performed by it under, is not in
default or violation of, and has no knowledge of any default or violation by
any other party to each Company Employee Plan, and each Company Employee Plan
has been established and maintained in all material respects in accordance
with its terms and in compliance with all applicable laws, statutes, orders,
rules and regulations, including but not limited to ERISA or the Code; (ii)
each Company Employee Plan intended to qualify under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code has
either received a favorable determination letter from the IRS with respect to
each such Plan as to its qualified status under the Code, including all
amendments to the Code effected by the Tax Reform Act of 1986 and subsequent
legislation, or has remaining a period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such a determination
letter and make any amendments
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necessary to obtain a favorable determination; (iii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Sections 406
and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has
occurred with respect to any Company Employee Plan; (iv) there are no actions,
suits or claims pending, or, to the knowledge of Company, threatened or
reasonably anticipated (other than routine claims for benefits) against any
Company Employee Plan or against the assets of any Company Employee Plan; (v)
each Company Employee Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
material (in each case relative to the liabilities under such Plan) liability
to Parent, Company or any of its Affiliates (other than ordinary
administration expenses typically incurred in a termination event); (vi) there
are no audits, inquiries or proceedings pending or, to the knowledge of
Company or any Affiliates, threatened by the IRS or DOL with respect to any
Company Employee Plan; and (vii) neither Company nor any Affiliate is subject
to any penalty or tax with respect to any Company Employee Plan under Section
502(i) of ERISA or Sections 4975 through 4980 of the Code.
(e) Pension Plans. Company does not now, nor has it ever, maintained,
established, sponsored, participated in, or contributed to, any Pension Plan
which is subject to Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has Company contributed to or been
requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan provides, or
has any liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may
be required by COBRA or other applicable statute, and Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) or any other person
that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute.
(h) Neither Company nor any Affiliate has, prior to the Effective Time, and
in any material respect, violated any of the health care continuation
requirements of COBRA, the requirements of FMLA or any similar provisions of
state law applicable to its Employees.
(i) Effect of Transaction
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made by Company or its
Affiliates with respect to any Employee as a result of the transactions
contemplated by this Agreement will be characterized as an "excess
parachute payment," within the meaning of Section 280G(b)(1) of the Code.
(j) Employment Matters. Company and each of its material subsidiaries: (i)
is in compliance in all material respects with the applicable foreign,
federal, state and local laws, rules and regulations respecting employment,
employment practices and wages and hours, in each case, in each location in
which Company or any of its material subsidiaries employs persons; (ii) has
withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees; (iii) is not liable for any
material arrears of wages or any taxes or any penalty for failure to comply
with any of the foregoing; and (iv) is not liable for any material payment to
any trust or other fund or to any governmental or administrative authority,
with respect to unemployment compensation benefits, social security or other
benefits or obligations for Employees (other than routine payments to be made
in the normal course of business and consistent with past practice). There are
no pending, threatened or reasonably anticipated claims or actions for
benefits under Company's worker's compensation policy or long-term disability
policy that would not be covered by such policy. To Company's knowledge, no
employee of Company has violated any employment contract, nondisclosure
agreement or
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noncompetition agreement by which such employee is bound due to such employee
being employed by Company and disclosing to Company or using trade secrets or
proprietary information of any other person or entity.
(k) Labor. No work stoppage or labor strike against Company is pending,
threatened or reasonably anticipated. Company does not know of any activities
or proceedings of any labor union to organize any Employees. There are no
actions, suits, claims, labor disputes or grievances pending, or, to the
knowledge of Company, threatened or reasonably anticipated relating to any
labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in any material liability to Company. Neither Company nor
any of its subsidiaries has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act. Company is not presently, nor has
it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by Company.
(l) International Employee Plan. Each International Employee Plan has been
established, maintained and administered in material compliance with its terms
and conditions and with the requirements prescribed by any and all statutory
or regulatory laws that are applicable to such International Employee Plan.
Furthermore, no International Employee Plan has unfunded liabilities, that as
of the Effective Time, will not be offset by insurance or fully accrued.
Except as required by law, no condition exists that would prevent Company or
Parent from terminating or amending any International Employee Plan at any
time for any reason.
2.14 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in material liability to Company, no underground storage tanks and no amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and
Recovery Act of 1976, as amended, and the regulations promulgated pursuant to
said laws, but excluding office and janitorial supplies, (a "HAZARDOUS
MATERIAL") are present, as a result of the actions of Company or any of its
subsidiaries or any affiliate of Company, or, to Company's knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that Company or any of its subsidiaries has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be likely
to result in a material liability to Company (in any individual case or in the
aggregate) (i) neither Company nor any of its subsidiaries has transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before
the Closing Date, and (ii) neither Company nor any of its subsidiaries has
disposed of, transported, sold, used, released, exposed its employees or
others to or manufactured any product containing a Hazardous Material
(collectively "HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule,
regulation, treaty or statute promulgated by any Governmental Entity in effect
prior to or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
(c) Permits. Company and its subsidiaries currently hold all material
environmental approvals, permits, licenses, clearances and consents (the
"COMPANY ENVIRONMENTAL PERMITS") necessary for the conduct of Company's and
its subsidiaries' Hazardous Material Activities and other businesses of
Company and its material subsidiaries as such activities and businesses are
currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation proceeding,
amendment procedure, writ or injunction is pending, and to Company's
knowledge, no action, proceeding, revocation proceeding, amendment procedure,
writ or injunction has been threatened by any Governmental Entity against
Company or any of its subsidiaries in a writing delivered to Company
concerning any Company Environmental Permit,
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Hazardous Material or any Hazardous Materials Activity of Company or any of
its subsidiaries. Company is not aware of any fact or circumstance which could
involve Company or any of its subsidiaries in any environmental litigation or
impose upon Company any material environmental liability.
2.15 Agreements, Contracts and Commitments. Neither Company nor any of its
material subsidiaries is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director or higher level employee or member of Company's
Board of Directors, other than those that are terminable by Company or any
of its subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit Company's or any of its subsidiaries= ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale or
license of software products in the ordinary course of business;
(d) any agreement, contract or commitment containing any covenant
limiting in any material respect the right of Company or any of its
material subsidiaries to engage in any line of business or to compete with
any person or granting any exclusive distribution rights;
(e) any material agreement, contract or commitment currently in force
relating to the disposition or acquisition by Company or any of its
subsidiaries after the date of this Agreement of a material amount of
assets not in the ordinary course of business or pursuant to which Company
has any material ownership interest in any corporation, partnership, joint
venture or other business enterprise other than Company's subsidiaries;
(f) any material joint marketing or development agreement currently in
force under which Company or any of its subsidiaries have continuing
material obligations to jointly market any product, technology or service
and which may not be canceled without penalty upon notice of 90 days or
less, or any material agreement pursuant to which Company or any of its
subsidiaries have continuing material obligations to jointly develop any
intellectual property that will not be owned, in whole or in part, by
Company or any of its subsidiaries and which may not be canceled without
penalty upon notice of 90 days or less;
(g) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is
material to Company and its subsidiaries taken as a whole; or
(h) any agreement, contract or commitment currently in force to license
any third party to manufacture or reproduce any Company product, service or
technology except as a distributor in the normal course of business.
Neither Company nor any of its material subsidiaries, nor to Company's
knowledge any other party to a Company Contract (as defined below), is in
breach, violation or default under, and neither Company nor any of its
subsidiaries has received written notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which Company or any of its
subsidiaries is a party or by which it is bound that are required to be
disclosed in the Company Schedules pursuant to clauses (a) through (h) above
or pursuant to Section 2.9 hereof (any such agreement, contract or commitment,
a "COMPANY CONTRACT") in such a manner as would permit any other party to
cancel or terminate any such Company Contract, or would permit any other party
to seek material damages or other remedies (for any or all of such breaches,
violations or defaults, in the aggregate).
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2.16 Pooling of Interests. To the knowledge of Company, based on
consultation with its independent accountants, neither Company nor any of its
directors, officers, affiliates or stockholders has taken any action which
would preclude Parent's ability to account for the Merger as a pooling of
interests.
2.17 Certain Payments. The Company Schedules set forth each plan or
agreement pursuant to which any amounts may become payable (whether currently
or in the future) to current or former officers and directors of Company as a
result of or in connection with the Merger.
2.18 Registration Statement; Joint Proxy Statement/Prospectus. The
information supplied by Company for inclusion in the Registration Statement
(as defined in Section 3.4(b)) shall not at the time the Registration
Statement is filed with the SEC and at the time it becomes effective under the
Securities Act contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
are made, not misleading. The information supplied by Company for inclusion in
the joint proxy statement/prospectus to be sent to (a) the stockholders of
Company in connection with the meeting of Company's stockholders to consider
the approval and adoption of this Agreement and the approval of the Merger
(the "COMPANY STOCKHOLDERS' MEETING") and (b) the stockholders of Parent in
connection with the meeting of Parent's stockholders to consider the approval
of the issuance of shares of Parent Common Stock pursuant to the Merger (the
"PARENT STOCKHOLDERS' MEETING") (such joint proxy statement/prospectus as
amended or supplemented is referred to herein as the "JOINT PROXY
STATEMENT/PROSPECTUS") shall not, on the date the Joint Proxy
Statement/Prospectus is first mailed to Company's stockholders and Parent's
stockholders or at the time of the Company Stockholders' Meeting or the Parent
Stockholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the Company Stockholders' Meeting or the
Parent Stockholders' Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to Company or any of its
affiliates, officers or directors should be discovered by Company which is
required to be set forth in an amendment to the Registration Statement or a
supplement to the Joint Proxy Statement/Prospectus, Company shall promptly
inform Parent. Notwithstanding the foregoing, Company makes no representation
or warranty with respect to any information supplied by Parent or Merger Sub
which is contained in any of the foregoing documents.
2.19 Board Approval. The Board of Directors of Company has, as of the date
of this Agreement, determined (i) that the Merger is fair to, and in the best
interests of Company and its stockholders, and, (ii) subject to the terms and
conditions set forth in this Agreement, to recommend that the stockholders of
Company approve and adopt this Agreement and approve the Merger.
2.20 Fairness Opinion. Company's Board of Directors has received an opinion
from Hambrecht & Quist LLC dated as of the date hereof, to the effect that as
of the date hereof, the Merger and the Exchange Ratio are fair to Company's
stockholders from a financial point of view and has delivered or will promptly
deliver to Parent a copy of such opinion.
2.21 Section 203 of the Delaware General Corporation Law Not Applicable;
Company Rights Plan. The Board of Directors of Company has taken all actions
so that (a) the restrictions contained in Section 203 of the Delaware General
Corporation Law applicable to a "business combination" (as defined in such
Section 203) will not apply to the execution, delivery or performance of this
Agreement or to the consummation of the Merger or the other transactions
contemplated by this Agreement and (b) the execution, delivery and performance
of this Agreement and the consummation of the Merger will not cause any
change, effect or result under the Company Rights Plan which is adverse to the
interests of Parent. Without limiting the generality of the foregoing, if
necessary to accomplish the foregoing, the Company Rights Plan has been
amended to (i) render the Company Rights Plan inapplicable to the Merger and
the other transactions contemplated by this Agreement, (ii) ensure that (x)
none of Parent or its subsidiaries is an Acquiring Person (as defined in the
Company Rights Plan) pursuant to the Company Rights Plan by virtue of the
execution of this Agreement or the consummation of the
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Merger or the other transactions contemplated hereby and (y) a Distribution
Date, Flip-In Event, Triggering Event or Flip-Over Event (as such terms are
defined in the Company Rights Plan) does not occur by reason of the execution
of this Agreement, the consummation of the Merger, or the consummation of the
transactions contemplated hereby, and such amendment may not be further
amended by Company without the prior consent of Parent in its sole discretion.
2.22 Customs. Company has acted with reasonable care to properly value and
classify, in accordance with applicable tariff laws, rules and regulations,
all goods that Company or any of its subsidiaries import into the United
States or into any other country (the "IMPORTED GOODS"). To Company's
knowledge, there are currently no material claims pending against Company by
the U.S. Customs Service (or other foreign customs authorities) relating to
the valuation, classification or marking of the Imported Goods.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to Company, subject to the
exceptions specifically disclosed in writing in the disclosure letter and
referencing a specific representation supplied by Parent to Company dated as
of the date hereof and certified by a duly authorized officer of Parent (the
"PARENT SCHEDULES"), as follows:
3.1 Organization of Parent.
(a) Each of Parent, Merger Sub and the material subsidiaries of Parent (i)
is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is organized; (ii) has the corporate
or other power and authority to own, lease and operate its assets and property
and to carry on its business as now being conducted; and (iii), except as
would not be material to Parent, is duly qualified or licensed to do business
in each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary.
(b) Parent has delivered or made available to Company a true and correct
copy of the Certificate of Incorporation and Bylaws of Parent, each as amended
to date, and each such instrument is in full force and effect. Neither Parent
nor any of its material subsidiaries is in violation of any of the provisions
of its Certificate of Incorporation or Bylaws or equivalent governing
instruments.
3.2 Parent and Merger Sub Capital Structure. The authorized capital stock of
Parent consists of 100,000,000 shares of Common Stock, of which there were
51,259,448 shares issued and outstanding as of September 30, 1997, and
5,000,000 shares of Preferred Stock, of which one share of Series A Preferred
Stock is issued and outstanding. As of September 30, 1997, Parent had reserved
an aggregate of 10,317,588 shares of Parent Common Stock, net of exercises,
for issuance pursuant to Parent's 1997 Stock Incentive Plan, the FSA Stock
Option Plan, Parent's Outside Director Stock Option Plan, the SA93 Stock
Option Plan, the SAII Stock Option Plan, Parent's Non-Officer Stock Option
Plan and Parent's 1992 Stock Option Plan. As of September 30, 1997, there were
options outstanding to purchase an aggregate of 8,016,938 shares of Parent
Common Stock pursuant to such plans. As of September 30, 1997, Parent had
reserved an aggregate of 354,181 shares of Parent Common Stock, net of
purchases, for issuance pursuant to Parent's Employee Stock Purchase Plan. All
outstanding shares of Parent Common Stock are duly authorized, validly issued,
fully paid and nonassessable and are not subject to preemptive rights created
by statute, the Articles of Incorporation or Bylaws of Parent or any agreement
or document to which Parent is a party or by which it is bound. The authorized
capital stock of Merger Sub consists of 1000 shares of Common Stock, $0.001
par value, all of which, as of the date hereof, are issued and outstanding and
are held by Parent. Merger Sub was formed on or about October 10, 1997, for
the purpose of consummating the Merger and has no material assets or
liabilities except as necessary for such purpose.
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3.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 3.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Parent, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities Parent owns free and clear of all claims
and encumbrances, directly or indirectly through one or more subsidiaries, and
except for shares of capital stock or other similar ownership interests of
certain subsidiaries of Parent that are owned by certain nominee equity
holders as required by the applicable law of the jurisdiction of organization
of such subsidiaries, as of the date of this Agreement, there are no equity
securities, partnership interests or similar ownership interests of any class
of any material subsidiary of Parent, or any security exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Section 3.2, there are no options,
warrants, equity securities, partnership interests or similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which Parent is a party or by which it is bound
obligating Parent to issue, deliver or sell, or cause to be issued, delivered
or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition of, any shares of capital stock, partnership
interests or similar ownership interests of Company or obligating Company to
grant, extend, accelerate the vesting of or enter into any such option,
warrant, equity security, call, right, commitment or agreement. As of the date
of this Agreement, except as contemplated by this Agreement, the Parent Voting
Agreement and the Parent Affiliate Agreement, there are no voting trusts,
proxies or other agreements or understandings to which Parent is a party or by
which it is bound with respect to any equity security of any class of Parent
or with respect to any equity security, partnership interest or similar
ownership interest of any class of any of its material subsidiaries.
