<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETWORKS 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. STEPHEN T. WALKER EDWIN M. MARTIN, ESQ.
KURT J. BERNEY, ESQ. PRESIDENT AND CHIEF EXECUTIVE JAY G. FINKELSTEIN, ESQ.
JAN-MARC VAN DER SCHEE, ESQ. OFFICER PIPER & MARBURY L.L.P.
WILSON SONSINI GOODRICH & ROSATI TRUSTED INFORMATION SYSTEMS, INC. 1200 NINETEENTH STREET, NW
PROFESSIONAL CORPORATION 3060 WASHINGTON ROAD WASHINGTON, D.C. 20036
650 PAGE MILL ROAD GLENWOOD, MARYLAND 21738 (202) 861-3900
PALO ALTO, CA 94304 (301) 854-6889
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement 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
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par Value $0.01 per
share................................ 5,035,140 shares $20.531 $320,050,983 $94,415
===========================================================================================================================
</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant which
may be issued to former stockholders of Trusted Information Systems, Inc.
("TIS") pursuant to the Merger described herein giving effect to the
exercise of outstanding and exercisable options and shares expected to be
issued pursuant to TIS's Amended and Restated Employee Stock Option Plan,
TIS's Amended and Restated 1996 Directors Stock Option Plan and TIS's
Amended and Restated 1996 Stock Option Plan.
(2) Each share of TIS Common Stock will be converted into the right to receive
0.323 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 March 20, 1998.
Pursuant to Rule 457(f)(1), the maximum aggregate offering price is the
product of (i) $20.531, representing the average high and low price of TIS
Common Stock as reported on the Nasdaq National Market ("Nasdaq") on March
20, 1998, and (ii) up to 15,588,670 shares of TIS Common Stock to be
converted into shares of the Common Stock of Registrant.
(3) The amount of the registration fee includes $58,836 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 TIS of a preliminary Proxy
Statement/ Prospectus related to the proposed.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
TRUSTED INFORMATION SYSTEMS, INC.
PROXY STATEMENT
------------------------
NETWORKS ASSOCIATES, INC.
PROSPECTUS
------------------------
Networks Associates, Inc., a Delaware corporation ("Network Associates"),
and Trusted Information Systems, Inc., a Delaware corporation ("TIS"), have
entered into an Agreement and Plan of Reorganization, dated as of February 22,
1998, (the "Reorganization Agreement"), among Network Associates, Thor
Acquisition Corp., a wholly-owned subsidiary of Network Associates ("Merger
Sub"), and TIS. Pursuant to the Reorganization Agreement, Merger Sub will merge
with and into TIS, TIS will continue as the surviving corporation and will
become a wholly-owned subsidiary of Network Associates, and each outstanding
share of common stock of TIS, $0.01 par value ("TIS Common Stock"), will be
converted into the right to receive 0.323 of a share (the "Exchange Ratio") of
the common stock of Network Associates (all such actions collectively, the
"Merger").
This Proxy Statement/Prospectus is being furnished to stockholders of TIS
in connection with the solicitation of proxies by the TIS Board of Directors
(the "TIS Board") for use at the Special Meeting of TIS stockholders to be held
on , 1998, at the offices of Piper & Marbury L.L.P., 1200
Nineteenth Street, N.W., Washington, D.C. 20036, commencing at 8:00 a.m., local
time, and at any adjournment or postponement thereof (the "TIS Special
Meeting").
This Proxy Statement/Prospectus also constitutes the Prospectus of Network
Associates with respect to the common stock of Network Associates, par value
$0.01 (the "Network Associates Common Stock"), to be issued in the Merger in
exchange for outstanding shares of TIS Common Stock.
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS 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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE STOCKHOLDERS OF
TIS ARE URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/ PROSPECTUS
(INCLUDING THE ANNEXES HERETO) IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED
TO BEGINNING ON PAGE 11 UNDER "RISK FACTORS."
------------------------
This Proxy Statement/Prospectus and the accompanying proxy cards are first
being mailed to stockholders of TIS on or about March [ ], 1998.
The date of this Proxy Statement/Prospectus is [ ], 1998.
<PAGE> 3
Upon consummation of the Merger, each issued and outstanding share of TIS
Common Stock (other than shares owned by Network Associates, Merger Sub, or any
subsidiary of Network Associates) will be converted into the right to receive
0.323 of a share of Network Associates Common Stock and each outstanding option
to purchase TIS Common Stock under the stock option plans of TIS will be assumed
by Network Associates and will become an option to purchase that number of
shares of the Network Associates Common Stock as is equal (subject to rounding)
to the number of shares of TIS 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 TIS 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 TIS Common Stock will
thereafter cease to have any rights with respect thereto, except the right to
receive shares of Network Associates Common Stock.
Network Associates Common Stock is listed on the Nasdaq National Market
("Nasdaq") under the symbol NETA. It is a condition of the obligations of
Network Associates and TIS to the consummation of the Merger that the shares to
be issued in the Merger be approved for quotation on Nasdaq. Following
consummation of the Merger, TIS 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 February 20, 1998, 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 Network Associates Common Stock and TIS Common Stock
on Nasdaq were $62.50 per share and $12.63 per share, respectively. On March 23,
1998, the closing sale prices of the Network Associates Common Stock and TIS
Common Stock were $64.06 per share and $20 per share, respectively.
Because the Exchange Ratio is fixed, changes in the market price of Network
Associates Common Stock will affect the dollar value of the Network Associates
Common Stock to be received by stockholders of TIS in the Merger. Stockholders
of TIS are encouraged to obtain current market quotations for Network Associates
Common Stock and TIS Common Stock prior to the TIS Special Meeting.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS 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 NETWORK ASSOCIATES, TIS OR ANY OTHER PERSON.
THIS 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
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 NETWORK ASSOCIATES OR TIS SINCE THE DATE HEREOF, OR THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
Network Associates and TIS 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
<PAGE> 4
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. Network Associates Common Stock and TIS
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, TIS 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
Network Associates.
Under the rules and regulations of the SEC, the solicitation of proxies
from stockholders of TIS to approve and adopt the Reorganization Agreement and
to approve the Merger constitutes an offering of Network Associates Common Stock
to be issued in connection with the Merger. Accordingly, Network Associates 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 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 Network Associates
(File No. 0-20558) pursuant to the Exchange Act are incorporated by reference in
this Proxy Statement/Prospectus:
1. Network Associates' Annual Report on Form 10-K for the fiscal year
ended December 31, 1997; and
2. Network Associates' Current Reports on Form 8-K filed on February
10, 1998, February 12, 1998 and February 25, 1998; and
3. The description of Network Associates' Common Stock set forth in
Network Associates' registration statements filed pursuant to Section 12 of
the Exchange Act, and any amendment or report filed for the purpose of
updating any such description.
The following documents previously filed with the SEC by TIS (File No.
0-21067) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. TIS's Annual Report on Form 10-K for the fiscal year ended December
26, 1997, as amended on Form 10-K/A; and
2. TIS's Current Reports on Form 8-K filed on October 24, 1997,
October 27, 1997, December 24, 1997, and February 25, 1998.
All documents and reports subsequently filed by Network Associates and by
TIS pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus prior to the date of the TIS Special
Meeting shall be deemed to be incorporated by reference in this Proxy Statement/
Prospectus and to be part hereof from the dates of filing of such documents and
reports.
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.
<PAGE> 5
All information contained or incorporated by reference in this Proxy
Statement/Prospectus relating to Network Associates and Merger Sub has been
supplied by Network Associates and all such information relating to TIS has been
supplied by TIS.
THIS 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 PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, IN THE
CASE OF DOCUMENTS RELATING TO NETWORK ASSOCIATES, FROM NETWORK ASSOCIATES, 2805
BOWERS AVENUE, SANTA CLARA, CALIFORNIA 95051, ATTENTION: INVESTOR RELATIONS;
TELEPHONE NUMBER: (408) 988-3832, AND IN THE CASE OF DOCUMENTS RELATING TO TIS,
FROM TIS, 3060 WASHINGTON ROAD, GLENWOOD, MARYLAND 21738, ATTENTION: INVESTOR
RELATIONS; TELEPHONE NUMBER: (301) 854-6889. IN ORDER TO ASSURE TIMELY DELIVERY
OF THE DOCUMENTS PRIOR TO THE TIS SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE
MADE BY APRIL [--], 1998.
TRADEMARKS
This Proxy Statement/Prospectus contains trademarks of Network Associates
(including Net Tools, McAfee Total Virus Defense, PGP Total Network Security,
Sniffer Total Network Security and McAfee Total Service Desk) and TIS (including
Gauntlet, RecoverKey and Stalker) and may contain trademarks of others.
FORWARD-LOOKING STATEMENTS
OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS MADE IN THIS 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 TIS, 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 TIS STOCKHOLDERS SHOULD CAREFULLY
REVIEW.
<PAGE> 6
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............................................ 9
RISK FACTORS................................................ 11
COMPARATIVE PER SHARE DATA.................................. 27
COMPARATIVE MARKET PRICE DATA............................... 28
TIS SPECIAL MEETING......................................... 29
Date, Time and Place of TIS 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
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............. 31
Background of the Merger.................................. 31
Reasons for the Merger; TIS's Board Recommendation........ 34
Opinion of Financial Advisor.............................. 36
Certain Federal Income Tax Considerations................. 39
Governmental and Regulatory Approvals..................... 41
Accounting Treatment...................................... 41
No Appraisal Rights....................................... 41
TERMS OF THE MERGER......................................... 42
Effective Time............................................ 42
Manner and Basis of Converting Securities................. 42
Stock Ownership Following the Merger...................... 43
Conduct Following the Merger.............................. 43
Conduct of TIS's and Network Associates' Business Prior to
the Merger............................................. 44
Representations and Warranties............................ 46
No Solicitation........................................... 46
Termination Fee........................................... 47
Stock Options and Employee Benefits....................... 48
Interests of Certain Persons.............................. 48
Stock Option Agreement.................................... 49
Affiliate Agreements...................................... 50
Voting Agreements......................................... 51
Noncompetition Agreement.................................. 51
Conditions to the Merger.................................. 51
Termination of the Reorganization Agreement............... 53
COMPARISON OF CAPITAL STOCK................................. 54
Description of Network Associates Capital Stock........... 54
Description of TIS Capital Stock.......................... 55
Comparison of Rights of TIS and Network Associates
Stockholders........................................... 55
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......... 58
</TABLE>
i
<PAGE> 7
<TABLE>
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PAGE
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<S> <C>
NETWORKS ASSOCIATES, INC.................................... 64
Business.................................................. 64
Recent Developments....................................... 64
TRUSTED INFORMATION SYSTEMS, INC............................ 66
Business.................................................. 66
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 67
Overview.................................................. 67
The Commercial Division................................... 67
The Advanced Research and Engineering Division............ 67
Results of Operations..................................... 68
Quarterly Results of Operations........................... 70
Liquidity and Capital Resources........................... 71
Year 2000 Compliance Matters.............................. 72
ADDITIONAL MATTER BEING SUBMITTED TO A VOTE OF THE TIS
STOCKHOLDERS.............................................. 73
Proposal Two--Election of TIS Directors................... 73
TIS Directors to be Elected at the Special Meeting........ 73
TIS Directors Whose Terms Expire in 1999.................. 73
TIS Director Whose Term Expires in 2000................... 74
Recommendation of the TIS Board........................... 74
TIS Board of Directors and Committees..................... 74
TIS Executive Officers.................................... 75
TIS Executive Compensation................................ 76
Compensation Committee Report on TIS Executive
Compensation........................................... 77
TIS Compensation Committee Interlocks and Insider
Participation.......................................... 78
TIS Performance Graph..................................... 79
TIS Section 16(a) Beneficial Ownership Reporting
Compliance............................................. 79
TIS Principal Stockholders................................ 80
LEGAL MATTERS............................................... 81
EXPERTS..................................................... 81
STOCKHOLDER PROPOSALS....................................... 81
INDEX TO TIS FINANCIAL STATEMENTS........................... F-1
</TABLE>
ANNEX A AGREEMENT AND PLAN OF REORGANIZATION
ANNEX B OPINION OF J.P MORGAN SECURITIES INC.
ANNEX C STOCK OPTION AGREEMENT
ii
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this 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 Proxy Statement/Prospectus and in the information and documents annexed
hereto.
THE COMPANIES
Networks Associates, Inc.
Network Associates is a leading developer and provider of network security
and management software products. Network Associates has historically derived a
significant majority of its revenues from the licensing of its flagship McAfee
anti-virus products and Sniffer network fault and performance management
products. Network Associates is currently focusing its efforts on broadening its
revenue base by providing network security and management solutions to
enterprise customers, targeting in particular the Windows NT/Intel platform. In
furtherance of this strategy, Network Associates recently organized its products
into four product suites -- McAfee Total Virus Defense and PGP Total Network
Security and Sniffer Total Network Visibility and McAfee Total Service Desk.
These four product suites together form an integrated solution called "Net
Tools."
Networks Associates was formed in December 1997 as a result of the
strategic business combination of McAfee Associates, Inc. ("McAfee") and Network
General Corporation ("Network General"). Pursuant to this strategic combination,
Network General merged with a wholly owned subsidiary of McAfee, and McAfee
changed its legal name to "Networks Associates, Inc." and has since conducted
business using the name "Network Associates, Inc.," marketing products using,
among other names, Network Associates, McAfee and Network General. Network
Associates' principal executive offices are located at 2805 Bowers Avenue, Santa
Clara, California 95051. Its telephone number at that address is (408) 988-3832.
The proposed Merger will, among other things, broaden Network Associates'
suite of network security products. Similarly, Network Associates has agreed to
acquire Magic Solutions International, Inc. ("Magic Solutions"), a privately
held provider of internal help desk and asset management solutions. If
consummated, the Magic Solutions acquisition will broaden the McAfee Total
Service Desk suite of products. The Magic Solutions acquisition, which is
subject to customary conditions to closing (including Magic Solutions
stockholder approval), is expected to close early in the second quarter of 1998.
See "Networks Associates, Inc. -- Recent Developments" and "Risk
Factors -- Risks Associated with Network Associates Acquisitions Generally."
Trusted Information Systems, Inc.
TIS provides comprehensive security solutions for the protection of
computer networks, including global Internet-based systems, internal networks
and individual workstations and laptops, and is a leading provider of firewall
and intrusion detection products. TIS develops, markets, licenses and supports
the Gauntlet family of firewall products and the Stalker line of intrusion
detection products. These products allow customers to create "trusted" networks
that are protected from access, theft and damage by unauthorized users from
"untrusted" networks such as the Internet and also enable the creation of
virtual private networks through the encrypted transmission of information
across untrusted networks. TIS emphasizes the robustness of its security
solutions, its long experience with computer security and cryptography issues
and its ability to provide comprehensive solutions to customers. TIS also
emphasizes its strong reputation with corporate and government computer security
professionals in the United States and abroad as a pioneer in the field of
computer network security.
TIS is a Delaware corporation incorporated in May 1996. TIS's principal
executive offices are located at 3060 Washington Road, Glenwood, Maryland 21738.
Its telephone number at that address is (301) 854-6889.
1
<PAGE> 9
Thor Acquisition Corp.
Merger Sub is a Delaware corporation recently organized by Network
Associates 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 TIS
Date, Time, Place and Purpose
The TIS Special Meeting will be held at the offices of Piper & Marbury
L.L.P., 1200 Nineteenth Street, N.W., Washington, D.C. 20036 on [ ] at 10:00
a.m., local time. The purpose of the TIS Special Meeting is (i) to consider and
vote upon a proposal to approve and adopt the Reorganization Agreement and to
approve the Merger and (ii) to elect two directors to the TIS Board of Directors
with terms expiring in 2001 (the "TIS Board"). If the Merger is approved by the
TIS stockholders and the Merger is consummated, each of the directors on the TIS
Board immediately prior to the Effective Time will cease to be a director of TIS
at the Effective Time. See "TIS Special Meeting -- Date, Time and Place of TIS
Special Meeting" and "-- Purpose."
Record Date and Vote Required
Only TIS stockholders of record at the close of business on March 12, 1998
(the "TIS Record Date") are entitled to notice of and to vote at the TIS Special
Meeting. Under Delaware law, the Certificate of Incorporation of TIS and the
Bylaws of TIS, the affirmative vote of the majority of votes entitled to be cast
by the holders of TIS Common Stock outstanding as of the TIS Record Date is
required to approve and adopt the Reorganization Agreement and to approve the
Merger. The two director nominees receiving the highest number of affirmative
votes of the shares entitled to vote on such matter shall be elected as TIS
directors.
As of the TIS Record Date, there were approximately 253 stockholders of
record of TIS Common Stock and 13,882,789 shares of TIS Common Stock
outstanding, with each share entitled to one vote on the matters to be acted
upon at the TIS Special Meeting. See "TIS Special Meeting -- Vote Required."