3.4 Authority.
(a) Each of Parent and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby, subject only to the approval of the issuance of Parent
Common Stock pursuant to the Merger by Parent's stockholders. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Parent and Merger Sub, subject only to the approval of
the issuance of Parent Common Stock pursuant to the Merger by Parent's
stockholders and the filing of the Certificate of Merger pursuant to Delaware
Law. Approval by the stockholders of Parent of the issuance of Parent Common
Stock pursuant to the Merger may be obtained by the vote of a majority of the
total votes cast regarding such proposal at a duly called and noticed meeting
of Parent's stockholders at which a quorum is present. This Agreement has been
duly executed and delivered by each of Parent and Merger Sub and, assuming the
due authorization, execution and delivery by Company, constitutes the valid
and binding obligation of Parent and Merger Sub, enforceable against Parent
and Merger Sub in accordance with its terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of equity.
The execution and delivery of this Agreement by each of Parent and Merger Sub
does not, and the performance of this Agreement by each of Parent and Merger
Sub will not, (i) conflict with or violate the Certificate of Incorporation or
Bylaws of Parent or Merger Sub, (ii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to Parent or Merger Sub or by
which any of their respective properties is bound or affected or (iii) result
in any material breach of or constitute a material default (or an event that
with notice or lapse of time or both would become a material default) under,
or materially impair Parent's material rights or alter the material rights or
material obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a material lien or encumbrance on any of the material properties
or assets of Parent or Merger Sub pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or Merger Sub is a party or by
which Parent or Merger Sub or any of their respective properties are bound or
affected. The Parent Schedules list all consents, waivers and approvals under
any of Parent's or any of its material subsidiaries' agreements, contracts,
licenses or leases required to be obtained in connection with the consummation
of the transactions contemplated hereby, which, if individually or in the
aggregate not obtained, would result in a material loss of benefits to Parent
as a result of the Merger.
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(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required to be obtained
or made by Parent, Merger Sub, or any material subsidiary of Parent in
connection with the execution and delivery of this Agreement or the
consummation of the Merger, except for (i) the filing of a Form S-4 (or any
similar successor form thereto) Registration Statement (the "REGISTRATION
STATEMENT") with the SEC in accordance with the Securities Act, (ii) the
filing of the Certificate of Merger with the Secretary of State of the State
of Delaware, (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the HSR Act and
the securities or antitrust laws of any foreign country, and (iv) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not be material to Parent or have a material adverse
effect on the ability of Parent or Merger Sub to consummate the Merger.
(c) The Board of Directors of Parent has all requisite corporate power and
authority to take the actions described in Section 5.14 hereof.
3.5 SEC Filings; Parent Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
by Parent with the SEC since September 1, 1994, and has made available to
Company such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that Parent may
file subsequent to the date hereof) are referred to herein as the "PARENT SEC
REPORTS." As of their respective dates, the Parent SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Parent SEC Reports, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. None of Parent's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports (the "PARENT
FINANCIALS"), including any Parent SEC Reports filed after the date hereof
until the Closing, (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (iii) fairly presented the
consolidated financial position of Parent and its subsidiaries as at the
respective dates thereof and the consolidated results of Parent's operations
and cash flows for the periods indicated, except that the unaudited interim
financial statements may not contain footnotes and were or are subject to
normal and recurring year-end adjustments. The balance sheet of Parent
contained in Parent SEC Reports as of June 30, 1997 is hereinafter referred to
as the "PARENT BALANCE SHEET." Except as disclosed in the Parent Financials,
since the date of the Parent Balance Sheet neither Parent nor any of its
subsidiaries has any liabilities required under GAAP to be set forth on a
balance sheet (absolute, accrued, contingent or otherwise) which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Parent and its subsidiaries taken as a
whole, except for liabilities incurred since the date of the Parent Balance
Sheet in the ordinary course of business consistent with past practices.
3.6 Absence of Certain Changes or Events. Since the date of the Parent
Balance Sheet there has not been: (i) any Material Adverse Effect on Parent,
(ii) any declaration, setting aside or payment of any dividend on, or other
distribution (whether in cash, stock or property) in respect of, any of
Parent's capital stock, or any purchase, redemption or other acquisition by
Parent of any of Parent's capital stock or any other securities of Parent or
any options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase
agreements, (iii) any split, combination or reclassification of any of
Parent's capital stock, (iv) entry by Parent or
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any of its subsidiaries into any licensing or other agreement with regard to
the acquisition or disposition of any material Intellectual Property other
than licenses in the ordinary course of business consistent with past practice
or any amendment or consent with respect to any licensing agreement filed or
required to be filed by Parent with the SEC, (v) any material change by Parent
in its accounting methods, principles or practices, except as required by
concurrent changes in GAAP, or (vi) any material revaluation by Parent of any
of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
3.7 Taxes.
(a) Parent and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by Parent and each of its subsidiaries
with any Tax authority, except such Returns which are not material to Parent,
and have paid all Taxes shown to be due on such Returns.
(b) Neither Parent nor any of its material subsidiaries has been delinquent
in the payment of any Tax nor is there any Tax deficiency outstanding,
proposed or assessed against Parent or any of its material subsidiaries, nor
has Parent or any of its material subsidiaries executed any unexpired waiver
of any statute of limitations on or extending the period for the assessment or
collection of any Tax.
(c) Neither Parent nor any of its subsidiaries has any liability for unpaid
Taxes which has not been accrued for or reserved on the Parent Balance Sheet,
whether asserted or unasserted, contingent or otherwise, which is material to
Parent, other than any liability for unpaid Taxes that may have accrued since
the date of the Parent Balance Sheet in connection with the operation of the
business of Parent and its subsidiaries in the ordinary course.
3.8 Title to Properties; Absence of Liens and Encumbrances. Parent has good
and valid title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its tangible properties and assets, real,
personal and mixed, used or held for use in its business, free and clear of
any Liens, except as reflected in the Parent Financials and except for liens
for taxes not yet due and payable and such Liens or other imperfections of
title and encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
3.9 Intellectual Property. For the purposes of this Agreement, the following
terms have the following definitions:
"PARENT INTELLECTUAL PROPERTY" shall mean any Intellectual Property that is
owned by, or exclusively licensed to, Parent or any of its material
subsidiaries.
"PARENT REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, Parent.
(a) No material Parent Intellectual Property or product or service of Parent
is subject to any proceeding or outstanding decree, order, judgment,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Parent, or which may affect the validity, use or
enforceability of such Parent Intellectual Property.
(b) Each material item of Parent Registered Intellectual Property is valid
and subsisting, all necessary registration, maintenance and renewal fees
currently due in connection with such Registered Intellectual Property have
been made and all necessary documents, recordations and certificates in
connection with such Registered Intellectual Property have been filed with the
relevant patent, copyright, trademark or other authorities in the United
States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property.
(c) Parent owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Parent Intellectual
Property
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free and clear of any lien or encumbrance (excluding licenses and related
restrictions); and Parent is the exclusive owner of all trademarks and trade
names used in connection with the operation or conduct of the business of
Parent, including the sale of any products or the provision of any services by
Parent.
(d) Parent owns exclusively, and has good title to, all copyrighted works
that are Parent products or which Parent otherwise expressly purports to own.
(e) To the extent that any material Intellectual Property has been developed
or created by a third party for Parent, Parent has a written agreement with
such third party with respect thereto and Parent thereby either (i) has
obtained ownership of, and is the exclusive owner of, or (ii) has obtained a
license (sufficient for the conduct of its business as currently conducted and
as proposed to be conducted) to all such third party's Intellectual Property
in such Intellectual Property by operation of law or by valid assignment.
(f) All material contracts, licenses and agreements relating to the Parent
Intellectual Property are in full force and effect. The consummation of the
transactions contemplated by this Agreement will neither violate nor result in
the breach, modification, cancellation, termination, or suspension of such
contracts, licenses and agreements. Parent is in material compliance with, and
has not materially breached any term any of such contracts, licenses and
agreements and, to the knowledge of Parent, all other parties to such
contracts, licenses and agreements are in compliance with, and have not
materially breached any term of, such contracts, licenses and agreements.
(g) The operation of the business of Parent as such business currently is
conducted, including Parent's design, development, manufacture, marketing and
sale of the products or services of Parent (including with respect to products
currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party (provided that
with respect to patent rights, such representation is limited to Parent's
knowledge) or, to its knowledge, constitute unfair competition or trade
practices under the laws of any jurisdiction.
(h) Parent has not received notice from any third party that the operation
of the business of Parent or any act, product or service of Parent, infringes
or misappropriates the Intellectual Property of any third party or constitutes
unfair competition or trade practices under the laws of any jurisdiction.
(i) To the knowledge of Parent, no Person has or is infringing or
misappropriating any Parent Intellectual Property.
(j) Parent has taken reasonable steps to protect Parent's rights in Parent's
confidential information and trade secrets that it wishes to protect or any
trade secrets or confidential information of third parties provided to Parent,
and, without limiting the foregoing, Parent has and enforces a policy
requiring each employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Parent and all current and former employees and contractors of Parent have
executed such an agreement, except where the failure to do so is not
reasonably expected to be material to Parent.
3.10 Compliance; Permits; Restrictions.
(a) Neither Parent nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Parent or any of its
subsidiaries or by which Parent or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or its or any of their
respective properties is bound or affected, except for conflicts, violations
and defaults that (individually or in the aggregate) would not cause Parent to
lose any material benefit or incur any material liability. No investigation or
review by any Governmental Entity is pending or, to Parent's knowledge, has
been threatened in a writing delivered to Parent against Parent or any of its
subsidiaries, nor, to Parent's knowledge, has any Governmental Entity
indicated an intention to conduct an investigation of Parent or any of
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its subsidiaries. There is no material agreement, judgment, injunction, order
or decree binding upon Parent or any of its subsidiaries which has or could
reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of Parent, any acquisition of material
property by Parent or the conduct of business by Parent as currently
conducted.
(b) Parent and its subsidiaries hold, to the extent legally required, all
permits, licenses, variances, exemptions, orders and approvals from
governmental authorities that are material to and required for the operation
of the business of Parent as currently conducted (collectively, the "PARENT
PERMITS"). Parent and its subsidiaries are in compliance in all material
respects with the terms of the Parent Permits, except where the failure to be
in compliance with the terms of the Parent Permits would not be material to
Parent.
3.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, and to Parent's knowledge, no person has threatened in
a writing delivered to Parent to commence any action, suit, proceeding, claim,
arbitration or investigation against Parent or any of its subsidiaries which
would be likely to be material to Parent. No Governmental Entity has at any
time challenged or questioned in a writing delivered to Parent the legal right
of Parent to design, manufacture, offer or sell any of its products in the
present manner or style thereof.
3.12 Brokers' and Finders' Fees. Except for fees payable to Morgan Stanley &
Co. pursuant to an engagement letter dated September 9, 1997, a copy of which
has been made available to Company, Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated thereby.
3.13 Statements; Joint Proxy Statement/Prospectus. The information supplied
by Parent for inclusion in the Registration Statement shall not at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The information
supplied by Parent for inclusion in the Joint Proxy Statement/Prospectus shall
not, on the date the Joint Proxy Statement/Prospectus is first mailed to
Company's stockholders or Parent's stockholders or at the time of the Company
Stockholders' Meeting or the Parent Stockholders' Meeting contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not false or misleading; or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Company Stockholders' Meeting or the Parent Stockholders' Meeting which has
become false or misleading. If at any time prior to the Effective Time, any
event relating to Parent or any of its affiliates, officers or directors
should be discovered by Parent which is required to be set forth in an
amendment to the Registration Statement or a supplement to the Joint Proxy
Statement/Prospectus, Parent shall promptly inform Company. Notwithstanding
the foregoing, Parent makes no representation or warranty with respect to any
information supplied by Company which is contained in any of the foregoing
documents.
3.14 Valid Issuance. The Parent Common Stock to be issued in the Merger,
when issued in accordance with the provisions of this Agreement: (a) will be
validly issued, fully paid and nonassessable; and (b) will not be subject to
any restrictions on resale under the Securities Act, other than restrictions
imposed by Rule 145 promulgated under the Securities Act.
3.15 No Ownership of Company Common Stock. Parent does not own, beneficially
or of record, any shares of Company Common Stock.
3.16 Pooling of Interests. To the knowledge of Parent, based on consultation
with its independent accountants, neither Parent nor any of its directors,
officers, affiliates or stockholders has taken any action which would preclude
Parent's ability to account for the Merger as a pooling of interests.
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3.17 Board Approval. The Board of Directors of Parent has, as of the date of
this Agreement, determined (i) that the Merger is fair to, and in the best
interests of Parent and its stockholders, and, (ii) subject to the terms and
conditions set forth in this Agreement, to recommend that the stockholders of
Parent approve the issuance of shares of Parent Common Stock pursuant to the
Merger.
3.18 Fairness Opinion. Parent's Board of Directors has received an opinion
from Morgan Stanley & Co. dated as of on or about the date hereof, to the
effect that as of the date hereof, the Merger and the Exchange Ratio are fair
to Parent's stockholders from a financial point of view and has delivered or
will promptly deliver to Company a copy of such opinion.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Company. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, Company and each of its
subsidiaries shall, except to the extent that Parent shall otherwise consent
in writing, carry on its business, in all material respects, in the usual,
regular and ordinary course, in substantially the same manner as heretofore
conducted and in compliance in all material respects with all applicable laws
and regulations, pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, pay or perform other material obligations
when due, and use its commercially reasonable efforts consistent with past
practices and policies to (i) preserve intact its present business
organization, (ii) keep available the services of its present officers and
employees and (iii) preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, Company will promptly notify Parent of any material
event involving its business or operations.
In addition, except as permitted by the terms of this Agreement, and except
as provided in Article 4 of the Company Schedules, without the prior written
consent of Parent, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement pursuant to
its terms or the Effective Time, Company shall not do any of the following and
shall not permit its subsidiaries to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of such
plans;
(b) Grant any severance or termination pay to any officer or employee except
pursuant to written agreements outstanding, or policies existing, on the date
hereof and as previously disclosed in writing or made available to Parent, or
adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the Company Intellectual
Property, or enter into grants to future patent rights, other than non-
exclusive licenses in the ordinary course of business and consistent with past
practice;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Company or its subsidiaries, except repurchases of
unvested shares at cost in connection with the termination of the employment
relationship with any employee, consultant or director pursuant to stock
option or purchase agreements in effect on the date hereof;
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(f) Issue, deliver, sell, authorize, pledge or otherwise encumber or propose
any of the foregoing of, any shares of capital stock or any securities
convertible into shares of capital stock, or subscriptions, rights, warrants
or options to acquire any shares of capital stock or any securities
convertible into shares of capital stock, or enter into other agreements or
commitments of any character obligating it to issue any such shares or
convertible securities, other than the issuance delivery and/or sale of (i)
options pursuant to any of the Company Stock Option Plans with strike prices
equal to fair market value at the time of grant or options pursuant to the
ESPP, in each case, in the ordinary course of business, consistent with past
practice, and subject to and in compliance with the restrictions of Section
4.1(p), (ii) shares of Company Common Stock pursuant to the exercise of stock
options therefor outstanding as of the date of this Agreement and (iii) shares
of Company Common Stock issuable to participants in the ESPP consistent with
the terms thereof;
(g) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its material subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to the business of Company or enter into any material joint
ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the business
of Company, except sales of product and inventory in the ordinary course of
business consistent with past practice;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of Company,
enter into any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the economic effect
of any of the foregoing other than (i) in connection with the financing of
ordinary course trade payables consistent with past practice or (ii) pursuant
to existing credit facilities in the ordinary course of business;
(k) Adopt or amend any employee benefit plan or employee stock purchase or
employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter
agreements entered into in the ordinary course of business consistent with
past practice with employees who are terminable "at will,"), pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates or fringe benefits (including rights to severance or
indemnification) of its directors, officers, employees or consultants other
than in the ordinary course of business, consistent with past practice, or
change in any material respect any management policies or procedures;
(l) Make any payments outside of the ordinary course of business in excess
of $1 million;
(m) except in the ordinary course of business, modify, amend or terminate
any material contract or agreement to which Company or any subsidiary thereof
is a party or waive, release or assign any material rights or claims
thereunder;
(n) enter into any contracts, agreements, or obligations relating to the
distribution, sale, license or marketing by third parties of Company's
products or products licensed by Company other than in the ordinary course of
business consistent with past practice;
(o) revalue any of its material assets or, except as required by GAAP, make
any change in accounting methods, principles or practices;
(p) Take any action that would be reasonably likely to interfere with
Parent's ability to account for the Merger as a pooling of interests whether
or not otherwise permitted by the provisions of this Article IV; or
(q) Agree in writing or otherwise to take any of the actions described in
Section 4.1(a) through (p) above.