As of the TIS Record Date, the executive officers and directors of TIS
owned approximately 32% of the outstanding shares of TIS Common Stock,
representing approximately 32% of the votes entitled to be cast by holders of
TIS Common Stock issued and outstanding as of the TIS Record Date. Mr. Stephen
T. Walker and Dr. Martha Branstad, both TIS directors and the two largest
stockholders of TIS, have each entered into a Voting Agreement with Network
Associates obligating them, among other things, to vote their shares of TIS
Common Stock in favor of the Merger. As of the TIS Record Date, Mr. Walker and
Dr. Branstad held in the aggregate approximately 31% of the outstanding TIS
Common Stock as of the TIS Record Date. Consequently, Stockholder Approval will
be obtained if holders of additional shares of TIS Common Stock representing
approximately 19% of the outstanding shares of TIS Common Stock vote in favor of
the approval and adoption of the Reorganization Agreement and approval of the
Merger. See "Terms of the Merger -- Voting Agreements" and "-- Conditions to the
Merger."
TIS BOARD RECOMMENDATIONS
The TIS Board, by unanimous vote of the directors present and voting at a
special meeting of the TIS Board on February 22, 1998 (which included all
directors except Dr. Gerald J. Popek, who recused himself from all deliberations
and votes regarding the Merger) approved the Reorganization Agreement and the
transactions contemplated thereby and determined that the Merger is fair to, and
in the best interests of, TIS and its stockholders. After careful consideration,
the TIS Board has approved the Reorganization Agreement and has determined that
the Merger is fair to, and in the best interests of TIS and its stockholders.
The TIS Board recommends that holders of shares of TIS Common Stock vote FOR (i)
approval and adoption of the Reorganization Agreement and the Merger and (ii)
the election of the director nominees named herein. If the Merger is approved by
the TIS stockholders and the Merger is consummated, each of the directors on the
TIS
2
<PAGE> 10
Board immediately prior to the Effective Time will cease to be a director of TIS
at the Effective Time. Holders of shares of TIS Common Stock should read this
Proxy Statement/Prospectus carefully prior to voting.
NETWORK ASSOCIATES' REASONS FOR THE MERGER
The Board of Directors of Network Associates (the "Network Associates
Board") has approved the Reorganization Agreement and has identified several
potential benefits of the Merger which they believe will contribute to the
success of both Network Associates and TIS following the Merger. As computer
networks have proliferated and become more complex, management information
systems directors and other information technology professionals are continually
seeking integrated solutions for their network security and management needs
from a limited number of vendors. The combination of Network Associates and TIS
creates a complementary and comprehensive suite of product offerings to serve
the enterprise network security market. Following the Merger, the combined
company will be able to offer industry-recognized security products that address
multiple security needs, including firewalls, encryption, authentication,
intrusion detection and anti-virus solutions. Other potential benefits include
the opportunity (i) to market Network Associates' broader suite of network
security and management products under the Net Tools product umbrella to TIS's
existing customer base; (ii) to leverage Network Associates' extensive customer
base and channels of distribution in connection with the sales and marketing of
TIS's products; (iii) to expand Network Associates' professional services
organization; and (iv) to realize other synergies and cost savings following the
Merger. See "Approval of the Merger and Related Transactions -- Background of
the Merger" and "-- Reasons For the Merger; TIS's Board Recommendation."
TIS'S REASONS FOR THE MERGER
The TIS Board's decision to approve the Reorganization Agreement and the
Merger was based in significant part upon its assessment of the trends
developing in the network security software industry, and the changes which may
come about in such market as a result of increasing competition, consolidation
and customer demands. The TIS Board believes that companies which are able to
provide customers with an integrated software security solution, will be
better-positioned to compete in such environment in the long term. In addition,
the TIS Board believes that TIS will face increased competition as larger
network security and management companies expand their suite of product
offerings through acquisition and/or internal development to include a broad
array of security products and as customers increasingly seek to purchase total
solutions from a limited number of vendors.
The TIS Board identified several other potential strategic benefits of the
Merger which TIS believes will contribute to the success of the combined
companies including (i) the potential realization of synergies and cost savings
associated with combining the underlying organizations and technologies of TIS
and Network Associates; (ii) the opportunity for TIS to leverage Network
Associates' significantly greater financial resources and marketing
capabilities; (iii) the opportunity to greatly increase the available sales
force to market TIS's products by marketing such products through Network
Associates' extensive direct sales force; (iv) the opportunity to broaden and
expand TIS's international distribution channels by using Network Associates'
extensive sales and distribution presence internationally; and (v) the
opportunity to market TIS's products to Network Associates' larger and generally
different installed base of customers.
TIS further evaluated the merits of the Network Associates Common Stock and
concluded that the Network Associates Common Stock may have appreciation
potential in the long term and represent a more liquid investment than the TIS
Common Stock and is followed by a much greater number of stock analysts. The TIS
Board also considered the opinion of its financial advisers, other potential
benefits and synergies that may result from Merger and interests that certain
persons may have in the Merger. A more complete description of the primary
factors considered and relied upon by the TIS Board in reaching its
recommendation are referred to in "Approval of the Merger and Related
Transactions -- Background of the Merger" and "-- Reasons For the Merger; TIS's
Board Recommendation" and "Terms of the Merger -- Interests of Certain Persons."
3
<PAGE> 11
FAIRNESS OPINION
J.P. Morgan Securities Inc. ("J.P. Morgan") has delivered to the TIS Board
its written opinion, dated February 22, 1998, to the effect that, as of such
date, the consideration to be paid to TIS's stockholders in the Merger is fair,
from a financial point of view, to such stockholders. The full text of the
opinion of J.P. Morgan, which sets forth assumptions made and matters
considered, is attached as Annex B to this Proxy Statement/ Prospectus and is
incorporated herein by reference. Holders of TIS Common Stock are urged to, and
should, read such opinion in its entirety. See "Approval of the Merger and
Related Transactions -- Opinion of TIS's Financial Advisor" and Annex B hereto.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the combined businesses of Network Associates and TIS.
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 TIS
Common Stock on the exchange of their shares of TIS Common Stock solely for
shares of Network Associates Common Stock. As a condition to the consummation of
the Merger, each of Network Associates and TIS 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 TIS 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 March 13, 1998 Network Associates and TIS 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 Network Associates and TIS. The
Merger is also subject to 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 Network Associates of
letters at the closing of the Merger from Coopers & Lybrand L.L.P., Network
Associates' independent accountants, and Ernst & Young LLP, TIS's independent
public accountants, regarding the firms' concurrence with Network Associates
management's and TIS 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 TIS and TIS will become a wholly-
4
<PAGE> 12
owned subsidiary of Network Associates. 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 TIS with
TIS remaining as the surviving corporation. As a result of the Merger, each
outstanding share of TIS Common Stock, other than shares owned by Merger Sub,
Network Associates or any wholly-owned subsidiary of Network Associates, will be
converted into the right to receive 0.323 of a share (the "Exchange Ratio") of
Network Associates Common Stock, and each outstanding option to purchase TIS
Common Stock under TIS's stock option plans (each, a "TIS Common Stock Option")
will be assumed by Network Associates (each, an "Assumed Option") and will
become an option to purchase that number of shares of Network Associates Common
Stock as is equal (subject to rounding) to the number of shares of TIS 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
TIS Common Stock at which such TIS 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 February 20, 1998, 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 Network Associates Common Stock and TIS Common Stock
on Nasdaq were $62.50 and $12.63, respectively. On March 23, 1998, the closing
prices per share of Network Associates Common Stock and TIS Common Stock on
Nasdaq were $64.06 and $20.00, respectively. See "Comparative Market Price
Data." Because the Exchange Ratio is fixed, changes in the market price of
Network Associates Common Stock will affect the market value of the Network
Associates Common Stock to be received by stockholders of TIS in the Merger. TIS
stockholders are encouraged to obtain current market quotations for Network
Associates Common Stock and TIS Common Stock prior to the TIS Special Meeting.
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 Network Associates
and TIS 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 [ ] 1998. See "Terms of the
Merger -- Effective Time."
Exchange of TIS Stock Certificates; Assumption of TIS Options
Promptly after the Effective Time, Network Associates, acting through
Boston EquiServe as its exchange agent (the "Exchange Agent"), will deliver to
each TIS 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 TIS Common Stock. CERTIFICATES SHOULD NOT BE
SURRENDERED BY THE HOLDERS OF TIS COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective Time, each
outstanding TIS Common Stock option will be assumed by Network Associates 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, Network Associates will file a
registration statement on Form S-8 under the Securities Act covering the shares
of Network Associates Common Stock issuable with respect to the Assumed Options.
See "Terms of the Merger -- Manner and Basis of Converting Shares."