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4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, (i) Parent shall
consult with Company prior to taking any material action outside of the
ordinary course of business and (ii) Parent shall consult with and seek the
advice of Leslie G. Denend, Gregory M. Gallo, Laurence R. Hootnick and Harry
J. Saal (to the extent such persons continue as directors of Company and are
reasonably available for such consultation), regarding its intention to effect
any material acquisition described in Section 4.2(c) (and will share the
material terms of such acquisition with such persons) prior to the earlier of
the public announcement of such acquisition, the consummation thereof or the
execution by Parent of a definitive written agreement obligating Parent
(subject to customary conditions) to consummate such acquisition. In addition,
during the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement pursuant to its terms or the
Effective Time, except as permitted by the terms of this Agreement and except
as provided in Section 4.2 of the Parent Schedules, without the prior written
consent of Company, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement pursuant to
its terms or the Effective Time, Parent shall not do any of the following:
(a) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any capital stock;
(b) Take any action that would be reasonably likely to interfere with
Parent's ability to account for the Merger as a pooling of interests; or
(c) Acquire or enter into any agreement to acquire a majority of the
voting securities or all or substantially all of the assets of any
corporation or other business entity (other than Company), whether by
merger, consolidation, stock tender or otherwise, unless the Board of
Directors of Parent determines in good faith that consummation of such
transaction and subsequent integration of the business proposed to be
acquired, when considered in light of the integration of operations of
Parent and Company following the Merger, would be in the best interests of
Parent and the stockholders of Parent following the Merger;
(d) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents; or
(e) Agree in writing or otherwise to take any of the actions described in
Section 4.1(a) through (d) above.
ARTICLE IV
ADDITIONAL AGREEMENTS
5.1 Joint Proxy Statement/Prospectus; Registration Statement; Other Filings;
Board Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Company and Parent will prepare, and file with the SEC, the Joint Proxy
Statement/Prospectus and Parent will prepare and file with the SEC the
Registration Statement in which the Joint Proxy Statement/Prospectus will be
included as a prospectus. Each of Company and Parent will respond to any
comments of the SEC, will use its respective commercially reasonable efforts
to have the Registration Statement declared effective under the Securities Act
as promptly as practicable after such filing and each of Company and Parent
will cause the Joint Proxy Statement/Prospectus to be mailed to its
stockholders at the earliest practicable time after the Registration Statement
is declared effective by the SEC. As promptly as practicable after the date of
this Agreement, each of Company and Parent will prepare and file any other
filings required to be filed by it under the Exchange Act, the Securities Act
or any other Federal, foreign or Blue Sky or related laws relating to the
Merger and the transactions contemplated by this Agreement (the "OTHER
FILINGS"). Each of Company and Parent will notify the other promptly upon the
receipt of any comments from the SEC or its staff or any other government
officials and of any request by the SEC or its staff
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or any other government officials for amendments or supplements to the
Registration Statement, the Joint Proxy Statement/Prospectus or any Other
Filing or for additional information and will supply the other with copies of
all correspondence between such party or any of its representatives, on the
one hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Joint Proxy
Statement/Prospectus, the Merger or any Other Filing. Each of Company and
Parent will cause all documents that it is responsible for filing with the SEC
or other regulatory authorities under this Section 5.1(a) to comply in all
material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the Joint Proxy
Statement/Prospectus, the Registration Statement or any Other Filing, Company
or Parent, as the case may be, will promptly inform the other of such
occurrence and cooperate in filing with the SEC or its staff or any other
government officials, and/or mailing to stockholders of Company, such
amendment or supplement.
(b) The Joint Proxy Statement/Prospectus will include the recommendation of
the Board of Directors of Company in favor of adoption and approval of this
Agreement and approval of the Merger, except to the extent that the Board of
Directors of Company shall have withdrawn or modified its approval of this
Agreement or the Merger in accordance with Section 5.4(a)(ii).
(c) The Joint Proxy Statement/Prospectus will include the recommendation of
the Board of Directors of Parent in favor of approval of issuance of shares of
Parent Common Stock pursuant to the Merger, except that the Board of Directors
of Parent may withdraw, modify or refrain from making such recommendation to
the extent that such Board determines, in good faith, after consultation with
outside legal counsel, that compliance with the Board's fiduciary duties would
require it to do so.
5.2 Meetings of Stockholders. Promptly after the date hereof, each of
Company and Parent will take all action necessary in accordance with the
Delaware Law and its Certificate of Incorporation and Bylaws to convene the
Company Stockholders' Meeting or the Parent Stockholders' Meeting,
respectively, to be held as promptly as practicable, and in any event (to the
extent permissible under applicable law) within 45 days after the declaration
of effectiveness of the Registration Statement, for the purpose of voting upon
this Agreement and the Merger or the issuance of shares of Parent Common Stock
pursuant to the Merger, respectively. Company will use its commercially
reasonable efforts to solicit from its stockholders proxies in favor of the
adoption and approval of this Agreement and the approval of the Merger and
will take all other action necessary or advisable to secure the vote or
consent of its stockholders required by the rules of Nasdaq or Delaware Law to
obtain such approvals, except to the extent that the Board of Directors of
Company shall have withdrawn or modified its approval of this Agreement or the
Merger in accordance with Section 5.4(a)(ii). Parent will use its commercially
reasonable efforts to solicit from its stockholders proxies in favor of
approval of issuance of shares of Parent Common Stock pursuant to the Merger
and will take all other action necessary or advisable to secure the vote or
consent of its stockholders required by the rules of Nasdaq or Delaware Law to
obtain such approvals, except to the extent that the Board of Directors of
Parent shall have withdrawn or modified its approval of such matters in
accordance with Section 5.1(c). Company will consult with Parent and use its
commercially reasonable efforts to hold the Company Stockholders' Meeting on
the same day and at the same time as the Parent Stockholders' Meeting.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Company and Parent have previously executed
a Confidentiality Agreement], dated as of on or about September 12, 1997 (the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. Each of Company and Parent will afford the other
and the other's accountants, counsel and other representatives reasonable
access during normal business hours to its properties, books, records and
personnel during the period prior to the Effective Time to obtain all
information concerning its business, including the status of product
development efforts, properties, results of operations and personnel, as such
other party may reasonably request. No information or knowledge obtained by
any party hereto in any investigation
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pursuant to this Section 5.3 will affect or be deemed to modify any
representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) Obligations of Company.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms Company
and its subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors or employees or any investment banker, attorney
or other advisor or representative retained by any of them to, directly or
indirectly, (x) solicit, initiate or encourage the submission of any
Alternative Proposal (as hereinafter defined) or (y) participate in any
discussions or negotiations regarding, or furnish to any person any non-public
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes or would reasonably
be expected to lead to, any Alternative Proposal; provided, however, that if,
at any time prior to obtaining the approval of the stockholders of Company of
this Agreement and the Merger by the requisite vote under applicable law (the
"STOCKHOLDER APPROVAL") the Board of Directors of Company determines in good
faith, after consultation with outside legal counsel, that it is necessary to
do so in order to comply with its fiduciary duties to Company's stockholders
under applicable law, Company may, in response to an Alternative Proposal that
was unsolicited or that did not otherwise result from a breach of this Section
5.4(a), and subject to compliance with Section 5.4(a)(iii) and Section
5.4(a)(v), furnish information with respect to Company and participate in
negotiations regarding such Alternative Proposal. Company and its subsidiaries
will immediately cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
Alternative Proposal. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding two sentences by
any officer, director or employee of Company or any of its subsidiaries or any
investment banker, attorney or other advisor or representative of Company or
any of its subsidiaries shall be deemed to be a breach of this Section 5.4(a)
by Company. For purposes of this Agreement, "ALTERNATIVE PROPOSAL" means any
inquiry, proposal or offer from any person or "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
relating to any direct or indirect acquisition or purchase of a substantial
amount of assets of Company or any of its subsidiaries (other than the
purchase of Company's products in the ordinary course of business) or more
than a 10% interest in the total outstanding voting securities of Company or
any of its subsidiaries or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder)
beneficially owning 10% or more of the total outstanding voting securities of
Company or any of its subsidiaries or any merger, consolidation, business
combination, sale of substantially all the assets, recapitalization,
liquidation, dissolution or similar transaction involving Company or any of
its subsidiaries, other than the transactions contemplated by this Agreement.
(ii) Neither the Board of Directors of Company nor any committee thereof
shall (x) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Parent or Merger Sub, the approval or recommendation by such
Board of Directors or any such committee of this Agreement or the Merger or
(y) cause Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (an "ACQUISITION AGREEMENT")
with respect to any Alternative Proposal. In addition, subject to the other
provisions of this Section 5.4(a), from and after the date of this Agreement
until the earlier of the Effective Time and termination of this Agreement
pursuant to its terms, Company and its subsidiaries will not, nor will they
authorize or permit any of their respective officers, directors or employees
or any investment banker, attorney or other advisor or representative retained
by any of them to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Alternative
Proposal. Notwithstanding the foregoing or anything else contained in this
Agreement, prior to obtaining the Stockholder Approval, the Board of Directors
of Company, to the extent it determines in good faith, after consultation with
outside legal counsel, that it is necessary to do so in order to comply with
its fiduciary duties to Company's stockholders under applicable law, may
withdraw or modify its approval or recommendation of this Agreement or the
Merger (and, to the extent it does so, Company may refrain from soliciting
proxies to secure the vote of its stockholders as
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may otherwise be required by Section 5.2) or approve or recommend any Superior
Proposal (as hereinafter defined), in each case at any time after the third
business day following Parent's receipt of bona fide written notice (a "NOTICE
OF SUPERIOR PROPOSAL") advising Parent that the Board of Directors of Company
has received a Superior Proposal, specifying the material terms and conditions
of the Superior Proposal and identifying the person making such Superior
Proposal (it being understood that any amendment to the price or material
terms of a Superior Proposal shall require an additional Notice of Superior
Proposal and an additional three business day period thereafter to the extent
permitted under applicable law); provided, that unless this Agreement is
terminated pursuant to Section 7.1, nothing contained in this Section shall
limit Company's obligation to hold and convene the Company Stockholders'
Meeting (regardless of whether the recommendation of the Board of Directors of
Company shall have been withdrawn, modified or not yet made) or to provide
Company stockholders with material information relating to such meeting. For
purposes of this Agreement, a "SUPERIOR PROPOSAL" means any bona fide proposal
made by a third party to acquire, directly or indirectly, including pursuant
to a tender offer, exchange offer, merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more than
50% of the voting power of Company Common Stock or all or substantially all
the assets of Company and otherwise on terms which the Board of Directors of
Company determines in its good faith judgment (after consultation with a
financial advisor of nationally recognized reputation) to be more favorable to
Company's stockholders than the Merger and for which financing, to the extent
required, is then committed or which, in the good faith judgment of the Board
of Directors of Company, is capable of being obtained by such third party.
(iii) In addition to the obligations of Company set forth in paragraphs (i)
and (ii) of this Section 5.4(a), Company as promptly as practicable shall
advise Parent orally and in writing of any request for non-public information
which Company reasonably believes would lead to an Alternative Proposal or of
any Alternative Proposal, the material terms and conditions of such request or
Alternative Proposal, and the identity of the person making any such request,
Alternative Proposal or inquiry. Company will keep Parent informed in all
material respects of the status and details (including material amendments) of
any such request or Alternative Proposal.
(iv) Nothing contained in this Section 5.4(a) or elsewhere in this Agreement
shall prohibit Company from (x) taking and disclosing to its stockholders a
position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the
Exchange Act or (y) making any disclosure to Company's stockholders if, in the
good faith judgment of the majority of the members of the Board of Directors
of Company, after consultation with independent legal counsel, failure to so
disclose would be inconsistent with applicable laws; provided that none of
Company nor its Board of Directors nor any committee thereof shall, except in
accordance with the provisions of Section 5.4(a)(ii), withdraw or modify, or
publicly propose to withdraw or modify, its position with respect to this
Agreement or the Merger or approve or recommend, or propose to approve or
recommend, an Alternative Proposal.
(v) Notwithstanding anything to the contrary in this Section 5.4(a), Company
will not provide any non-public information to a third party unless: (x)
Company provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously or is contemporaneously
delivered to Parent.
(b) Obligations of Parent. From and after the date of this Agreement until
the earlier of the Effective Time or termination of this Agreement pursuant to
its terms, Parent and its subsidiaries will not, nor will they authorize or
permit any of their respective officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by any
of them to, directly or indirectly, (x) solicit, initiate or encourage the
submission of any Parent Proposal (as hereinafter defined) or (y) participate
in any discussions or negotiations regarding, or furnish to any person any
non-public information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes or would
reasonably be expected to lead to, any Parent Proposal; provided, however,
that if the Board of Directors of Parent determines in good faith, after
consultation with outside legal counsel, that it is necessary to do so in
order to comply with its fiduciary duties to Parent's stockholders under
applicable law, Parent may, in response to a Parent Proposal that was
unsolicited
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or that did not otherwise result from a breach of this Section 5.4(b), furnish
information with respect to Parent and participate in negotiations regarding
such Parent Proposal. Parent and its subsidiaries will immediately cease any
and all existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any Parent Proposal. In addition, nothing
contained in this Section 5.4(b) or elsewhere in this Agreement shall prohibit
Parent from (x) taking and disclosing to its stockholders a position
contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or
(y) making any disclosure to Parent's stockholders if, in the good faith
judgment of the majority of the members of the Board of Directors of Parent,
after consultation with independent legal counsel, failure to so disclose
would be inconsistent with applicable laws. Without limiting the foregoing, it
is understood that any violation of the restrictions set forth in the first
two sentences of this Section 5.4(b) by any officer, director or employee of
Parent or any of its subsidiaries or any investment banker, attorney or other
advisor or representative of Parent or any of its subsidiaries shall be deemed
to be a breach of this Section 5.4(b) by Parent. For purposes of this
Agreement, "PARENT PROPOSAL" means any proposal made by a third party to
consummate any of the following transactions or series of related transactions
(other than the Merger): (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Parent pursuant to which the stockholders of Parent immediately preceding such
transaction or series of related transactions hold less than 60% of the equity
interests in the surviving or resulting entity of such transaction or
transactions (without respect to any overlap in the companies' stockholder
bases); (ii) a sale or other disposition by Parent of assets (excluding
inventory and used equipment sold in the ordinary course of business)
representing in excess of 40% of the fair market value of Parent's business
immediately prior to such sale; or (iii) the acquisition by any person or
group (including by way of a tender offer or an exchange offer or issuance by
Parent), directly or indirectly, of beneficial ownership or a right to acquire
beneficial ownership of 40% or more of the then outstanding shares of capital
stock of Parent.
5.5 Public Disclosure. Parent and Company will consult with each other, and
to the extent practicable, agree, before issuing any press release or
otherwise making any public statement with respect to the Merger, this
Agreement or an Alternative Proposal and will not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law or any listing agreement with a national securities exchange.
The parties have agreed to the text of the joint press release announcing the
signing of this Agreement.