5
<PAGE> 13
Stock Ownership Following the Merger
Based upon the number of shares of TIS Common Stock outstanding as of
February 28, 1998, an aggregate of approximately 4.5 million shares of Network
Associates Common Stock will be issued to TIS stockholders in the Merger, and
Network Associates will assume TIS options in exchange for options to purchase
up to approximately 551,000 additional shares of Network Associates Common
Stock. Based upon the number of shares of Network Associates Common Stock issued
and outstanding as of February 28, 1998, and after giving effect to the issuance
of Network Associates Common Stock as described in the previous sentence, the
TIS Common Stock outstanding immediately prior to the Merger would be converted
into, and have voting power with respect to, approximately 6.3% of Network
Associates' total issued and outstanding shares, the holders of former TIS
options would hold options exercisable for less than 0.1% Network Associates'
total issued and outstanding shares (assuming the exercise of only such former
TIS options). The foregoing numbers of shares and percentages are subject to
change in the event that the capitalization of either Network Associates or TIS
changes subsequent to February 28, 1998 and prior to the Effective Time, and
there can be no assurance as to the actual capitalization of Network Associates
or TIS at the Effective Time or of Network Associates at any time following the
Effective Time. See "Terms of the Merger -- Stock Ownership 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, TIS (and each of its subsidiaries) has agreed, except (i) as
indicated in the disclosure schedule delivered by TIS to Network Associates in
connection with the Reorganization Agreement or (ii) to the extent that Network
Associates 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. TIS has agreed to promptly notify Network
Associates of any material event involving its business or operations.
Furthermore, except as provided in its disclosure schedules, TIS has agreed that
it will not, without the prior written consent of Network Associates, perform or
engage in certain activities in the conduct of its business and the business of
its subsidiaries. Network Associates has agreed that, among other things, it
will not, without the prior consent of TIS, enter into certain acquisition
transactions. See "Terms of the Merger -- Conduct of TIS's and Network
Associates' Business Prior to the Merger."
No Solicitation
Under the terms of the Reorganization Agreement, TIS 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. TIS has agreed that if the Merger is not consummated as a
result of certain specified events, it will pay to Network Associates a
termination fee of $9 million. See "Terms of the Merger -- Termination of the
Reorganization Agreement" and "-- Termination Fee."
Conditions to the Merger
Consummation of the Merger is subject to certain conditions, including: (i)
certain approvals by the stockholders of TIS 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 Merger;
6
<PAGE> 14
(iv) receipt by Network Associates and TIS 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 Network Associates of
letters from Network Associates' and TIS's independent public accountants
regarding the firms' respective concurrence with Network Associates management's
and TIS 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 of the shares of Network Associates Common Stock to be issued to TIS
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 Network Associates or
TIS; and (x) receipt by TIS of certain consents, waivers or approvals from third
parties as set forth in the disclosure schedules of TIS. See "Terms of the
Merger -- Conditions to the Merger."
CERTAIN RELATED ACTIONS
Stock Option Agreement
As an inducement to Network Associates to enter into the Merger Agreement,
TIS entered into the Stock Option Agreement. A copy of the Stock Option
Agreement is attached as Annex C to this Proxy Statement/Prospectus. Pursuant to
the Stock Option Agreement, TIS granted to Network Associates an irrevocable
option (the "Option") to acquire up to a number of shares of TIS Common Stock
equal to 19.9% of the issued and outstanding shares (the "Option Shares") as of
the date, if any, upon which an Exercise Event (as defined) occurs, (i) by
paying cash at a price of $20.00 per share (the "Exercise Price") and/or, at
Network Associates' election, (ii) by exchanging therefor Network Associates
Common Stock, at a rate for each Option Share, of a number of shares of Network
Associates Common Stock equal to the Exercise Price divided by the average
closing sale prices during the previous 30 trading days of Network Associates
Common Stock on the Nasdaq National Market immediately preceding the date of the
closing of the particular Option exercise. See "Terms of the Merger -- Stock
Option Agreement and Annex C hereto."
Affiliate Agreements
Each of the members of the TIS Board and certain officers of TIS have
entered into an agreement restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of TIS Common Stock
held by him or her prior to the Merger and the shares of Network Associates
Common Stock received by him or her in the Merger so as to comply with the
requirements of applicable federal securities 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
Mr. Walker and Dr. Branstad, both TIS directors and the two largest TIS
stockholders, have entered into Voting Agreements. Pursuant to these Voting
Agreements, which are irrevocable, such persons have agreed, among other things,
to vote all shares of TIS Common Stock of which they have beneficial ownership
or acquire beneficial ownership prior to the termination of the Voting
Agreements (i) in favor of approval and adoption of the Reorganization Agreement
and approval of the Merger and (ii) against approval of any proposal made in
opposition to or in competition with the consummation of the Merger or certain
actions which may impede, delay, discourage or adversely affect the Merger and
the transactions contemplated thereby. In addition, Mr. Walker and Dr. Branstad
have granted an irrevocable proxy to the Network Associates Board of Directors
to vote their shares in favor of approval of the Reorganization Agreement and
the Merger. Network Associates has Voting Agreements and proxies in respect of
approximately 31% of the outstanding TIS Common Stock. See "Terms of the
Merger -- Conditions to the Merger" and "-- Voting Agreements."
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<PAGE> 15
Noncompetition Agreement
Mr. Walker has entered into a Noncompetition Agreement with Network
Associates providing that, for the period of the longer of (i) twenty-four (24)
months from the Effective Time and (ii) twelve (12) months after the termination
of any employment arrangement with Network Associates or any subsidiary after
the Closing Date, he will not directly or indirectly own, manage, control,
participate in, consult with, render services for, allow his name to be used in
connection with or in any manner engage in any business directly competing with
the businesses of TIS or any of its subsidiaries as such businesses exist or are
in process of development on the Closing Date or otherwise engage in any network
security, firewall, encryption and network security policy management business,
in each case in certain geographic areas. Mr. Walker has also agreed to certain
restrictions regarding solicitation of employees, customers and other business
relations of Network Associates and TIS. See "Terms of the
Merger -- Noncompetition Agreement."
Interests of Certain Persons in the Merger
In considering the recommendation of the TIS Board with respect to the
Reorganization Agreement and the Merger, holders of TIS Common Stock should be
aware that certain directors and executive officers of TIS have certain
interests in the Merger that are in addition to the interests of holders of TIS
Common Stock generally. See "Terms of the Merger -- Interests of Certain
Persons."
NO APPRAISAL RIGHTS
TIS 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, TIS stockholders who do not wish to receive Network Associates
Common Stock in exchange for their shares of TIS Common Stock must liquidate
their investment by selling their TIS Common Stock prior to the consummation of
the Merger.
MARKET AND PRICE DATA
Network Associates Common Stock is traded on Nasdaq under the symbol NETA.
On February 20, 1998, the last trading day before public announcement of the
execution of the Reorganization Agreement, the closing price of Network
Associates Common Stock as reported on Nasdaq was $62.50 per share. On March 23,
1998, the closing price of Network Associates Common Stock as reported on Nasdaq
was $64.06 per share. There can be no assurance as to the actual price of
Network Associates 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."
TIS Common Stock is traded on Nasdaq under the symbol TISX. On February 20,
1998, the last trading day before public announcement of the execution of the
Reorganization Agreement, the closing price of TIS Common Stock as reported on
Nasdaq was $12.63 per share. On March 23, 1998, the closing price of TIS Common
Stock as reported on Nasdaq was $20 per share. There can be no assurance as to
the actual price of TIS 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, TIS 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 Network
Associates Common Stock will affect the market value of the Network Associates
Common Stock to be received by stockholders of TIS in the Merger. TIS
stockholders are encouraged to obtain current market quotations for Network
Associates Common Stock and TIS Common Stock prior to the TIS Special Meeting.
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<PAGE> 16
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected historical annual financial information of Network
Associates and TIS has been derived from their respective audited historical
financial statements and should be read in conjunction with such consolidated
financial statements and notes thereto. The consolidated financial statements
for Network Associates for the three years ended December 31, 1997 are
incorporated by reference in this Proxy Statement/Prospectus, and the
consolidated financial statements for TIS for the years ended, December 29,
1995, December 27, 1996 and December 26, 1997 are included elsewhere in this
Proxy Statement/Prospectus. The selected pro forma combined financial
information is derived from the unaudited pro forma combined condensed financial
statements included in this Proxy Statement/Prospectus, and should be read in
conjunction with such unaudited pro forma financial statements and the notes
thereto. 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.