5.6 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use reasonable efforts to take, or
cause to be taken, such actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, such things as are necessary,
proper or advisable to consummate and make effective, as expeditiously as
reasonably practicable, the Merger and the other transactions contemplated by
this Agreement, including using reasonable efforts to accomplish the
following: (i) the taking of such reasonable acts as are necessary to cause
the conditions precedent set forth in Article VI to be satisfied, (ii) the
obtaining of all necessary actions or nonactions, waivers, consents,
approvals, orders and authorizations from Governmental Entities and the making
of all necessary registrations, declarations and filings (including
registrations, declarations and filings with Governmental Entities, if any)
and the taking of such reasonable steps as may be necessary to avoid any suit,
claim, action, investigation or proceeding by any Governmental Entity, (iii)
the obtaining of all necessary consents, approvals or waivers from third
parties, (iv) the defending of any suits, claims, actions, investigations or
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (v) the execution or delivery of
any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. In
connection with and without limiting the foregoing, Company and its Board of
Directors shall, if any state takeover statute or similar statute or
regulation is or becomes applicable to the Merger, this Agreement or any of
the transactions contemplated by this Agreement, use reasonable efforts to
ensure that the Merger and the other transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effect of such
statute or regulation on the Merger, this Agreement and the transactions
contemplated
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hereby. Notwithstanding anything herein to the contrary, nothing in this
Agreement shall be deemed to require Parent or Company or any subsidiary or
affiliate thereof to agree to any divestiture by itself or any of its
affiliates of shares of capital stock or of any business, assets or property,
or the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise control of such assets,
properties and stock.
(b) Company shall give prompt notice to Parent of any representation or
warranty made by it contained in this Agreement becoming untrue or inaccurate,
or any failure of Company to comply with or satisfy in any material respect
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement, in each case, such that the conditions set forth in
Section 6.3(a) or 6.3(b) would not be satisfied, provided, however, that no
such notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
(c) Parent shall give prompt notice to Company of any representation or
warranty made by it or Merger Sub contained in this Agreement becoming untrue
or inaccurate, or any failure of Parent or Merger Sub to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement, in each case, such that
the conditions set forth in Section 6.2(a) or 6.2(b) would not be satisfied,
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
5.7 Third Party Consents. As soon as reasonably practicable following the
date hereof, Parent and Company will each use its commercially reasonable
efforts to obtain any material consents, waivers and approvals under any of
its or its subsidiaries' respective agreements, contracts, licenses or leases
required to be obtained in connection with the consummation of the
transactions contemplated hereby.
5.8 Stock Options and Employee Benefits.
(a) At the Effective Time, each outstanding option to purchase shares of
Company Common Stock (each a "COMPANY STOCK OPTION") under the Company Stock
Option Plans, whether or not exercisable, will be assumed by Parent. Each
Company Stock Option so assumed by Parent under this Agreement will continue
to have, and be subject to, the same terms and conditions set forth in the
applicable Company Stock Option Plan immediately prior to the Effective Time
(including, without limitation, any repurchase rights or vesting provisions),
except that (i) each Company Stock Option will be exercisable (or will become
exercisable in accordance with its terms) for that number of whole shares of
Parent Common Stock equal to the product of the number of shares of Company
Common Stock that were issuable upon exercise of such Company Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of Parent Common Stock and
(ii) the per share exercise price for the shares of Parent Common Stock
issuable upon exercise of such assumed Company Stock Option will be equal to
the quotient determined by dividing the exercise price per share of Company
Common Stock at which such Company Stock Option was exercisable immediately
prior to the Effective Time by the Exchange Ratio, rounded up to the nearest
whole cent.
(b) It is intended that Company Stock Options assumed by Parent shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Company Stock Options qualified as
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 5.8 shall be applied consistent with such intent.
(c) Rights outstanding under the ESPP shall be treated in a manner
reasonably acceptable to Parent and Company, provided that in no event shall
any such treatment interfere with Parent's ability to account for the Merger
as a pooling of interests.
(d) Parent will reserve sufficient shares of Parent Common Stock for
issuance under Section 5.8 and under Section 1.6(c) hereof.
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5.9 Form S-8. Parent agrees to file a registration statement on Form S-8 for
the shares of Parent Common Stock issuable with respect to assumed Company
Stock Options within five days after the Effective Time and shall use its
commercially reasonable efforts to maintain the effectiveness of such
registration statement thereafter for as long as any of such options or other
rights remain outstanding.
5.10 Indemnification.
(a) From and after the Effective Time, Parent will fulfill and honor and
will cause the Surviving Corporation to fulfill and honor in all respects the
obligations of Company pursuant to any indemnification agreements between
Company and its directors and officers as of the Effective Time (the
"INDEMNIFIED PARTIES") and any indemnification provisions under Company's
Certificate of Incorporation or Bylaws as in effect on the date hereof. The
Certificate of Incorporation and By-laws of the Surviving Corporation will
contain provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Certificate of Incorporation and Bylaws of Company as in effect on the date
hereof, which provisions will not be amended, repealed or otherwise modified
for a period of six years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who, immediately prior
to the Effective Time, were directors, officers, employees or agents of
Company, unless such modification is required by law.
(b) For a period of six years after the Effective Time, Parent will maintain
or cause the Surviving Corporation to maintain in effect, if available,
directors' and officers' liability insurance covering those persons who are
currently covered by Company's directors' and officers' liability insurance
policy on terms comparable to those applicable to the current directors and
officers of Company; provided, however, that in no event will Parent or the
Surviving Corporation be required to expend in excess of 150% of the annual
premium currently paid by Company for such coverage (or such coverage as is
available for such 150% of such annual premium).
5.11 Nasdaq Listing. Parent agrees to use its commercially reasonable
efforts to cause to be authorized for listing on Nasdaq prior to the Effective
Time the shares of Parent Common Stock issuable, and those required to be
reserved for issuance, in connection with the Merger, upon official notice of
issuance.
5.12 Affiliate Agreements.
(a) Set forth on the Company Schedules is a list of those persons who may be
deemed to be, in Company's reasonable judgment, affiliates of Company within
the meaning of Rule 145 promulgated under the Securities Act (each a "COMPANY
AFFILIATE"). Company will provide Parent with such information and documents
as Parent reasonably requests for purposes of reviewing such list. Company
will use its commercially reasonable efforts to deliver or cause to be
delivered to Parent, as promptly as practicable on or following the date
hereof, from each Company Affiliate an executed affiliate agreement in
substantially the form attached hereto as Exhibit B-1 (the "COMPANY AFFILIATE
AGREEMENT"), each of which will be in full force and effect as of the
Effective Time. Parent will be entitled to place appropriate legends on the
certificates evidencing any Parent Common Stock to be received by a Company
Affiliate pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Parent Common Stock,
consistent with the terms of the Company Affiliate Agreement.
(b) Set forth on the Parent Schedules is a list of those persons who may be
deemed to be, in Parent's reasonable judgment, affiliates of Parent (each a
"PARENT AFFILIATE"). Parent will provide Company with such information and
documents as Parent reasonably requests for purposes of reviewing such list.
Parent will use its commercially reasonable efforts to deliver or cause to be
delivered to Company, as promptly as practicable on or following the date
hereof, from each Parent Affiliate an executed affiliate agreement in
substantially the form attached hereto as Exhibit B-2 (the "PARENT AFFILIATE
AGREEMENT"), each of which will be in full force and effect as of the
Effective Time.
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5.13 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, Company and Parent each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification
or control laws and regulations of any applicable jurisdiction, as reasonably
agreed to by the parties. Company and Parent each shall promptly (a) supply
the other with any information which may be required in order to effectuate
such filings and (b) supply any additional information which reasonably may be
required by the FTC, the DOJ or the competition or merger control authorities
of any other jurisdiction and which the parties may reasonably deem
appropriate.
5.14 Board of Directors of Parent Following the Merger. The Board of
Directors of Parent will take all actions within its power to cause the Board
of Directors of Parent, effective no later than one day following the
Effective Time, to consist of five persons, one of whom shall be Leslie G.
Denend (who shall retain his present position as a Class II director), one of
whom will be Harry J. Saal (who shall be offered a position as a Class II
director) and the remaining three of whom shall have served on the Board of
Directors of Parent immediately prior to the Effective Time. If, prior to the
Effective Time, any of the foregoing designees shall decline or be unable to
serve as a director, Company (if such person is Leslie Denend or Harry Saal)
or Parent (in all other cases) shall designate another person to serve in such
person's stead, which person shall be reasonably acceptable to the other
party.
ARTICLE IV
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Company Stockholder Approval. This Agreement shall have been approved
and adopted, and the Merger shall have been duly approved, by the requisite
vote under applicable law, by the stockholders of Company.
(b) Parent Stockholder Approval. The issuance of shares of Parent Common
Stock pursuant to the Merger shall have been duly approved by the requisite
vote under applicable law by the stockholders of Parent.
(c) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of the Joint Proxy Statement/Prospectus, shall have been initiated or
threatened in writing by the SEC.
(d) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions contemplated
hereby will have expired or terminated early and all material foreign
antitrust approvals required to be obtained prior to the Merger in connection
with the transactions contemplated hereby shall have been obtained.
(e) Tax Opinions. Parent and Company shall each have received written
opinions from their respective tax counsel (Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and Gray Cary Ware & Freidenrich, a Professional
Corporation, respectively), in form and substance reasonably satisfactory to
them, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code and such opinions shall not have
been withdrawn; provided, however, that if the counsel to either Parent or
Company does not render such opinion, this condition shall nonetheless be
deemed to be satisfied with respect to such party if counsel to the other
party renders such opinion to such party. The parties to this Agreement agree
to make and
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use their commercially reasonable efforts to cause their shareholders to make
such reasonable representations as requested by such counsel for the purpose
of rendering such opinions.
(f) Opinion of Accountants. Each of Parent and Company shall have received
letters from each of Coopers & Lybrand L.L.P. and Arthur Andersen LLP,
respectively, dated within two (2) business days prior to the Effective Time,
regarding that firm's concurrence with Parent's management's and Company's
management's conclusions as to the appropriateness of pooling of interest
accounting for the Merger under Accounting Principles Board Opinion No. 16, if
the Merger is consummated in accordance with this Agreement.
(g) Nasdaq Listing. The shares of Parent Common Stock to be issued to
Company stockholders pursuant to the Merger shall have been approved for
listing on Nasdaq upon notice of issuance.
6.2 Additional Conditions to Obligations of Company. The obligation of
Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by Company:
(a) Representations and Warranties. The representations and warranties of
Parent and Merger Sub contained in this Agreement (i) shall have been true and
correct in all material respects as of the date of this Agreement and (ii)
shall be true and correct in all material respects on and as of the Closing
Date except for changes contemplated by this Agreement and except for those
representations and warranties which address matters only as of a particular
date (which shall have been true and correct as of such particular date), with
the same force and effect as if made on and as of the Closing Date, except,
with regard to the foregoing clauses (i) and (ii), in such cases (other than
the representations in Sections 3.2, 3.3, 3.16 and 3.18) where the failure to
be so true and correct would not have or be reasonably likely to have a
Material Adverse Effect on Parent. Company shall have received a certificate
with respect to the foregoing signed on behalf of Parent by an authorized
officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to the
Closing Date, and Company shall have received a certificate to such effect
signed on behalf of Parent by an authorized officer of Parent.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Parent shall have occurred since the date of this Agreement or be reasonably
likely to occur.
(d) Affiliate Agreements. Each of the Parent Affiliates shall have entered
into the Parent Affiliate Agreement and each of such agreements will be in
full force and effect as of the Effective Time.
(e) Certain Actions. The Board of Directors of Parent shall have complied in
all material respects with the provisions of Section 5.14 hereof.
(f) Consents. Parent shall have obtained all consents, waivers and approvals
required in connection with the consummation of the transactions contemplated
hereby in connection with the agreements, contracts, licenses or leases set
forth on Section 6.2 of the Company Schedules.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. The representations and warranties of
Company contained in this Agreement (i) shall have been true and correct in
all material respects as of the date of this Agreement and (ii) shall be true
and correct in all material respects on and as of the Closing Date except for
changes contemplated by this Agreement and except for those representations
and warranties which address matters only as of a particular date (which shall
have been true and correct as of such particular date), with the same force
and effect as if made on and as of the Closing Date, except, with regard to
the foregoing clauses (i) and (ii), in such cases (other than the
representations in Sections 2.2, 2.3, 2.20 and 2.21) where the failure to be
so true and correct
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would not have or be reasonably likely to have a Material Adverse Effect on
Company. Parent shall have received a certificate with respect to the
foregoing signed on behalf of Company by an authorized officer of Company.
(b) Agreements and Covenants. Company shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date, and Parent shall have received a certificate to such effect signed on
behalf of Company by the Chief Executive Officer and the Chief Financial
Officer of Company.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Company shall have occurred since the date of this Agreement or be reasonably
likely to occur.
(d) Affiliate Agreements. Each of the Company Affiliates shall have entered
into the Company Affiliate Agreement and each of such agreements will be in
full force and effect as of the Effective Time.
(e) Consents. Company shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby in connection with the agreements, contracts, licenses or
leases set forth on Section 6.3(e) of the Parent Schedules.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approvals of the
stockholders of Company or Parent:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and Company;
(b) by either Company or Parent if the Merger shall not have been
consummated by March 31, 1998 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before such
date and such action or failure to act constitutes a breach of this Agreement;
(c) by either Company or Parent if a Governmental Entity shall have issued
an order, decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action is final and
nonappealable;
(d) by either Company or Parent if the required approvals of the
stockholders of Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
Company stockholders duly convened therefor or at any adjournment thereof
(provided that the right to terminate this Agreement under this Section 7.1(d)
shall not be available to Company where the failure to obtain Company
stockholder approval shall have been caused by the action or failure to act of
Company and such action or failure to act constitutes a breach by Company of
this Agreement);
(e) by either Company or Parent if the required approval of the stockholders
of Parent contemplated by this Agreement shall not have been obtained by
reason of the failure to obtain the required vote at a meeting of Parent
stockholders duly convened therefor or at any adjournment thereof (provided
that the right to terminate this Agreement under this Section 7.1(e) shall not
be available to Parent where the failure to obtain Parent stockholder approval
shall have been caused by the action or failure to act of Parent and such
action or failure to act constitutes a material breach by Parent of this
Agreement);
(f) by Parent if (i) the Board of Directors of Company or any committee
thereof shall have withdrawn or modified in a manner adverse to Parent its
approval or recommendation of the Merger or this Agreement, (ii) Company shall
have failed to include in the Joint/Proxy Statement/Prospectus the
recommendation of the Board of Directors of Company in favor of approval of
the Merger and this Agreement, (iii) the Board of Directors of Company shall
have failed to reconfirm such recommendation within ten business days after a
written request to
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do so at any time following the public announcement or disclosure of an
Alternative Proposal (iv) the Board of Directors of Company or any committee
thereof shall have recommended any Alternative Proposal or (v) the Board of
Directors of Company or any committee thereof shall have resolved to do any of
the foregoing;
(g) by Company if (i) the Board of Directors of Parent or any committee
thereof shall have withdrawn or modified in a manner adverse to Company its
recommendation of approval of the issuance of shares of Parent Common Stock
pursuant to the Merger, (ii) Parent shall have failed to include in the
Joint/Proxy Statement/Prospectus the recommendation of the Board of Directors
of Parent in favor of approval of the issuance of shares of Parent Common
Stock pursuant to the Merger, (iii) the Board of Directors of Parent shall
have failed to reconfirm such recommendation within ten business days after a
written request to do so at any time following the public announcement or
disclosure of a Parent Contingent Proposal (as defined in Section 7.3(d)) or
(iv) the Board of Directors of Parent or any committee thereof shall have
resolved to do any of the foregoing;
(h) by Company at any time prior to the approval of the Merger by Company's
stockholders and following the earlier of (i) three days following the date
the Registration Statement is declared effective pursuant to the Securities
Act by the SEC or (ii) sixty days following the date hereof, if the Board of
Directors of Company recommends a Superior Proposal to the stockholders of
Company;
(i) by Company, upon a breach of any representation, warranty, covenant or
agreement on the part of Parent set forth in this Agreement, or if any
representation or warranty of Parent shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that Company may
not terminate this Agreement under this Section 7.1(i) if such inaccuracy in
Parent's representations and warranties or breach by Parent is curable by
Parent through the exercise of its commercially reasonable efforts prior to
March 31, 1998, provided Parent continues to exercise commercially reasonable
efforts to cure such breach (it being understood that Company may not
terminate this Agreement pursuant to this paragraph (i) if it shall have
materially breached this Agreement or if such breach by Parent is cured prior
to March 31, 1998); or
(j) by Parent, upon a breach of any representation, warranty, covenant or
agreement on the part of Company set forth in this Agreement, or if any
representation or warranty of Company shall have become untrue, in either case
such that the conditions set forth in Section 6.3(a) or Section 6.3(b) would
not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that Parent may
not terminate this Agreement under this Section 7.1(j) if such inaccuracy in
Company's representations and warranties or breach by Company is curable by
Company through the exercise of its commercially reasonable efforts prior to
March 31, 1998, provided Company continues to exercise commercially reasonable
efforts to cure such breach (it being understood that Parent may not terminate
this Agreement pursuant to this paragraph (j) if it shall have materially
breached this Agreement or if such breach by Company is cured prior to March
31, 1998).