NETWORK ASSOCIATES SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue................................. $145,939 $192,692 $278,910 $421,794 $612,193
Income from operations...................... 27,265 35,053 59,696 105,846 18,221
Net income (loss)........................... 19,782 28,016 42,341 64,110 (28,356)
Net income (loss) per share -- diluted...... $ 0.32 $ 0.43 $ 0.62 $ 0.89 $ (0.41)
Common and common stock equivalent shares
used in per share
calculation -- diluted.................... 61,768 64,771 68,693 72,221 68,748
</TABLE>
NETWORK ASSOCIATES SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Working capital............................. $ 88,451 $133,130 $180,673 $246,671 $201,286
Total assets................................ 204,941 269,947 327,350 457,756 601,931
Deferred revenue and taxes.................. 34,256 48,149 53,584 58,921 82,650
Total equity................................ 150,272 202,498 243,659 328,923 359,759
</TABLE>
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<PAGE> 17
TIS SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 29, DECEMBER 27, DECEMBER 26,
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue........................ $8,791 $13,117 $18,090 $27,375 $42,223
Income (loss) from operations...... 192 1,271 2,352 (4,711) (11,522)
Net income (loss).................. 35 675 1,344 (3,211) (8,564)
Net income (loss) per
share -- diluted................. $ 0.00 $ 0.09 $ 0.17 $ (0.32) $ (0.63)
Common and common stock
equivalent shares used in per
share calculation -- diluted..... 7,503 7,660 8,019 9,952 13,532
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, DECEMBER 29, DECEMBER 27, DECEMBER 26,
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE
SHEET DATA:
Working capital.................... $ (68) $ 400 $ 410 44,364 $34,259
Total assets....................... 4,412 5,229 10,528 59,955 53,768
Deferred revenue and taxes......... 17 12 1,262 2,683 3,447
Total stockholders' equity......... 793 1,467 2,635 49,099 40,733
</TABLE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $297,000 $449,169 $654,416
Income from operations...................................... 62,048 101,135 6,699
Net income (loss)........................................... 43,685 60,899 (36,920)
Net income (loss) per share -- diluted...................... $ 0.61 $ 0.81 $ (0.50)
Common and common stock equivalent shares used in per share
calculation -- diluted.................................... 71,283 75,435 73,119
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $229,146
Total assets................................................ 655,699
Deferred revenue and taxes.................................. 86,097
Total stockholders' equity.................................. 394,092
</TABLE>
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<PAGE> 18
RISK FACTORS
The following factors should be considered carefully by holders of TIS
Common Stock in evaluating whether to approve and adopt the Reorganization
Agreement and to approve the Merger. These factors should be considered in
conjunction with the other information included or incorporated by reference in
this 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
Network Associates and TIS will require substantial attention from management.
The anticipated benefits of the Merger will not be achieved unless the
operations of TIS are successfully combined with those of Network Associates 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
Network Associates' 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. The diversion of the
attention of management from the day-to-day operations of Network Associates, 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 Network Associates. The difficulties of integrating Network
Associates and TIS may also be compounded by Network Associates' pending
acquisition of Magic Solutions or, subject to the limitations set forth in the
Reorganization Agreement, any other acquisition transaction Network Associates
may enter into.
Risks Associated with Fixed Exchange Ratio. As a result of the Merger, each
outstanding share of TIS Common Stock will be converted into the right to
receive 0.323 of a share of Network Associates Common Stock. Because the
Exchange Ratio is fixed, it will not increase or decrease due to fluctuations in
the market price of either Network Associates Common Stock or TIS Common Stock.
The specific market value of the consideration to be received by TIS
stockholders in the Merger will, therefore, depend on the market price of
Network Associates Common Stock on and after the Effective Time. In the event
that the market price of Network Associates Common Stock decreases or increases
prior to the Effective Time, the market value of Network Associates Common Stock
to be received by TIS stockholders in the Merger would correspondingly decrease
or increase. The market prices of Network Associates Common Stock and TIS Common
Stock as of a recent date are set forth herein under "Summary -- Market and
Price Data," and "Comparative Market Price Data." TIS stockholders are advised
to obtain recent market quotations for Network Associates Common Stock and TIS
Common Stock. Network Associates Common Stock and TIS Common Stock historically
have been subject to substantial price volatility. No assurance can be given as
to the market prices of Network Associates Common Stock or TIS Common Stock at
any time before the Effective Time or as to the market price of the common stock
of Network Associates 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
Network Associates and TIS. Excluding costs associated with combining the
operations of the two companies, pre-tax expenses are estimated at approximately
$10 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 of such expenses or that unanticipated
contingencies will not occur that will substantially increase the costs of
combining the operations of the two
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companies. In any event, costs associated with the Merger are expected to
negatively impact results of operations in the quarter ending June 30, 1998 and
possibly the quarter ending September 30, 1998.
Dependence on Retention and Integration of Key Employees. The success of
Network Associates and TIS after the Merger is dependent, in part, on the
retention and integration of key management, technical, marketing, sales and
customer support personnel of TIS. TIS has entered into separation arrangements
with certain members of senior management. See "Terms of the Merger -- Interests
of Certain Persons." Network Associates and TIS believe that the success of the
Merger 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 Network Associates prior to or for any specified
period after the proposed Merger. The loss of such services could adversely
affect Network Associates' business, financial condition and results of
operations.
RISKS RELATED TO BUSINESS AND OPERATIONS
Variability of Quarterly Operating Results. Each of Network Associates' and
TIS's results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and their future results of operations could
fluctuate significantly from quarter to quarter and from year to year.
Network Associates' and TIS's net revenues and operating results may vary
from quarter to quarter due to a number of reasons, including (i) the volume and
timing of new orders and renewals, (ii) distributor inventory levels and return
rates; (iii) changes in the proportion of revenues attributable to licenses and
consulting fees; (iv) the introduction of new products, product upgrades or
updates by Network Associates or its competitors; (v) changes in product mix;
(vi) changes in product prices and pricing models; (vii) seasonality; (viii)
trends in the computer industry; (ix) general economic conditions (such as the
recent economic turbulence in Asia); (x) extraordinary events such as
acquisitions or litigation; and (xi) the occurrence of unexpected events. The
operating results of many software companies reflect seasonal trends, and
Network Associates' and TIS'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.
Although Network Associates has experienced significant growth in net
revenue and net income (before acquisition and other related costs) in absolute
terms, Network Associates' growth rate has slowed in recent periods. Network
Associates has experienced increased price competition for its products and
Network Associates expects competition to increase in the near-term, which may
result in reduced average selling prices for Network Associates' 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), Network Associates' historic
revenue growth rate will be difficult to sustain or increase. To the extent
these trends continue, Network Associates' results of operations could be
materially adversely affected. Renewals have historically accounted for a
significant portion of Network Associates' net revenue; however, there can be no
assurance that Network Associates will be able to sustain historic renewal rates
for its products in the future. Risks related to Network Associates' recent
change in business strategies could also cause fluctuations in operating results
and could make comparisons with historic operating results and balances
difficult or not meaningful. See "-- Risks Related to Certain Network Associates
Business Strategies."
The timing and amount of Network Associates' and TIS's revenues are subject
to a number of factors that make estimating operating results prior to the end
of a quarter uncertain. Neither Network Associates nor TIS expects to maintain a
significant level of backlog and, as a result, product revenues in any quarter
will be dependent on contracts entered into or orders booked and shipped in that
quarter. During 1997, Network Associates generally experienced a significant
level of order receipts toward the end of the last month of a quarter, resulting
in a high percentage of revenue shipments during the last month of a quarter,
which makes predicting revenues more difficult. The timing of closing larger
orders increases the risks of quarter-to-quarter fluctuation. In addition, to
the extent that Network Associates is successful in licensing larger product
suites under the Net Tools umbrella (particularly to large enterprise and
national accounts), the size of its orders
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and the length of its sales cycle are likely to increase. If orders forecasted
for a specific customer for a particular quarter are not realized or revenues
are not otherwise recognized in that quarter, operating results for that quarter
could be materially adversely affected.
The trading prices of Network Associates Common Stock and TIS 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, industry
analysts or investors could result in an immediate and adverse effect on the
market price of Network Associates' Common Stock. Network Associates may not
discover, or be able to confirm, revenue or earnings shortfalls until the end of
a quarter, which could result in an immediate and adverse effect on the price of
Network Associates Common Stock.
Risk of Inclusion of Network Management and Security Functionality in
Hardware and Other Software. In the future, vendors of hardware and of operating
system software or other software (such as firewall or electronic mail software)
may continue to enhance their products or bundle separate products to include
functionality that currently is provided primarily by network security and
management software. Such enhancements may 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, Cisco Systems, Inc. ("Cisco") recently incorporated a
firewall in certain of its hardware products and Microsoft Corporation
("Microsoft") introduced limited anti-virus functionality into its MS-DOS
versions in 1993. The widespread inclusion of the functionality of Network
Associates' and TIS's products as standard features of computer hardware or of
operating system software or other software could render Network Associates' and
TIS's products obsolete and unmarketable, particularly if the quality of such
functionality were comparable to that of Network Associates' or TIS's products.