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (miscellaneous),
each of which shall survive the termination of this Agreement, and (ii)
nothing herein shall relieve any party from liability for any willful breach
of this Agreement. No termination of this Agreement shall affect the
obligations of the parties contained in the Confidentiality Agreement, all of
which obligations shall survive termination of this Agreement in accordance
with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that Parent and Company shall share
equally all fees and expenses, other than attorneys' and accountants fees and
expenses, incurred in relation to the printing and filing
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(with the SEC) of the Joint Proxy Statement/Prospectus (including any
preliminary materials related thereto) and the Registration Statement
(including financial statements and exhibits) and any amendments or
supplements thereto.
(b) Company Payments. In the event that this Agreement is terminated by
Parent pursuant to Section 7.1(f) or Company pursuant to Section 7.1(h),
Company shall promptly, but in no event later than two days after the date of
such termination, pay Parent a fee equal to $30 million in immediately
available funds (the "COMPANY TERMINATION FEE"). If this Agreement shall be
terminated by any party hereto pursuant to Section 7.1(d) and prior to such
termination an Alternative Proposal shall have been publicly announced or
otherwise publicly disclosed, and prior to the date 12 months following the
date of the termination of this Agreement either (i) a Company Acquisition (as
hereinafter defined) shall be consummated or (ii) Company shall enter into an
Acquisition Agreement providing for a Company Acquisition, then Company shall
pay to Parent the Company Termination Fee in immediately available funds in
the case of clause (i) concurrently with the consummation of such Company
Acquisition or in the case of clause (ii) one half of the Company Termination
Fee concurrently with the execution of such Acquisition Agreement and the
remaining half of the Company Termination Fee upon the consummation of any
Company Acquisition occurring with twelve months following such execution.
Company acknowledges that the agreements contained in this Section 7.3(b) are
an integral part of the transactions contemplated by this Agreement, and that,
without these agreements, Parent would not enter into this Agreement;
accordingly, if Company fails promptly to pay the amounts due pursuant to this
Section 7.3(b) , and, in order to obtain such payment, Parent commences a suit
which results in a judgment against Company for the amounts set forth in this
Section 7.3(b) and such judgment is not set aside or reversed, Company shall
pay to Parent its reasonable costs and expenses (including attorneys' fees and
expenses) in connection with such suit, together with interest on the amounts
set forth in this Section 7.3(b) at the prime rate of The Chase Manhattan Bank
in effect on the date such payment was required to be made. "COMPANY
ACQUISITION" shall mean any of the following transactions or series of related
transactions: (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Company pursuant to which the stockholders of Company immediately preceding
such transaction or series of related transactions hold less than 60% of the
equity interests in the surviving or resulting entity of such transaction or
transactions (without respect to any overlap in the companies' stockholder
bases) (other than the transactions contemplated by this Agreement); (ii) a
sale or other disposition by Company of assets (excluding inventory and used
equipment sold in the ordinary course of business) representing in excess of
40% of the fair market value of Company's business immediately prior to such
sale; or (iii) the acquisition by any person or group (including by way of a
tender offer or an exchange offer or issuance by Company), directly or
indirectly, of beneficial ownership or a right to acquire beneficial ownership
of 40% or more of the then outstanding shares of capital stock of Company.
(c) Payment of the fees described in Section 7.3(b) above shall not be in
lieu of damages incurred in the event of material and willful breach of this
Agreement.
(d) Parent Payments. In the event that this Agreement is terminated by
Company pursuant to Section 7.1(g), Parent shall promptly, but in no event
later than two days after the date of such termination, pay Company a fee
equal to $30 million in immediately available funds (the "PARENT TERMINATION
FEE"). If this Agreement shall be terminated by any party hereto pursuant to
Section 7.1(e) and prior to the time of the occurrence of the event entitling
such party to terminate this Agreement pursuant to such provision a Parent
Contingent Proposal shall have been publicly announced or otherwise publicly
disclosed, and prior to the date 12 months following the date of the
termination of this Agreement either (i) the transaction contemplated by such
Parent Contingent Proposal shall be consummated or (ii) Parent shall enter
into a written agreement providing for the consummation of the transaction
contemplated by such Parent Contingent Proposal, then Parent shall pay to
Company the Parent Termination Fee in immediately available funds, in the case
of clause (i) concurrently with the consummation of the transaction
contemplated by such Parent Contingent Proposal and in the case of clause (ii)
one half of the Parent Termination Fee concurrently with the execution of such
agreement and the remaining half of the Parent Termination Fee upon the
consummation of the transaction contemplated by such agreement. Parent
acknowledges that the agreements contained in this Section 7.3(d) are an
integral part of the transactions contemplated by this Agreement, and that,
without these agreements, Company would not enter into this
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Agreement; accordingly, if Parent fails promptly to pay the amounts due
pursuant to this Section 7.3(d), and, in order to obtain such payment, Company
commences a suit which results in a judgment against Parent for the amounts
set forth in this Section 7.3(d) and such judgment is not set aside or
reversed, Parent shall pay to Company its reasonable costs and expenses
(including attorneys' fees and expenses) in connection with such suit,
together with interest on the amounts set forth in this Section 7.3(d) at the
prime rate of The Chase Manhattan Bank in effect on the date such payment was
required to be made. Payment of the fees described in this Section 7.3(d)
shall not be in lieu of damages incurred in the event of material and willful
breach of this Agreement. "PARENT CONTINGENT PROPOSAL" shall mean a Parent
Proposal, which proposal is and is publicly disclosed to be contingent upon
the issuance of shares of Parent Common Stock pursuant to the Merger not being
approved by the stockholders of Parent or the Merger otherwise not being
consummated.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent and Company.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Company, Parent and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time (such as those set forth in Section 5.10) shall
survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
McAfee Associates, Inc.
2710 Walsh Avenue
Santa Clara, California 95051-0963
Attention: President
Telephone No.: (408) 988-3832
Telecopy No.: (408) 988-6054
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeff Saper, Esq.
Marty Korman, Esq.
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
(b) if to Company, to:
Network General Corporation
4200 Bohannon Drive
Menlo Park, California 94025
Attention: President
Telephone No.: (650) 473-2000
Telecopy No.: (650) 321-0878
with a copy to:
Gray Cary Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301-1825
Attention: Rod Howard, Esq.
Telephone No.: (650) 328-6561
Telecopy No.: (650) 327-3699
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated. The words "INCLUDE,"
"INCLUDES" and
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"INCLUDING" when used herein shall be deemed in each case to be followed by
the words "without limitation." The table of contents and headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. When reference is made
herein to "THE BUSINESS OF" an entity, such reference shall be deemed to
include the business of all direct and indirect subsidiaries of such entity.
Reference to the subsidiaries of an entity shall be deemed to include all
direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement the term "KNOWLEDGE" means with respect
to a party hereto, with respect to any matter in question, that any of the
Chief Executive Officer, Chief Financial Officer, General Counsel, Director of
Legal Affairs or Controller of such party, has actual knowledge of such
matter.
(c) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" when
used in connection with an entity means any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of such entity and its
subsidiaries taken as a whole, except for those changes, events and effects
that (i) are directly and primarily caused by conditions affecting the United
States economy as a whole or affecting the industry in which such entity
competes as a whole, which conditions do not affect such entity in a
disproportionate manner, or (ii) are directly and primarily related to or
result from announcement or pendency of the Merger.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Schedules and the
Parent Schedules (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive
any termination of this Agreement; and (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as specifically provided
in Section 5.10.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof. Each of the parties hereto irrevocably consents to the jurisdiction
of any state or federal court
A-44
<PAGE>
within the Northern District of California or the State of Delaware, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in
any manner authorized by the laws of the State of California or the State of
Delaware, as is appropriate, for such persons and waives and covenants not to
assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, COMPANY AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, COMPANY OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
*****
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
A-45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
McAFEE ASSOCIATES, INC.
By: /s/ William L. Larson
_________________________________
Name: William L. Larson
_______________________________
Chairman and Chief Executive
Officer
Title: ______________________________
MYSTERY ACQUISITION CORP.
/s/ Prabhat K. Goyal
By: _________________________________
Prabhat K. Goyal
Name: _______________________________
President
Title: ______________________________
NETWORK GENERAL CORPORATION
/s/ Laurence R. Hootnick
By: _________________________________
Laurence R. Hootnick
Name: _______________________________
Director
Title: ______________________________
A-46
<PAGE>
FIRST AMENDMENT, dated as of October 22, 1997 (the "First Amendment"), to
the Agreement and Plan of Reorganization dated as of October 13, 1997 (the
"Reorganization Agreement") among McAfee Associates, Inc., a Delaware
corporation ("Parent"), Mystery Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), and Network General
Corporation, a Delaware corporation (the "Company").
WHEREAS Parent, Merger Sub and the Company each desire to amend the
Reorganization Agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Section 5.14 of the Reorganization Agreement is hereby amended and
restated to read in its entirety as follows:
Section 5.14 Board of Directors of Parent Following the Merger. The Board
of Directors of Parent shall take all actions within its power to cause the
Board of Directors of Parent, effective no later than one day following the
Effective Time, to consist of six persons, one of whom shall be Leslie G.
Denend (who shall retain his present position as a Class II director), one
of whom shall be Harry J. Saal (who shall be offered a position as a Class
II director) and the remaining four of whom shall have served on the Board
of Directors of Parent immediately prior to the Effective Time (each a
"Parent Designee"). If, prior to the Effective Time, any of the foregoing
designees shall decline or be unable to serve as a director, Company (if
such person is Leslie Denend or Harry Saal) or Parent (in all other cases)
shall designate another person to serve in such person's stead, which
person shall be reasonably acceptable to the other party; provided,
however, that the Board of Directors of McAfee shall take all actions
within its power to ensure the Board of Directors of Parent will be reduced
to five directors in the event any Parent Designee shall resign or decline
or be unable to serve as a director.
2. The First Amendment shall be governed by, and construed in accordance
with, the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
3. This First Amendment may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the
parties and delivered to the other parties.
4. Except as expressly modified and amended by this First Amendment, the
Reorganization Agreement shall continue in full force and effect and is hereby
ratified and confirmed in all respects.
A-47
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
the Reorganization Agreement to be executed by their duly authorized respective
officers as of the date first written above.
McAFEE ASSOCIATES, INC.
/s/ William L. Larson
By: _________________________________
Name: William L. Larson
Title: Chairman and Chief
Executive Officer
MYSTERY ACQUISITION CORP.
/s/ Prabhat K. Goyal
By: _________________________________
Name: Prabhat K. Goyal
Title: President
NETWORK GENERAL CORPORATION
/s/ Scott C. Neely
By: _________________________________
Name: Scott C. Neely
Title: Vice President
A-48
<PAGE>
ANNEX B
October 13, 1997
Board of Directors
McAfee Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Members of the Board:
We understand that Network General Corporation ("Network General"), McAfee
Associates, Inc. ("McAfee") and Mystery Acquisition Corp., a wholly owned
subsidiary of McAfee ("Acquisition Sub") propose to enter into an Agreement
and Plan of Reorganization, dated as of October 13, 1997 (the "Merger
Agreement"), which provides, among other things, for the merger (the "Merger")
of Acquisition Sub with and into Network General. Pursuant to the Merger,
Network General will become a wholly owned subsidiary of McAfee and each
issued and outstanding share of common stock, par value $0.01 per share, of
Network General (the "Network General Common Stock"), other than shares held
in treasury or held by McAfee or any affiliate of McAfee, will be converted
into the right to receive 0.4167 (the "Exchange Ratio") of a share of common
stock, par value $0.01 per share, of McAfee (the "McAfee Common Stock"). The
terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to McAfee.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of McAfee and Network General;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning McAfee and Network General prepared by the
managements of McAfee and Network General;
(iii) discussed the past and current operations and financial condition and
the prospects of McAfee, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of McAfee;
(iv) discussed the past and current operations and financial condition and
the prospects of Network General, including information relating to
certain strategic, financial and operational benefits anticipated from
the Merger, with senior executives of Network General;
(v) reviewed the pro forma impact of the Merger on the earnings per share
of McAfee and Network General;
(vi) reviewed the reported prices and trading activity for the McAfee
Common Stock and the Network General Common Stock;
(vii) compared the financial performance of McAfee and Network General and
the prices and trading activity of the McAfee Common Stock and the
Network General Common Stock with that of certain publicly-traded
companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(ix) reviewed and discussed with the senior managements of McAfee and
Network General the strategic rationale for the Merger and certain
alternatives to the Merger;
(x) participated in discussions and negotiations among representatives of
McAfee and Network General and their financial and legal advisors;
(xi) reviewed the Merger Agreement and certain related agreements; and
(xii) performed such other analyses and considered such other factors as we
have deemed appropriate.