Furthermore, even if network security and/or management functionality provided
as standard features by hardware providers or operating systems or other
software is more limited than that of Network Associates' or TIS'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
Network Associates or TIS, as applicable, 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, their business,
financial condition and results of operations would be materially adversely
affected.
Risks Associated with Network Associates Recent Acquisitions. In addition
to risks described under "-- Risks Associated with Network Associates
Acquisitions Generally," Network Associates faces significant risks associated
with its recent combination with Network General and other recent acquisitions
(including the acquisitions in December 1997 of Pretty Good Privacy, Inc.
("PGP") and Helix Software Company ("Helix")). There can be no assurance that
Network Associates will realize the desired benefits of these transactions. In
order to successfully integrate these companies, Network Associates must, among
other things, continue to attract and retain key management and other personnel;
integrate, both from an engineering and a sales and marketing perspective, the
acquired products (including Network General's Sniffer and CyberCop products,
PGP's encryption products and Helix's utilities products) into its suite of
product offerings; integrate and develop a cohesive focused direct and indirect
sales force for its product offerings; consolidate duplicate facilities; and
develop name recognition for its new name. The diversion of the attention of
management from the day-to-day operations of Network Associates, or difficulties
encountered in the integration process, could have a material adverse effect on
Network Associates' business, financial condition and results of operations. See
"-- Need to Develop Enterprise and National Accounts Sales Force and Security
Products Sales Force; Risks Related to Direct Sales Force."
During 1997, Network Associates incurred significant non-recurring charges
associated with Network General combination and the acquisitions of PGP and
Helix. There can be no assurance that Network Associates will not incur
additional material charges in subsequent quarters to reflect additional costs
associated with these transactions and with respect to its name change and the
marketing of its products under the "Network Associates" name.
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Risks Related to Certain Network Associates Business Strategies. Network
Associates has historically derived a significant majority of its revenues from
the licensing of its flagship anti-virus products and Sniffer products. See
"-- Dependence on Revenue from Flagship Anti-Virus and Sniffer Products."
Network Associates is currently focusing its efforts on broadening its revenue
base by providing network security and management solutions to enterprise
customers, targeting in particular the Windows NT/Intel platform. In furtherance
of this strategy, Network Associates recently organized its products into four
product suites -- McAfee Total Virus Defense, PGP Total Network Security, and
Sniffer Total Network Visibility and McAfee Total Virus Defense. These four
product suites together form an integrated solution called "Net Tools" which
utilizes a new pricing model. There can be no assurance that potential customers
will respond favorably to the modified pricing structure and the lack of a
favorable response could materially adversely affect Network Associates'
operating results. Although Network Associates will continue to offer perpetual
licenses with annual support and maintenance contracts for its Sniffer products,
it is currently developing a subscription licensing model for those products. In
addition, in an effort to increase total Sniffer unit sales Network Associates
intends to develop software only versions of certain Sniffer products -- meaning
that Network Associates would no longer sell the hardware components contained
in the current Sniffer products. There can be no assurance that Network
Associates can produce a software only Sniffer product on a timely basis or at
all, that customers will not continue to require that Network Associates provide
the associated hardware platform and components, that total unit licenses of
Sniffer products will increase over previous levels or that customers will react
favorably to the subscription pricing model for Sniffer products. To the extent
that customers do license Sniffer products on a two-year subscription basis or
license significant amounts of software only Sniffer products, Network
Associates' operating results and financial condition would likely be affected.
In the case of subscription licenses, Network Associates would, among other
things, expect an increase in deferred revenues related to the service portion
of the two-year Sniffer license that would be capitalized on Network Associates'
balance sheet. In the initial year of the license, the corresponding revenue
would be lower than if the license were perpetual. In the case of the software
only Sniffer product, for any individual license, Network Associates would
expect lower total revenues and a higher overall gross margin related to the
transaction, as Network Associates would not be selling the corresponding
hardware component. Currently, the hardware component has a lower gross margin
than the total product gross margin.
As part of the Net Tools concept, Network Associates is in the process of
designing a centralized console from which the various component suites can be
operated, administered and maintained utilizing a common look and feel. Network
Associates faces significant engineering challenges related to these efforts. In
addition, Network Associates faces significant engineering and other challenges
related to the integration of its various security products (such as its
recently acquired PGP encryption products, Network General CyberCop product and
any products acquired in the Merger) into a marketable suite of products and the
development of a software only Sniffer product. Success of Network Associates'
Net Tools suite strategy will also depend, in part, upon successful development
and coordination of Network Associates' sales force; on successful development
of a national accounts sales force and an effective indirect sales channel for
Network Associates' Sniffer product and security products; and on the
development and expansion of an effective professional services organization.
See "-- Risks Associated with Recent Network Associates Acquisitions," "-- Risks
Associated with Network Associates Acquisitions Generally," "-- Need to Develop
Enterprise and National Accounts Sales Force and Security Products Sales Force;
Risks Related to Direct Sales Force."
The foregoing factors, individually or in the aggregate, could materially
adversely affect Network Associates' operating results and could make comparison
of historic operating results and balances difficult or not meaningful.
Risks Associated with Acquisitions Generally. The software industry has
experienced and is expected to continue to experience a significant amount of
consolidation. In addition, it is expected that Network Associates will grow
internally and through strategic acquisitions in order, among other things, to
expand the breadth and depth of its product suites and to build its professional
services organization. Network Associates continually evaluates potential
acquisitions of complementary businesses, products and technologies, and Network
Associates currently has an acquisition pending to acquire Magic Solutions. See
"Networks Associates, Inc. -- Pending Magic Solutions Acquisition." In addition
to the combination with Network
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General in December 1997, Network Associates has consummated a series of
significant acquisitions since 1994, including the acquisitions of PGP and Helix
in December 1997, Cinco Networks, Inc. in August 1997, 3DV Technology, Inc. in
March 1997, FSA Corporation of Canada in August 1996, Vycor Corporation in
February 1996, Saber Software Corporation, Inc. in August 1995 and ProTools,
Inc. in January 1994. In addition, since 1995 Network Associates has acquired a
number of its international distributors, including distributors in Australia,
Brazil, Japan and The Netherlands and is currently investigating acquisitions of
additional foreign distributors. Past acquisitions have consisted of, and future
acquisitions will likely include, acquisitions of businesses, interests in
businesses and assets of businesses. Any acquisition, depending on its size,
could result in the use of a significant portion of Network Associates'
available cash or, if such acquisition is made utilizing Network Associates'
securities, could result in significant dilution to Network Associates'
stockholders, and could result in the incurrence of significant acquisition
related charges to earnings. Acquisitions by Network Associates 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 Network Associates. Furthermore, there can be no
assurance that any products acquired in connection with any such acquisition
will gain acceptance in Network Associates' markets or that Network Associates
will obtain the anticipated or desired benefits of such transactions.
On October 16, 1997, TIS acquired Haystack Laboratories, Inc. ("Haystack"),
a privately held company which develops and markets Stalker and WebStalker
intrusion detection and monitoring software products. The Haystack acquisition
was accounted for as a pooling of interests. In connection with that
acquisition, TIS faced many of the risks associated with acquisitions as
described herein.
Achieving the anticipated benefits of an acquisition will depend, in part,
upon whether the integration of the acquired business, products or technology is
accomplished in an efficient and effective manner, and there can be no assurance
that this will occur. Moreover, successful acquisitions in the high technology
industry may be more difficult to accomplish than in other industries. Combining
a merged or acquired company requires, among other things, integration of
product offerings and coordination of sales and marketing and research and
development efforts. There can be no assurance that such an integration can be
accomplished smoothly or successfully. The difficulties of such integration may
be increased by the necessity of coordinating geographically separated
organizations, the complexity of the technologies being integrated, and the
necessity of integrating personnel with disparate business backgrounds and
combining two different corporate cultures. The integration of operations
following an acquisition requires the dedication of management resources that
may distract attention from the day-to-day business, and may disrupt key
research and development, marketing or sales efforts. The inability of
management to successfully integrate any acquisition could have a material
adverse effect on the business, operating results and financial condition of
Network Associates or TIS, as applicable. In addition, as commonly occurs,
during the pre-acquisition and integration phases of technology acquisitions,
aggressive competitors may undertake initiatives to attract customers and to
recruit key employees through various incentives.