B-1
<PAGE>
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the internal financial statements and other
financial and operating data and discussions relating to the strategic,
financial and operational benefits anticipated from the Merger provided by
McAfee and Network General, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the prospects of McAfee and Network General, respectively. We
have relied upon the assessment by the managements of McAfee and Network
General of their ability to retain key employees of both McAfee and Network
General. We have also relied upon, without independent verification, the
assessment by the managements of McAfee and Network General of McAfee's and
Network General's technologies and products, the timing and risks associated
with the integration of McAfee with Network General, and the validity of, and
risks associated with, McAfee's and Network General's existing and future
products and technologies. We have not made any independent valuation or
appraisal of the assets, liabilities or technology of McAfee or Network
General, respectively, nor have we been furnished with any such appraisals. We
have assumed that the Merger will be accounted for as a "pooling-of-interests"
business combination in accordance with U.S. Generally Accepted Accounting
Principles, will be treated as a tax-free reorganization and/or exchange
pursuant to the Internal Revenue Code of 1986, as amended, and will be
consummated in accordance with the terms set forth in the Merger Agreement.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of McAfee in
connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for McAfee and Network General and
have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of McAfee, and that this opinion may be included in its entirety in
any filing made by McAfee or Network General with the Securities and Exchange
Commission with respect to the transactions contemplated by the Merger
Agreement. In addition, this opinion does not in any manner address the prices
at which the McAfee Common Stock will actually trade at any time and we
express no recommendation or opinion as to how the holders of McAfee Common
Stock should vote at the shareholders' meeting held in connection with the
Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to McAfee.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:/s/ Charles R. Cory
----------------------------------
Charles R. Cory
Managing Director
B-2
<PAGE>
ANNEX C
October 13, 1997
Confidential
The Board of Directors
Network General Corporation
4200 Bohannon Drive
Menlo Park, CA 94025
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of Network General Corporation ("Network General" or the "Company") of
the consideration to be received by such shareholders in connection with the
proposed merger of Mystery Acquisition Corp. ("Merger Sub"), a wholly owned
subsidiary of McAfee Associates, Incorporated ("McAfee"), with and into
Network General (the "Proposed Transaction") pursuant to the Agreement and
Plan of Merger to be dated as of October 13, 1997, among McAfee, Merger Sub,
and Network General (the "Agreement"). We understand that the Agreement
provides, among other things, that each issued and outstanding share of Common
Stock shall be converted into the right to receive 0.4167 of a share of common
stock of McAfee as more fully set forth in the Agreement. For purposes of this
opinion, we have assumed that the Proposed Transaction will qualify as a tax-
free reorganization under the United States Internal Revenue Code for the
shareholders of the Company and that the Proposed Transaction will be
accounted for as a pooling of interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, strategic
transactions, corporate restructurings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as a financial
advisor to the Board of Directors of Network General in connection with the
Proposed Transaction, and we will receive a fee for our services, which
include the rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Network General and have received fees for rendering
these services. In particular, Hambrecht & Quist acted as a co-managing
underwriter in the Company's initial public offering in 1989, as a co-managing
underwriter in a follow-on offering by the Company in 1989 and as the lead-
managing underwriter in the Company's follow-on offering in 1992. Hambrecht &
Quist also acted as financial advisor in connection with the Company's
acquisition of ProTools in 1994 and with the Company's acquisition of Cinco
Networks in 1997. In the ordinary course of business, Hambrecht & Quist acts
as a market maker and broker in the publicly traded securities of Network
General and receives customary compensation in connection therewith, and also
provides research coverage for Network General. In the ordinary course of
business, Hambrecht & Quist actively trades in the equity and derivative
securities of Network General for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Hambrecht & Quist may in the future provide additional
investment banking or other financial advisory services to McAfee.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
McAfee for recent years and interim periods to date and certain other
relevant financial and operating data of McAfee made available to us from
published sources and from the internal records of McAfee;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to McAfee prepared by the
management of McAfee;
C-1
<PAGE>
The Board of Directors
Network General Corporation
Page 2
(iii) discussed the business, financial condition and prospects of McAfee
with certain of its officers;
(iv) reviewed the publicly available consolidated financial statements of
Network General for recent years and interim periods to date and certain
other relevant financial and operating data of Network General made
available to us from published sources and from the internal records of
Network General;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to Network General prepared by the
management of Network General;
(vi) discussed the business, financial condition and prospects of Network
General with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of McAfee and Network General and compared such information
and certain financial information for McAfee and Network General with
similar information for certain other companies engaged in businesses we
consider comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement; and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning McAfee or Network General
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of
any of the assets or liabilities of McAfee or Network General; nor have we
conducted a physical inspection of the properties and facilities of either
company. Furthermore, with your permission, we have not prepared or obtained
any evaluation or appraisal of any potential or pending litigation that may
involve the Company or McAfee, including Symantec Corporation vs McAfee
Associates, Incorporated filed April 23, 1997, or Trend Micro Incorporated vs
McAfee Associates, Incorporated and Symantec Corporation filed May 13, 1997,
or McAfee Associates, Incorporated vs Symantec Corporation filed August 25,
1997, or Digital Development Corporation vs 3Com Corporation, Microdyne
Corporation and McAfee Associates, Incorporated filed September 11, 1997, or
Hilgraeve Corporation vs McAfee Associates, Incorporated filed September 15,
1997. With respect to the financial forecasts and projections made available
to us and used in our analysis, we have assumed that they reflect the best
currently available estimates and judgments of the expected future financial
performance of McAfee and Network General. For purposes of this opinion, we
have assumed that neither McAfee nor Network General is a party to any pending
transactions, including external financings, recapitalizations or material
merger discussions, other than the Proposed Transaction and those activities
undertaken in the ordinary course of conducting their respective businesses.
Our opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this letter
and any change in such conditions would require a reevaluation of this
opinion. We express no opinion as to the price at which McAfee common stock
will trade subsequent to the Effective Time (as defined in the Agreement). We
were not requested to, and did not, solicit indications of interest from any
other parties in connection with a possible acquisition of, or business
combination with, Network General.
C-2
<PAGE>
The Board of Directors
Network General Corporation
Page 3
It is understood that this letter is for the information of the Board of
Directors in connection with their evaluation of the Proposed Transaction and
may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in the Proxy
Statement issued in connection with the proposed transaction. This letter does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the Common Stock in the
Proposed Transaction is fair to such holders from a financial point of view. We
express no opinion, however, as to the adequacy of any consideration received
in the Proposed Transaction by McAfee or any of its affiliates.
Very truly yours,
Hambrecht & Quist llc
/s/ Daniel H. Case III
By: _________________________
Daniel H. Case III
Chief Executive Officer
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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, indemnification 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 6 of the Registrant's Certificate of Incorporation and Article VIII of
the Registrant's Bylaws provide for indemnification of its directors,
officers, employees and other agents to the maximum extent permitted by the
Delaware Law. In addition, the Registrant has entered into Indemnification
Agreements with its officers and directors.
The Reorganization Agreement provides that commencing with the effectiveness
of the Merger, the Registrant will indemnify the current officers and
directors of Network General for any action or inaction by such person prior
to the Merger.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* Agreement and Plan of Reorganization, dated as of October 13,
1997, among McAfee Associates, Inc., Mystery Acquisition Corp. and
Network General Corporation, as amended by the First Amendment
thereto, dated as of October 22, 1997.
3.1 Second Restated Certificate of Incorporation of McAfee Associates,
Inc., incorporated by reference to Exhibit 3.1 of the Form 10-Q of
McAfee Associates, Inc. for the Quarter ended September 30, 1996.
3.2 Bylaws of McAfee Associates, Inc., incorporated by reference to
Exhibit 3.1 of the Registration Statement No. 3351042 on Form S-1
of McAfee Associates, Inc.
3.3 Certificate of Designation of Series A Preferred Stock of McAfee
Associates, Inc. incorporated by reference to Exhibit 3.3 of the
Form 10-Q of McAfee Associates, Inc. for the Quarter ended
September 30, 1996.
4.1 Registration Rights Agreement, dated as of August 30, 1996, by and
among McAfee Associates, Inc., FSA Combination Corp. and FSA
Corporation, incorporated by reference to the Report on Form 8-K
of McAfee Associates, Inc., as filed with the Securities and
Exchange Commission on September 24, 1996 (the "September 24 Form
8-K").
4.2 Registration Rights Agreement, dated January 13, 1997 by and
between McAfee Associates, Inc. and the shareholders of Jade,
incorporated by reference to the Report on Form 8-K of McAfee
Associates, Inc., as filed with the Securities and Exchange
Commission on March 14, 1997 (the "March 14 Form 8-K").
4.3 Registration Rights Agreement, dated as of February 28, 1997, by
and between McAfee Associates, Inc. and shareholders of Schuijers,
incorporated by reference to Exhibit 10.50 to the Report on Form
10-K of McAfee Associates, Inc. for the year ended December 31,
1996 (the "1996 Form 10-K).
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
8.1 Form of Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
8.2 Form of Tax Opinion of Gray Cary Ware & Freidenrich, A
Professional Corporation.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
9.1 Form of McAfee Associates, Inc. Voting Agreement, dated as of
October 13, 1997.
9.2 Form of Network General Corporation Voting Agreement, dated as of
October 13, 1997.
10.1 1992 Stock Option Plan, incorporated by reference to Exhibit 10.5
to the Report on Form 10-K of McAfee Associates, Inc. for the year
ended December 31, 1994 ("1994 Form 10-K") as amended.
10.2 Outside Directors Stock Option Plan, incorporated by reference to
Exhibit 10.7 to the Annual Report on Form 10-K of McAfee
Associates, Inc., for the year ended December 31, 1992.
10.3 401(k) Plan, incorporated by reference to Exhibit 10.20 of the
1994 Form 10-K.
10.4 Change in control agreement between McAfee Associates, Inc. and
Robert J. Schwei, dated as of April 14, 1995, incorporated by
reference to Exhibit 10.4 of the Registration Statement No.
33-93926 on Form S-4 of McAfee Associates, Inc. ("the S-4").
10.5 Change in control agreement between McAfee Associates, Inc. and
Peter Watkins, dated as of May 1, 1995, incorporated by reference
to Exhibit 10.6 of the S-4.
10.6 Change in control agreement between McAfee Associates, Inc. and
William L. Larson, dated as of April 14, 1995, incorporated by
reference to Exhibit 10.7 of the S-4.
10.7 Agreement and Plan of Merger, dated as of March 6, 1996, among
McAfee Associates, Inc., McCor Acquisition Corporation and Vycor
Corporation, incorporated by reference to Exhibit 10.35 of the
Form 10-K of McAfee Associates, Inc., filed for the year ended
December 31, 1995.
10.8 1995 Stock Incentive Plan, incorporated by reference to Exhibit
10.40 of the Form 10-Q of McAfee Associates, Inc. for the Quarter
ended June 30, 1996.
10.9 Change in control agreement between McAfee Associates, Inc. and
Prabhat K. Goyal incorporated by reference to Exhibit 10.43 of the
Form 10-Q of McAfee Associates, Inc. for the Quarter ended June
30, 1996.
10.10 Combination Agreement by and among McAfee Associates, Inc., FSA
Combination Corp., FSA Corporation, and Daniel Freedman, the sole
shareholder of FSA Corporation, dated as of August 16, 1996,
incorporated by reference to the September 24 Form 8-K.
10.11 Stock Exchange Agreement, dated as of January 13, 1997, by and
among McAfee Associates, Inc., FSA Combination Corp., Kabushiki
Kaisha Jade ("Jade") and the shareholders of Jade, incorporated by
reference to the March 14 Form 8-K.
10.12 Stock Exchange Agreement, dated as of February 29, 1997, by and
among McAfee Associates, Inc., FSA Combination Corp., Schuijers
Holding B.V. ("Schuijers") and the shareholders of Schuijers,
incorporated by reference to Exhibit 10.50 to the 1996 Form 10-K.
10.13 Sublease Agreement for facility at 2805 Bowers Avenue, Santa
Clara, dated as of February 20, 1997, by and between McAfee
Associates, Inc. and National Semiconductor Corporation,
incorporated by reference to Exhibit 10.51 of the Form 10-Q of
McAfee Associates, Inc. for the Quarter ended June 30, 1997.
10.14 Quota Purchase Assignment Agreement, dated as of April 14, 1997,
by and among McAfee Associates, Inc. and McAfee Do Brasil Ltda.,
Compusul-Consultoria E Comericio De Informatica Ltda., and the
stockholders of Compusul-Consultoria E Comericio De Informatica
Ltda., incorporated by reference to Exhibit 10.52 of the Form 10-Q
of McAfee Associates, Inc. for the Quarter ended June 30, 1997.
10.15 1997 Stock Incentive Plan, incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-8 of McAfee
Associates, Inc., filed with the Securities and Exchange
Commission on August 8, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
21.1 Subsidiaries of McAfee Associates, Inc.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in opinions filed as Exhibits 5.1 and 8.1).
23.2 Consent of Gray Cary Ware & Freidenrich, A Professional
Corporation (included in opinion filed as Exhibit 8.2).
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Morgan Stanley & Co. Incorporated.
23.6 Consent of Hambrecht & Quist LLC.
24.1 Power of Attorney (see Page II-5).
99.1 McAfee Associates, Inc. Form of Proxy for Special Meeting to be
held December 1, 1997.
99.2 Network General Corporation Form of Proxy for Special Meeting to
be held December 1, 1997.
99.3 Consent of Harry J. Saal.
</TABLE>
- --------
* Incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus.
(B) FINANCIAL STATEMENTS SCHEDULES
The information required to be set forth herein is incorporated by reference
to McAfee's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and Network General's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(8) To supply by means of a post-effective amendment all required
information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
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 of 1933 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 of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
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 the 31st day of October 1997.
McAFEE ASSOCIATES, INC.
/s/ William L. Larson
By: _________________________________
William L. Larson
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William L. Larson and Prabhat K. Goyal
and each of them, jointly and severally, as his true and lawful attorneys-in-
fact and agents, each with full power of substitution for him and in his name,
place and stead in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that each said attorneys-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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 AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ William L. Larson Chairman of the Board, October 31, 1997
____________________________________ President and Chief
William L. Larson Executive Officer (Principal
executive officer)
/s/ Prabhat K. Goyal Chief Financial Officer October 31, 1997
____________________________________ (Principal financial and
Prabhat K. Goyal accounting officer)
/s/ Edwin Harper Board Member October 31, 1997
____________________________________
Edwin Harper
/s/ Leslie G. Denend Board Member October 31, 1997
____________________________________
Leslie G. Denend
/s/ John Bolger Board Member October 31, 1997
____________________________________
John Bolger
/s/ Virginia Gemmell Board Member October 31, 1997
____________________________________
Virginia Gemmell
</TABLE>
II-5
<PAGE>
4300-SPC-97
<PAGE>
4680-SPC-97
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* Agreement and Plan of Reorganization, dated as of October 13,
1997, among McAfee Associates, Inc., Mystery Acquisition Corp. and
Network General Corporation, as amended by the First Amendment
thereto, dated as of October 22, 1997.
3.1 Second Restated Certificate of Incorporation of McAfee Associates,
Inc., incorporated by reference to Exhibit 3.1 of the Form 10-Q of
McAfee Associates, Inc. for the Quarter ended September 30, 1996.
3.2 Bylaws of McAfee Associates, Inc., incorporated by reference to
Exhibit 3.1 of the Registration Statement No. 3351042 on Form S-1
of McAfee Associates, Inc.
3.3 Certificate of Designation of Series A Preferred Stock of McAfee
Associates, Inc. incorporated by reference to Exhibit 3.3 of the
Form 10-Q of McAfee Associates, Inc. for the Quarter ended
September 30, 1996.
4.1 Registration Rights Agreement, dated as of August 30, 1996, by and
among McAfee Associates, Inc., FSA Combination Corp. and FSA
Corporation, incorporated by reference to the Report on Form 8-K
of McAfee Associates, Inc., as filed with the Securities and
Exchange Commission on September 24, 1996 (the "September 24 Form
8-K").
4.2 Registration Rights Agreement, dated January 13, 1997 by and
between McAfee Associates, Inc. and the shareholders of Jade,
incorporated by reference to the Report on Form 8-K of McAfee
Associates, Inc., as filed with the Securities and Exchange
Commission on March 14, 1997 (the "March 14 Form 8-K").
4.3 Registration Rights Agreement, dated as of February 28, 1997, by
and between McAfee Associates, Inc. and shareholders of Schuijers,
incorporated by reference to Exhibit 10.50 to the Report on Form
10-K of McAfee Associates, Inc. for the year ended December 31,
1996 (the "1996 Form 10-K).
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
8.1 Form of Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
8.2 Form of Tax Opinion of Gray Cary Ware & Freidenrich, A
Professional Corporation.
9.1 Form of McAfee Associates, Inc. Voting Agreement, dated as of
October 13, 1997.
9.2 Form of Network General Corporation Voting Agreement, dated as of
October 13, 1997.
10.1 1992 Stock Option Plan, incorporated by reference to Exhibit 10.5
to the Report on Form 10-K of McAfee Associates, Inc. for the year
ended December 31, 1994 ("1994 Form 10-K") as amended.
10.2 Outside Directors Stock Option Plan, incorporated by reference to
Exhibit 10.7 to the Annual Report on Form 10-K of McAfee
Associates, Inc., for the year ended December 31, 1992.
10.3 401(k) Plan, incorporated by reference to Exhibit 10.20 of the
1994 Form 10-K.
10.4 Change in control agreement between McAfee Associates, Inc. and
Robert J. Schwei, dated as of April 14, 1995, incorporated by
reference to Exhibit 10.4 of the Registration Statement No.