Rapid Technological Change; Risks Associated with Product
Development -- Network Associates. 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. Network
Associates' 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 Network Associates believes that it offers one of the
broadest product lines in 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, Network Associates believes
that it will need to further expand its product offerings. There can be no
assurance that Network Associates will be successful in developing and
marketing, on a timely basis, enhancements to its existing products or new
products, or that such enhancements or new products will adequately address the
changing needs of the marketplace.
In addition, from time to time, Network Associates or its competitors may
announce new products with new or additional capabilities or technologies. Such
announcements of new products could have the potential
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to replace, or shorten the life cycles of, Network Associates' existing products
and to cause customers to defer or cancel purchases of Network Associates'
existing products.
Network Associates has in the past experienced delays in software
development, and there can be no assurance that Network Associates will not
experience delays in connection with its current or future product development
activities. Complex software products such as those offered by Network
Associates 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, Network Associates
experienced compatibility issues in connection with its recent NetShield
upgrade, and Network Associates' anti-virus software products have in the past
falsely detected viruses that did not actually exist. Delays and difficulties
associated with new product introductions, performance or enhancements could
have a material adverse effect on Network Associates' business, financial
condition and results of operation.
Network Associates' development efforts are impacted by the adoption or
evolution of industry standards related to its products and the environments in
which they operate. For example, no uniform industry standard has developed in
the market for encryption security products. As industry standards are adopted
or evolve, Network Associates may be required to modify existing products or
develop and support new versions of existing products. In addition, to the
extent that no industry standard develops, Network Associates' products and
those of its competitors may be incompatible if they use competing standards,
which could prevent or significantly delay overall development of the market for
a particular product or products. The failure of Network Associates' products to
comply, or delays in compliance, with existing or evolving industry standards
could have a material adverse effect on Network Associates' business, financial
condition and results of operation.
Network Associates' long-term success will depend on its ability on a
timely and cost-effective basis to develop upgrades and updates to its existing
product offerings, to modify and enhance acquired products, and to introduce new
products which meet the needs of current and potential 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. Network Associates believes that the ability
to provide these upgrades and updates to users frequently and at a low cost is a
key to success. For example, 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 Network Associates' business,
financial condition and results of operations. There can be no assurance that
Network Associates 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 Network Associates' 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 Network Associates' future products and
product versions which are designed to operate with such future versions of
operating systems. Network Associates' failure to introduce in a timely manner
new products that are compatible with operating systems and environments
preferred by desktop computer users would have a material adverse effect on
Network Associates' business, financial condition and results of operations.
Rapid Technological Change; Risks Associated with Product
Development -- TIS. The information security industry is characterized by rapid
changes, including frequent new product introductions, continuing advances in
technology and changes in customer requirements and preferences. The
introduction of new technologies or advances in techniques for gaining
unauthorized network access could render TIS's existing products obsolete or
unmarketable. The development cycle for TIS's new products may be significantly
longer than TIS's historical product development cycle, resulting in higher
development costs or a loss in market share. Advances in techniques by
individuals and entities seeking to gain unauthorized access to networks could
expose TIS's existing products to new and unexpected attacks and require
accelerated development of new products or require TIS to invest resources in
products that may not become profitable. There can be no assurance that (i) TIS
will be able to counter challenges to its current products; (ii) TIS's future
product offerings will keep pace with the technological changes implemented by
competitors or persons seeking to breach information security; (iii) TIS's
products will satisfy evolving preferences of customers and prospects;
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or (iv) TIS will be successful in developing and marketing products for any
future technology. Failure to develop and introduce new products and product
enhancements in a timely fashion could have a material adverse effect on TIS's
financial condition or results of operations.
As a result of the rapid technological changes, described above, the
success of TIS's products may depend, in part, on TIS's ability to introduce
products which will satisfy the needs of the information security market or
achieve market acceptance. Any inability of TIS to develop products on a timely
basis that address changing customer requirements may require TIS to
substantially increase development expenditures or may result in a loss of
market share to a competitor. There can also be no assurance that
security-related products or technologies developed by others will not adversely
affect TIS's competitive position or render its products or technologies
noncompetitive or obsolete.
Network Associates Dependence on Revenue from Flagship Anti-Virus and
Sniffer Products. In recent years, Network Associates has derived a substantial
majority of its net revenue from its flagship McAfee anti-virus software
products and Sniffer network fault and performance management products. These
products are expected to continue to account for a significant portion of
Network Associates' 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, a change in Network Associates' pricing model for such
products, the inclusion of anti-virus or network management and analysis
functionality in system hardware or operating system software or other software
or otherwise, or a maturation in the respective markets for these products could
have a material adverse effect on Network Associates' business, financial
condition and results of operations.
Dependence on Emergence of Network Management and Network Security
Markets. The markets for Network Associates' network management and network
security products and TIS's network security products are evolving, and their
growth depends upon broader market acceptance of network management and network
security software. Although the number of LAN-attached personal computers has
increased dramatically, 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
benefit Network Associates or TIS significantly. In addition, there are a number
of potential approaches to network management and network security, including
the incorporation of management and security tools into network operating
systems or hardware. Therefore, even if network management and network security
tools gain broader market acceptance, there can be no assurance that Network
Associates' or TIS's products will be chosen by organizations which acquire
network management and network security tools. Furthermore, to the extent that
either network management or network security market does continue to develop,
Network Associates and TIS expect that competition will increase. See
"-- Competition" and "-- Risk of Inclusion of Network Security and Management
Functionality in Hardware and Other Software."
COMPETITION
Network Associates. The markets for Network Associates' products are
intensely competitive and Network Associates expects competition to increase in
the near-term. Network Associates believes that the principal competitive
factors affecting the markets for its products include performance,
functionality, quality, customer support, breadth of product line, frequency of
upgrades and updates, integration of products, manageability of products, brand
name recognition, Network Associates' reputation and price. Certain of the
criteria upon which the performance and quality of Network Associates'
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
Network Associates' competitors have been in Network management market longer
than Network Associates, 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 Network Associates. Network Associates will also need to develop name
recognition for its new name, "Network Associates." 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 security and management products. As is the case in many segments
of the software industry,
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Network Associates has been encountering, and expects to further encounter,
increasing competition. This increased competition 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 Network Associates' business, financial
condition and results of operations. In addition, competitive pressures may make
it difficult for Network Associates to maintain or exceed its growth rate.
Although there is a trend toward consolidation in the Network security and
management market, the market is currently highly fragmented with products
offered by many vendors. Network Associates' principal competitor is the Peter
Norton Group of Symantec in the network security market and Intel's LanDesk in
the network management market. Network Associates' other competitors include
Computer Associates/ Cheyenne Software, IBM, 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. In the encryption portion of the security market, Network
Associates' principal competitors are Security Dynamics Technologies, Inc.,
Cylink Corporation, Entrust Technologies and VeriSign, Inc. Network Associates'
principal competitors in the help desk market are Remedy Corporation, Software
Artistry (recently acquired by Tivoli Systems/IBM) and Magic Solutions, Inc.
(which Network Associates has agreed to acquire). Network Associates' principal
competitor in the software-based network fault and performance management market
is HP, with other competitors including Azure Technologies Incorporated, Concord
Communications, DeskTalk Systems, Kaspia Systems, Shomiti Systems, Inc. and
Wandel & Goltermann, Inc. Network Associates also faces competition in the
security market from Cisco, Security Dynamics Technologies, Inc., Check Point
Software and other vendors in the encryption/ firewall market. In addition,
Network Associates faces competition from large and established software
companies such as Microsoft, Intel, Novell and HP which offer network management
products as enhancements to their network operating systems. As the network
management market develops, Network Associates 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
markets around a smaller number of vendors who are able to provide the necessary
software and support capabilities. In addition, to the extent that Network
Associates is successful in developing its Net Tools suite of products designed
around a centralized management and administration console for the Windows NT
platform, Network Associates will likely compete with large computer systems
management companies such as Tivoli Systems (TME) and Computer Associates
(Unicenter). There can be no assurance that Network Associates 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 Network Associates. 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 Network
Associates 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 often present stronger competition and shareware authors control 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 lagged significantly behind North America
and Europe in their adoption of networking technology. There can be no assurance
that Network Associates will be able to compete successfully in international
markets.
TIS. Competition in the information security market is intense and
constantly evolving, and TIS expects such competition to increase in the future.
In addition, TIS's industry is consolidating at a rapid pace. TIS believes that
significant competitive factors affecting this market are depth of product
functionality, product quality and performance, product price, customer support,
conformance to protocols and industry standards and breadth of platform support.
In addition, TIS believes that the ability to rapidly develop and implement new
products and features for the market is critical. There can be no assurance that
TIS can maintain or enhance its competitive position against current and future
competitors. Significant factors such as the
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emergence of new products, fundamental changes in computing technology and
aggressive pricing and marketing strategies may also affect TIS's competitive
position. Many of these factors are out of TIS's control.