33-93926 on Form S-4 of McAfee Associates, Inc. ("the S-4").
10.5 Change in control agreement between McAfee Associates, Inc. and
Peter Watkins, dated as of May 1, 1995, incorporated by reference
to Exhibit 10.6 of the S-4.
10.6 Change in control agreement between McAfee Associates, Inc. and
William L. Larson, dated as of April 14, 1995, incorporated by
reference to Exhibit 10.7 of the S-4.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.7 Agreement and Plan of Merger, dated as of March 6, 1996, among
McAfee Associates, Inc., McCor Acquisition Corporation and Vycor
Corporation, incorporated by reference to Exhibit 10.35 of the
Form 10-K of McAfee Associates, Inc., filed for the year ended
December 31, 1995.
10.8 1995 Stock Incentive Plan, incorporated by reference to Exhibit
10.40 of the Form 10-Q of McAfee Associates, Inc. for the Quarter
ended June 30, 1996.
10.9 Change in control agreement between McAfee Associates, Inc. and
Prabhat K. Goyal incorporated by reference to Exhibit 10.43 of the
Form 10-Q of McAfee Associates, Inc. for the Quarter ended June
30, 1996.
10.10 Combination Agreement by and among McAfee Associates, Inc., FSA
Combination Corp., FSA Corporation, and Daniel Freedman, the sole
shareholder of FSA Corporation, dated as of August 16, 1996,
incorporated by reference to the September 24 Form 8-K.
10.11 Stock Exchange Agreement, dated as of January 13, 1997, by and
among McAfee Associates, Inc., FSA Combination Corp., Kabushiki
Kaisha Jade ("Jade") and the shareholders of Jade, incorporated by
reference to the March 14 Form 8-K.
10.12 Stock Exchange Agreement, dated as of February 29, 1997, by and
among McAfee Associates, Inc., FSA Combination Corp., Schuijers
Holding B.V. ("Schuijers") and the shareholders of Schuijers,
incorporated by reference to Exhibit 10.50 to the 1996 Form 10-K.
10.13 Sublease Agreement for facility at 2805 Bowers Avenue, Santa
Clara, dated as of February 20, 1997, by and between McAfee
Associates, Inc. and National Semiconductor Corporation,
incorporated by reference to Exhibit 10.51 of the Form 10-Q of
McAfee Associates, Inc. for the Quarter ended June 30, 1997.
10.14 Quota Purchase Assignment Agreement, dated as of April 14, 1997,
by and among McAfee Associates, Inc. and McAfee Do Brasil Ltda.,
Compusul-Consultoria E Comericio De Informatica Ltda., and the
stockholders of Compusul-Consultoria E Comericio De Informatica
Ltda., incorporated by reference to Exhibit 10.52 of the Form 10-Q
of McAfee Associates, Inc. for the Quarter ended June 30, 1997.
10.15 1997 Stock Incentive Plan, incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-8 of McAfee
Associates, Inc., filed with the Securities and Exchange
Commission on August 8, 1997.
21.1 Subsidiaries of McAfee Associates, Inc.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in opinions filed as Exhibits 5.1 and 8.1).
23.2 Consent of Gray Cary Ware & Freidenrich, A Professional
Corporation (included in opinion filed as Exhibit 8.2).
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Morgan Stanley & Co. Incorporated.
23.6 Consent of Hambrecht & Quist LLC.
24.1 Power of Attorney (see Page II-5).
99.1 McAfee Associates, Inc. Form of Proxy for Special Meeting to be
held December 1, 1997.
99.2 Network General Corporation Form of Proxy for Special Meeting to
be held December 1, 1997.
99.3 Consent of Harry J. Saal.
</TABLE>
- --------
* Incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus.
II-2
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
October 31, 1997
McAfee Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
RE: Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 filed by you with
the Securities Exchange Commission (the "Commission") on or about this date (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of shares of your Common Stock, par value
$0.01 per share (the "Shares"). As your counsel in connection with this
transaction, we have examined the proceedings proposed to be taken by you in
connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement, will be legally and validly
issued, fully paid and non-assessable.
We consent to the use of this Opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Joint Proxy Statement/Prospectus
constituting a part thereof, and any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 8.1
[WSG&R LETTERHEAD]
__________, 1997
McAfee Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Ladies and Gentlemen:
We have acted as counsel for McAfee Associates, Inc., a Delaware
corporation ("McAfee") in connection with the preparation and execution of the
Agreement and Plan of Reorganization (the "Merger Agreement") dated as of
October 13, 1997, among McAfee, Mystery Acquisition Corp., a wholly-owned
subsidiary of McAfee incorporated in Delaware ("Sub"), and Network General
Corporation, a Delaware corporation ("Network General"). Pursuant to the Merger
Agreement, Sub will merge with and into Network General (the "Merger"), and
Network General will become a wholly-owned subsidiary of McAfee. Unless
otherwise defined, capitalized terms referred to herein have the meanings set
forth in the Merger Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and representations
set forth in the registration statement on Form S-4 filed with the Securities
and Exchange Commission (the "Registration Statement"), the Merger Agreement
(including Exhibits), an opinion of counsel received by Network General from
Gray Cary Ware & Freidenrich, A Professional Corporation, substantially
identical in substance to this opinion (the "GCWF Tax Opinion"), and such other
documents pertaining to the Merger as we have deemed necessary or appropriate.
We have also relied upon certificates of officers of Network General and McAfee,
respectively (the "Officers' Certificates"), as well as affiliate agreements
executed and delivered by certain stockholders of Network General (the
"Affiliate Agreements").
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to effectiveness thereof;
<PAGE>
McAfee Associates, Inc.
, 1997
- ----------------
Page 2
2. Any statement made in any of the documents referred to herein, "to the
best of the knowledge" of any person or party is correct without such
qualification;
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct in
all material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Merger will be reported by McAfee and Network General on their
respective federal income tax returns in a manner consistent with the opinion
set forth below; and
5. The GCWF Tax Opinion has been delivered and not withdrawn.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the Merger
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the statements set forth in the Officers' Certificates and the
Affiliate Agreements are true and correct as of the date hereof, at the
effective date of the Information Statement and at the Effective Time, then, for
federal income tax purposes, the Merger will qualify as a "reorganization" as
defined in Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of any
new developments in the application or interpretation of the Federal income tax
laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger). Furthermore, this opinion relates only to the
holders of Network General stock who hold such stock as a capital asset. No
opinion is expressed as to the Federal income tax treatment that may be relevant
to a particular investor in light of personal circumstances or to certain types
of investors subject to special treatment under the Federal income tax laws (for
example, life insurance companies, dealers in securities, taxpayers subject to
the alternative minimum tax, banks, tax-exempt organizations, non-United States
persons, and stockholders who acquired their shares of Network General stock
pursuant to the exercise of options or otherwise as compensation).
<PAGE>
McAfee Associates, Inc.
, 1997
- ----------------
Page 3
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion has been delivered to you for the purpose of satisfying the
requirements of Section 6.1(e) of the Merger Agreement. It may not be relied
upon for any other purpose or by any other person or entity, and may not be made
available to any other person or entity without our prior written consent. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name in the Registration
Statement in connection with references to this opinion and the tax consequences
of the Merger. In giving this consent, however, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF GRAY CARY WARE FREIDENRICH]
December __, 1997
Network General Corporation
4200 Bohannon Drive
Menlo Park, CA 94025
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing of a
registration statement on Form S-4 of a Joint Proxy Statement/Prospectus and for
the purpose of satisfying the requirement of Section 6.1(e) of the Agreement and
Plan of Reorganization dated October 13, 1997, as amended (the "Merger
Agreement") by and among McAfee Associates, Inc., a Delaware corporation
("McAfee"), Mystery Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of McAfee ("Sub") and Network General Corporation, a
Delaware corporation ("Network General"). Pursuant to the Merger Agreement, Sub
will merge with and into Network General (the "Merger"), and Network General
will become a wholly-owned subsidiary of McAfee.
Unless otherwise defined, capitalized terms referred to herein have the
meanings set forth in the Merger Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Network General in connection with the
preparation and execution of the Merger Agreement. As such, and for the purpose
of rendering this opinion, we have examined and are relying upon (without any
independent investigation or review thereof) the truth and accuracy, at all
relevant times, of the statements, covenants, representations and warranties
contained in the following documents (including all schedules and exhibits
thereto): (1) the Merger Agreement; (2) representations and warranties made to
us by Network General, McAfee and Sub (the "Officers' Certificates"); (3)
representations and warranties of certain shareholders of Network General in
"Affiliate Agreements"; (4) the registration statement on Form S-4 of a Joint
Proxy Statement/Prospectus of McAfee and Network General (the "Registration
Statement"); (5) an opinion of counsel, received by McAfee from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, substantially identical in
substance to this opinion (the "WSGR Tax Opinion"); and (6) such other
instruments and documents related to the
formation, organization and operation of Network General and McAfee or to the
consummation
<PAGE>
[LETTERHEAD OF GRAY CARY WARE FREIDENRICH]
Network General Corporation
December __, 1997
Page Two
of the Merger and the transactions contemplated thereby as we have deemed
necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification. As to all matters in
which a person or entity making a representation referred to above has
represented that such person or entity either is not a party to, does not have,
or is not aware of, any plan or intention, understanding or agreement, there is
in fact no such plan, intention, understanding or agreement;
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us (including, but not
limited to the Officers' Certificates and Affiliate Agreements) are true and
correct as of the date hereof, at the effective date of the Registration
Statement and at the Effective Time, and no actions have been (or will be) taken
which are inconsistent with such statements, descriptions and representations;
4. The Merger will be consummated in accordance with the Merger Agreement
(and without any waiver, breach or amendment of any of the provisions thereof),
will be effective under the applicable state law, and will be reported by McAfee
and Network General on their respective federal income tax returns in a manner
consistent with the opinion set forth below; and
5. The WSGR Tax Opinion has been delivered and not withdrawn.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that for federal income tax purposes, the Merger will constitute
a "reorganization" as defined in Section 368(a) of the Code. In addition to the
assumptions set forth above, this opinion is subject to the exceptions,
limitations and qualifications set forth below.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and the
Internal Revenue Service is not precluded from successfully asserting a contrary
position. Furthermore, no assurance can be given that future legislative,
judicial or administrative changes, on either a prospective or retroactive
basis, would
<PAGE>
[LETTERHEAD OF GRAY CARY WARE FREIDENRICH]
Network General Corporation
December __, 1997
Page Three
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code. No opinion is expressed as to
any other matter, including any other tax consequences of the Merger or any
other transaction (including any transaction undertaken in connection with the
Merger) under any foreign, federal, state, or local tax law.
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion has been delivered to you only for the purposes stated. It
may not be relied upon for any other purpose or by any other person or entity,
and may not be made available to any other person or entity without our prior
written consent. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and further consent to the use of our name in the
Registration Statement in connection with references to this opinion. In giving
this consent, however, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended.
Very truly yours,
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
<PAGE>
EXHIBIT 9.1
EXHIBIT A-2
MCAFEE ASSOCIATES, INC. VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of October
__, 1997, between Network General Corporation, a Delaware corporation (the
"COMPANY"), and the undersigned stockholder ("STOCKHOLDER") of McAfee
Associates, Inc., a Delaware corporation ("PARENT").
RECITALS
A. Concurrently with the execution of this Agreement, Parent, the Company
and Mystery Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Stockholder is the record holder of such number of outstanding
shares of Common Stock of Parent as is indicated on the final page of this
Agreement. In addition, the Stockholder holds options to purchase such number
of shares of Common Stock of Parent as is indicated on the final page of this
Agreement.
C. As a material inducement to enter into the Merger Agreement, the
Company desires the Stockholder to agree, and the Stockholder is willing to
agree, to vote the Shares (as defined below) and other such shares of capital
stock of the Company over which Stockholder has voting power so as to facilitate
consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1. Agreement to Vote Shares; Additional Purchases.
----------------------------------------------
1.1 Agreement to Vote Shares. At every meeting of the stockholders
------------------------
of Parent called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of Parent with respect to any of the following, Stockholder shall cause the
Shares and any New Shares (as defined below) to be voted in favor of approval of
the issuance of shares of Parent's Common Stock (the "PARENT COMMON STOCK"), to
the stockholders of the Company pursuant to the Merger Agreement.
1.2 Definition. For purposes of this Agreement, "SHARES" shall mean
----------
all issued and outstanding shares of Common Stock of Parent owned of record or
beneficially (over which
<PAGE>
beneficially-owned shares the Stockholder exercises voting power) by the
Stockholder as of the record date for persons entitled (a) to receive notice of,
and to vote at the meeting of the stockholders of Parent called for the purpose
of voting on the matter referred to in Section 1.1, or (b) to take action by
written consent of the stockholders of Parent with respect to the matter
referred to in Section 1.1
1.3 Additional Purchases. Stockholder agrees that any shares of
--------------------
capital stock of Parent that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership (over which beneficially-
owned shares the Stockholder exercises voting power) after the execution of this
Agreement and prior to the date of termination of this Agreement ("NEW SHARES")
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
-----------------
Stockholder agrees to deliver to the Company a proxy in the form attached hereto
as Exhibit A (the "PROXY"), which shall be irrevocable, with respect to the
Shares.
3. Representations and Warranties of the Stockholder. Stockholder (i) is
-------------------------------------------------
the owner of the shares of Common Stock of Parent, and the options to purchase
shares of Common Stock of Parent, indicated on the final page of this Agreement,
which at the date hereof are free and clear of any liens, claims, options,
charges or other encumbrances; (ii) does not beneficially own any securities of
Parent other than the shares of Common Stock of Parent, and options to purchase
shares of Common Stock of Parent, indicated on the final page of this Agreement;
and (iii) has full power and authority to make, enter into and carry out the
terms of this Agreement.
4. Additional Documents. Stockholder and the Company hereby covenant and
--------------------
agree to execute and deliver any additional documents necessary or desirable, in
the reasonable opinion of the Company or Stockholder, as the case may be, to
carry out the intent of this Agreement.
5. Consent and Waiver. Stockholder (not in his capacity as a director or
------------------
officer of the Company) hereby gives any consents or waivers that are reasonably
required for the issuance of the Parent Common Stock under the terms of any
agreements to which Stockholder is a party or pursuant to any rights Stockholder
may have.
6. Termination. This Agreement shall terminate and shall have no further
-----------
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of the
Merger Agreement or (ii) such date and time as the Merger Agreement shall have
been terminated pursuant to Article VII thereof.
7. Miscellaneous.
-------------
7.1 Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder
-2-
<PAGE>
of the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the
-----------------------------
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
7.3 Amendments and Modification. This Agreement may not be modified,
---------------------------
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto
---------------------------------------
acknowledge that the Company will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or agreements
of Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to the Company upon any such violation,
the Company shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to the
Company at law or in equity.
7.5 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
If to the Company: McAfee Associates, Inc.
2805 Bowers Avenue
Santa Clara, CA 95051
Attn: Chief Financial Officer
With a copy to: Gray Cary Ware & Freidenrich, P.C.
400 Hamilton Avenue
Palo Alto, CA 94301
Attn: Rod Howard, Esq.
If to the Stockholder: To the address for notice set forth on the
last page hereof.
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeff Saper, Esq.
Marty Korman, Esq.
-3-
<PAGE>
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and
-------------
construed and enforced in accordance with, the internal laws of the State of
Delaware (without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
7.8 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
7.9 Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
* * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
COMPANY
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDER:
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Stockholder's Address for Notice:
---------------------------------------------
---------------------------------------------
---------------------------------------------
____________ Outstanding Shares of Common Stock of
Parent
____________ Outstanding Shares of Common Stock of
Parent subject to outstanding stock options
***PARENT VOTING AGREEMENT***
-5-
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned Stockholder of McAfee Associates, Inc., a Delaware
corporation ("PARENT"), hereby irrevocably appoints the directors on the Board
of Directors of Network General Corporation, a Delaware corporation (the
"COMPANY"), and each of them, as the sole and exclusive attorneys and proxies of
the undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the voting of the Shares (as
defined in the Voting Agreement of even date between the Company and the
Stockholder (the "VOTING AGREEMENT")) on the matter described below (and on no
other matter), until such time as that certain Agreement and Plan of Merger,
dated as of October 13, 1997 (the "MERGER AGREEMENT"), among Parent, Mystery
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent ("MERGER SUB"), and the Company, shall be terminated in accordance with
its terms or the Merger (as defined in the Merger Agreement) becomes effective.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares and any and all other shares or securities issued or
issuable in respect thereof on or after the date hereof are hereby revoked and
no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement and
is granted in consideration of the Company entering into the Merger Agreement.
The attorneys and proxies named above will be empowered at any time prior to the
earlier of termination of the Merger Agreement and the date on which the Merger
becomes effective to exercise all voting rights (including, without limitation,
the power to execute and deliver written consents with respect to the Shares) of
the undersigned at every annual, special or adjourned meeting of Parent's
stockholders, and in every written consent in lieu of such a meeting, or
otherwise, to vote the Shares in favor of approval of the issuance of shares of
Parent Common Stock to the stockholders of the Company pursuant to the Merger
Agreement.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to the earlier of termination of the
Merger Agreement and the date on which the Merger becomes effective, at every
annual, special or adjourned meeting of the Stockholders of Parent and in every
written consent in lieu of such meeting, in favor of approval of the issuance of
shares of Parent Common Stock to the stockholders of the Company pursuant to the
Merger Agreement. The undersigned Stockholder may vote the Shares on all other
matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: ________________, 1997
Signature of Stockholder: _________________
Print Name of Stockholder: _________________
***PARENT PROXY***
<PAGE>
EXHIBIT 9.2
EXHIBIT A-1
NETWORK GENERAL VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of October
__, 1997, between McAfee Associates, Inc., a Delaware corporation ("PARENT"),
and the undersigned stockholder ("STOCKHOLDER") of Network General Corporation,
a Delaware corporation (the "COMPANY").
RECITALS
A. Concurrently with the execution of this Agreement, Parent, the Company
and Mystery Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Stockholder is the record holder of the number of outstanding
shares of Common Stock of the Company indicated on the final page of this
Agreement. In addition, the Stockholder holds options to purchase the number of
shares of Common Stock of the Company indicated on the final page of this
Agreement.
C. As a material inducement to enter into the Merger Agreement, Parent
desires the Stockholder to agree, and the Stockholder is willing to agree, to
vote the Shares (as defined below) and other such shares of capital stock of the
Company over which Stockholder has voting power so as to facilitate consummation
of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1. Agreement to Vote Shares; Additional Purchases.
----------------------------------------------
1.1 Agreement to Vote Shares. At every meeting of the stockholders
------------------------
of the Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of the
stockholders of the Company with respect to any of the following, Stockholder
shall cause the Shares and any New Shares (as defined below) to be voted in
favor of approval of the Merger Agreement and the Merger.
1.2 Definition. For purposes of this Agreement, "SHARES" shall mean
----------
all issued and outstanding shares of Common Stock of the Company owned of record
or beneficially (over
<PAGE>
which beneficially-owned shares the Stockholder exercises voting power) by the
Stockholder as of the record date for persons entitled (a) to receive notice of,
and to vote at the meeting of the stockholders of the Company called for the
purpose of voting on the matter referred to in Section 1.1, or (b) to take
action by written consent of the stockholders of the Company with respect to the
matter referred to in Section 1.1
1.3 Additional Purchases. Stockholder agrees that any shares of
--------------------
capital stock of the Company that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership (over which beneficially-
owned shares Stockholder exercises voting power) after the execution of this
Agreement and prior to the date of termination of this Agreement ("NEW SHARES")
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
-----------------
Stockholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "PROXY"), which shall be irrevocable, with respect to the Shares.
3. Representations and Warranties of the Stockholder. Stockholder (i) is
-------------------------------------------------
the owner of the shares of Common Stock of the Company, and the options to
purchase shares of Common Stock of the Company, indicated on the final page of
this Agreement, which at the date hereof are free and clear of any liens,
claims, options, charges or other encumbrances; (ii) does not beneficially own
any securities of the Company other than the shares of Common Stock of the
Company, and options to purchase shares of Common Stock of the Company,
indicated on the final page of this Agreement; and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement.
4. Additional Documents. Stockholder and Parent hereby covenant and
--------------------
agree to execute and deliver any additional documents necessary or desirable, in
the reasonable opinion of Parent or Stockholder, as the case may be, to carry
out the intent of this Agreement.
5. Consent and Waiver. Stockholder (not in his capacity as a director or
------------------
officer of the Company) hereby gives any consents or waivers that are reasonably
required for the consummation of the Merger under the terms of any agreements to
which Stockholder is a party or pursuant to any rights Stockholder may have.
6. Termination. This Agreement shall terminate and shall have no further
-----------
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of the
Merger Agreement or (ii) such date and time as the Merger Agreement shall have
been terminated pursuant to Article VII thereof.
7. Miscellaneous.
-------------
7.1 Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder
-2-
<PAGE>
of the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the
-----------------------------
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
7.3 Amendments and Modification. This Agreement may not be modified,
---------------------------
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto
---------------------------------------
acknowledge that Parent will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity.
7.5 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
If to Parent: McAfee Associates, Inc.
2805 Bowers Avenue
Santa Clara, CA 95051
Attn: President and Chief Executive Officer
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeff Saper, Esq.
Marty Korman, Esq.
If to the Stockholder: To the address for notice set forth on the
last page hereof.
With a copy to: Gray Cary Ware & Freidenrich, P.C.
400 Hamilton Avenue
Palo Alto, CA 94301
Attn: Rod Howard, Esq.
-3-
<PAGE>
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and
-------------
construed and enforced in accordance with, the internal laws of the State of
Delaware (without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
7.8 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
7.9 Effect of Headings. The section headings herein are for
------------------
convenience only and shall not affect the construction or interpretation of this
Agreement.
* * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
PARENT
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDER:
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Stockholder's Address for Notice:
---------------------------------------------
---------------------------------------------
---------------------------------------------
______________ Outstanding Shares of Common Stock of
the Company
______________ Outstanding Shares of Common Stock of
the Company subject to outstanding stock options
***COMPANY VOTING AGREEMENT***
-5-
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned Stockholder of Network General Corporation, a Delaware
corporation (the "COMPANY"), hereby irrevocably appoints the directors on the
Board of Directors of McAfee Associates, Inc., a Delaware corporation
("PARENT"), and each of them, as the sole and exclusive attorneys and proxies of
the undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the voting of the Shares (as
defined in the Voting Agreement of even date between Parent and the Stockholder
(the "VOTING AGREEMENT")) on the matter described below (and on no other
matter), until such time as that certain Agreement and Plan of Reorganization
dated as of October13, 1997 (the "MERGER AGREEMENT"), among Parent, Mystery
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent ("MERGER SUB"), and the Company, shall be terminated in accordance with
its terms or the Merger (as defined in the Merger Agreement) becomes effective.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares and any and all other shares or securities issued or
issuable in respect thereof on or after the date hereof are hereby revoked and
no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement and
is granted in consideration of Parent entering into the Merger Agreement. The
attorneys and proxies named above will be empowered at any time prior to the
earlier of termination of the Merger Agreement and the date on which the Merger
becomes effective to exercise all voting rights (including, without limitation,
the power to execute and deliver written consents with respect to the Shares) of
the undersigned at every annual, special or adjourned meeting of the Company's
stockholders, and in every written consent in lieu of such a meeting, or
otherwise, to vote the Shares in favor of approval of the Merger and the Merger
Agreement.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to the earlier of termination of the
Merger Agreement and the date on which the Merger becomes effective, at every
annual, special or adjourned meeting of the Stockholders of the Company and in
every written consent in lieu of such meeting, in favor of approval of the
Merger and the Merger Agreement. The undersigned Stockholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: [__________], 1997
Signature of Stockholder: _____________________________
Print Name of Stockholder: _____________________________
***COMPANY PROXY***
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF MCAFEE ASSOCIATES, INC.
<TABLE>
<CAPTION>
Company Name State/Country of
- ------------ Incorporation
-------------
<S> <C>
FSA Subsidiary Corporation Delaware
FSA Combination Corporation Delaware
McAfee France S.A. France
McAfee Europe B.V. Netherlands
McAfee Software Development Austria
Center Gmbh
McAfee Canada Software, Inc. Canada (Ontario)
FSA Corporation Canada (Alberta)
McAfee (U.K.) Ltd. U.K.
McAfee Gmbh Germany
Kabushiki Kaisha Jade Japan
McAfee do Brazil Brazil
McAfee Compusul Consultoria e Brazil
Commercio de Informatica, Ltda.
Schuijer Holding B.V. Netherlands
Mystery Acquisition Corp. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in this
registration statement on Form S-4 of our reports dated January 20, 1997,
except for Note 11 for which the date is March 1, 1997, on our audit of the
consolidated financial statements and financial statement schedule of McAfee
Associates, Inc. as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996. We also consent to the reference
to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
San Jose, California
October 30, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference and use in this registration statement of our report dated April 18,
1997 included in Network General Corporation's Form 10-K for the year ended
March 31, 1997 and to all references to our firm included in this registration
statement.
ARTHUR ANDERSEN LLP
San Jose, California
October 30, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
October 30, 1997
McAfee Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Dear Sirs:
We hereby consent to the inclusion of the Registration Statement on Form S-4
of McAfee Associates, Inc. ("McAfee") relating to the proposed merger of
Mystery Acquisition Corp., a wholly owned subsidiary of McAfee with and into
Network General Corporation, of our opinion letter to the Board of Directors
of McAfee included as Annex B to the Joint Proxy Statement/Prospectus which is
a part of the Registration Statement, and to the references to such letter and
our firm name in such Joint Proxy Statement/Prospectus. In giving such
consent, we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations adopted by the Securities and Exchange
Commission thereunder nor do we admit that we are experts with respect to any
part of such Registration Statement within the meaning of the term "experts"
as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Nicholas D. Osborne
_____________________________________
<PAGE>
EXHIBIT 23.6
October 30, 1997
CONSENT OF HAMBRECHT & QUIST LLC
We hereby consent to the inclusion of our opinion letter dated October 13,
1997 to the Board of Directors of Network General Corporation as Annex C to
the Joint Proxy Statement/Prospectus which forms a part of the Registration
Statement relating to the proposed merger of Mystery Acquisition Corp., a
wholly-owned subsidiary of McAfee Associates, Inc., with and into Network
General Corporation and to the references to such opinion in the Joint Proxy
Statement/Prospectus. In giving such consent, we do not admit and we disclaim
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations issued by the Securities and Exchange Commission thereunder.
Hambrecht & Quist LLC
/s/ David Golden
By: _________________________________
David Golden
Managing Director
<PAGE>
EXHIBIT 99.1
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
MCAFEE ASSOCIATES, INC.
SPECIAL MEETING OF STOCKHOLDERS
P The undersigned stockholder of McAfee Associates, Inc., a Delaware
corporation (the "Company"), hereby acknowledges receipt of (1) the Notice of
R Special Meeting of Stockholders of the Company mailed on October 31, 1997,
and (2) Proxy Statement relating to the Special Meeting of Stockholders of
O the Company, and hereby appoints William L. Larson and Prabhat K. Goyal, and
each of them, proxies and attorneys-in-fact, with full power to each of
X substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the Special Meeting of Stockholders of the Company to be held
Y on December 1, 1997 at 8:00 a.m., local time, at the Westin Hotel, 5101 Great
America Parkway, Santa Clara, California 95054, and at an adjournment or
adjournments thereof, and to vote all shares of Common Stock and Series A
Preferred Stock which the undersigned would be entitled to vote, if then and
there personally present, on the matters set forth.
CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE. [SEE REVERSE SIDE]
<PAGE>
[X] Please mark votes as in this example.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ITEMS MENTIONED BELOW.
1. To vote upon the issuance of shares of the Common Stock, par value
$0.01 per share, of the Company ("Company Common Stock") to the stockholders of
Network General Corporation ("Network General") pursuant to the Agreement and
Plan of Reorganization dated as of October 13, 1997, as amended by the First
Amendment thereto dated as of October 22, 1997 (the "Reorganization
Agreement"), among the Company, Network General and Mystery Acquisition Corp., a
wholly-owned subsidiary of the Company ("Merger Sub"), providing for the merger
of Merger Sub with and into Network General (the "Merger").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To vote upon an amendment to the Second Restated Certificate of
Incorporation (the "Certificate") of the Company to change the corporate name of
the Company to "Network Associates, Inc.," contingent upon consummation of the
Merger.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To vote upon an amendment to the Certificate to increase the number of
authorized shares of the Company Common Stock by 200 million shares to 300
million shares (which, if approved, will be effective whether or not the Merger
is consummated).
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To vote upon amendments to the Company's 1997 Stock Incentive Plan to
(a) increase the number of shares of Company Common Stock authorized thereunder
by 3.4 million shares to 5.85 million shares and (b) eliminate the ability of
the Company's Board of Directors to grant options thereunder with an exercise
price less than fair market value of the Company Common Stock on the date of the
grant, each contingent upon consummation of the Merger.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
MARK HERE FOR ADDRESS CHANGE [ ]
AND NOTE AT LEFT
(This proxy should be marked, dated, signed by
each stockholder exactly as such stockholder's
name appears hereon, and returned promptly in
the enclosed envelope. Persons signing in a
fiduciary capacity should so indicate. If
shares are held by joint tenants or as
community property, both should sign.)
Signature: Date: Signature: Date:
--------------- --------- --------------- -----------
<PAGE>
Exhibit 99.2
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
NETWORK GENERAL CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
The undesigned stockholder of Network General Corporation, a Delaware
P corporation (the "Company"), hereby acknowledges receipt of (1) the Notice
of Special Meeting of Stockholders of the Company mailed on October 31,
1997, and (2) Proxy Statement relating to the Special Meeting of
R Stockholders of the Company, and hereby appoints Michael M. Cully and Scott
C. Neely, and each of them, proxies and attorneys-in-fact, with full power
to each of substitution, on behalf and in the name of the undersigned, to
O represent the undersigned at the Special Meeting of Stockholders of the
Company to be held on December 1, 1997 at 8:00 a.m., local time, at Hotel
Sofitel, 223 Twin Dolphin Drive, Redwood City, California 94065, and at any
X adjournment or adjournments thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote, if then and there
personally present, on the matters set forth on the reverse side.
Y
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
<PAGE>
PLEASE MARK
VOTES AS IN
[X] THIS EXAMPLE.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ITEM MENTIONED BELOW.
1. To approve and adopt and Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization, dated as of October 13, 1997, as [_] [_] [_]
amended by the First Amendment dated as of October 22,
1997 (the "Reorganization Agreement"), among the
Company, McAfee Associates, Inc. and Mystery Acquisition Corp., a wholly-
owned subsidiary of McAfee ("Merger Sub"), and all transactions
contemplated by the Reorganization Agreement, and to approve the merger of
Merger Sub with and into the Company pursuant to the Reorganization
Agreement.
MARK HER FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
(This proxy should be marked, dated, signed by each
stockholder exactly as such stockholder's name
appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint
tenants or as community property, both should sign.)
Signature: __________ Date: __________ Signature: ____________ Date: _________
<PAGE>
EXHIBIT 99.3
CONSENT OF HARRY SAAL
In accordance with Rule 438 promulgated under the Securities Act of 1933,
as amended, the undersigned hereby consents to the reference in the Registration
Statement on Form S-4 filed by McAfee Associates, Inc., a Delaware corporation
("McAfee"), to the undersigned being named as a director of McAfee upon the
consummation of the Merger described in such Registration Statement.
/s/ Harry J. Saal
--------------------------
Harry J. Saal