The principal competitors for TIS's government-funded research and
development are GTE Internetworking (formerly BBN Corporation), The Open Group
(formerly known as "Open Software Foundation"), Secure Computing Corporation and
SRI International.
TIS's principal current competitors for its network security products
include America Online, Inc.'s Advanced Network and Services subsidiary, Bay
Networks Inc., Check Point Software Technologies Ltd., Cisco Systems, Inc.,
Digital Equipment Corporation, Harris Computer Systems Corporation, IBM,
Microsoft, Milkyway Networks Corporation, Axent Technologies, Raptor Systems,
Inc. (acquired by Axent), Secure Computing Corporation, Sun Microsystems, Inc.
and V-One. Due to the rapid expansion of the network security market, TIS may
face competition from new entrants in the network security industry, possibly
including TIS's resellers who may sell products of TIS's competitors.
Many of TIS's competitors and potential competitors have longer operating
histories, greater name recognition, a larger customer base and significantly
greater financial, marketing, technical and other competitive resources than
TIS. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than can TIS. There can be
no assurance that TIS's current or potential competitors will not develop
products comparable or superior to those developed by TIS or adapt more quickly
than TIS to new technologies, evolving industry trends or changing customer
requirements. Competition could increase if new companies enter the market or if
existing competitors expand their product lines, including the addition by
operating system vendors such as Microsoft Corporation of firewalls in their
operating system software products. An increase in competition could result in
price reductions and loss of market share. Any resulting reduction in gross
margins could have a material adverse effect on TIS's financial condition or
results of operations. Although TIS believes it has certain technological and
other advantages over its competitors, maintaining such advantages will require
continued investment by TIS in research and development and sales and marketing.
There can be no assurance that TIS will have sufficient resources to make such
investments or that TIS will be able to make the technological advances
necessary to maintain such competitive advantages. In addition, current and
potential competitors have established or may in the future establish
collaborative relationships among themselves or with third parties, including
third parties with whom TIS has strategic relationships, to increase the ability
of their products to address the security needs of TIS's prospective customers.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire significant market share. If this were to occur, TIS's financial
condition or results of operations could be materially adversely affected.
NEED TO DEVELOP ENTERPRISE AND NATIONAL ACCOUNTS SALES FORCE AND SECURITY
PRODUCTS SALES FORCE; RISKS RELATED TO DIRECT SALES FORCE
Network Associates. In connection with its recent acquisitions and as part
of its evolving strategy of offering product suites under the Net Tools
umbrella, Network Associates has recently reorganized its direct sales force
into three tiers. The first tier focuses on the sale of the full product suite
under the Net Tools umbrella to enterprise and national account customers. The
second tier consists of four separate sales groups focused on the sale of the
individual product suites (i.e., McAfee Total Virus Defense; PGP Total Network
Security; Sniffer Total Network Visibility; or McAfee Total Service Desk) to the
departmental level. The third tier consists of four separate outbound corporate
telesales forces who actively market Network Associates' individual product
suites to customers with less than 1,000 nodes. Network Associates historically
has not had a large enterprise or national accounts sales force and only
recently developed a direct sales group focused on these larger accounts. In
addition, Network Associates has not historically had a separate sales force
focused on the sale of its suite of security products (many of which were only
recently acquired and are currently being engineered into a common suite). To
succeed in the direct sales channel for the enterprise and national accounts
market and for the sale of the separate security product suite, Network
Associates will be required 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 Network
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<PAGE> 27
Associates' suite of products. There can be no assurance that Network Associates
will be successful in building the necessary sales organization or in
attracting, retaining or training these individuals. Historically, Network
Associates has sold its products at the departmental level. To succeed in the
enterprise and national accounts market will require, among other things,
establishing relationships and contacts with senior technology officers at these
accounts. There can be no assurance that Network Associates or its sales force
will be successful in these efforts.
Network Associates' sales organization structure may result in multiple
customer contacts by different Network Associates sales representatives
(particularly in circumstances where the customer has multiple facilities and
offices), a lack of coordination between Network Associates' various sales
organizations and a lack of focus by the individual sales representatives on
their designated customers or products. The occurrence of these events could
lead to customer confusion, disputes in the sales force and lost revenue
opportunities which could have a material adverse effect on Network Associates'
business, financial condition and results of operations. In addition, while the
development of a direct sales channel reduces Network Associates' dependence on
resellers and distributors, it may lead to conflicts for the same customers and
further customer confusion, pressure by current and prospective customers for
price reductions on products and, consequently, in reductions in Network
Associates' gross margin and operating profit.
TIS. TIS currently has over 40 employees in direct commercial sales and
marketing, many of whom have been employed by TIS for less than a year. In order
to increase its direct sales effort, TIS will need to increase the size of its
internal sales and marketing staff and increase the staff's productivity. There
can be no assurance that such internal expansion will be successfully completed,
that the cost of such expansion will not exceed the revenues generated or that
TIS's sales and marketing operation will successfully compete against the more
extensive and well funded sales and marketing operations of many of TIS's
current and future competitors. TIS has approximately 190 resellers worldwide.
There can be no assurance that TIS will be able to retain its resellers or
attract additional resellers or that its resellers will be able to market TIS's
products effectively and will be qualified to provide timely and cost-effective
customer support and service. TIS's resellers may carry competing product
offerings. There can be no assurance that any reseller will continue to
represent TIS's products. The inability to recruit, or the loss of, important
sales personnel or resellers could materially adversely affect TIS's financial
condition or results of operations.
PROPRIETARY TECHNOLOGY AND RIGHTS; LITIGATION
Network Associates. Network Associates' success is heavily dependent upon
proprietary software technology. Network Associates relies on a combination of
contractual rights, trademarks, trade secrets and copyrights to establish and
protect proprietary rights in its 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
Network Associates' products.
Network Associates recently changed its legal name to "Networks Associates,
Inc." and has recently begun conducting business as "Network Associates."
Network Associates believes that there are a number of other companies with
similar names. For example, five companies (Network Associates Corporation and
The Network Associates in California; Network Associates, Inc. in Kansas;
Network Associates, Inc. in Oregon; and Network Associates Consulting in Utah)
have made claims (including various trademark claims) or demands with respect to
Network Associates' use of the name Network Associates. Specifically, Network
Associates Corporation filed suit in the Superior Court of California for the
County of Santa Clara on February 25, 1998 and served its complaint on February
27, 1998, seeking among other things, a preliminary and permanent injunction
restraining Network Associates from using in California the name "Network
Associates" or "Network Associates, Inc." and certain compensatory and punitive
damages. A preliminary injunction hearing is scheduled for May 21, 1998. Network
Associates Consulting filed suit in the United States District Court for the
District of Utah on December 10, 1997, but has not served the complaint upon
Network Associates. There can be no assurance that Network Associates will be
able to enforce rights in that name, that it will be free to use the name in all
jurisdictions, that there will be no additional challenges to the use of that
name or that it will not be required to expend significant resources in
defending the use of that name.
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<PAGE> 28
Network Associates does not typically obtain signed license agreements from
its corporate, government and institutional customers who license products
directly from it. Network Associates 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 such licenses may not be enforceable under the laws of
many states and foreign jurisdictions. In addition, the laws of some foreign
countries either do not protect proprietary rights or offer only limited
protection for those rights. There can be no assurance that the steps taken by
Network Associates to protect its proprietary software technology will be
adequate to deter misappropriation of this technology. For example, Network
Associates is aware that a substantial number of users of its anti-virus
products have not paid any registration or license fees to Network Associates.
Changing legal interpretations of liability for unauthorized use of Network
Associates' software, or lessened sensitivity by corporate, government or
institutional users to avoiding copyright infringement, could have a material
adverse effect on Network Associates' business, financial condition and results
of operations.
In addition, as Network Associates may acquire a portion of software
included in its products from third parties, its exposure to infringement
actions may increase because it 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 Network
Associates employs or hires 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
Network Associates. Network Associates 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 Network Associates' business, financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of Network Associates' proprietary rights, subject
Network Associates to significant liabilities, require Network Associates to
seek licenses from third parties or prevent Network Associates from
manufacturing or selling its products, any one of which could have a material
adverse effect on Network Associates' 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.
Network Associates' principal assets are its intellectual property, and
Network Associates competes in an increasingly competitive market. There has
been substantial litigation regarding intellectual property rights of technology
companies. Network Associates has in the past been, and currently is, subject to
litigation related to its intellectual property. There can be no assurance that
there will be no developments arising out of such pending litigation or any
other litigation to which the Network Associates is or may become party which
could have a material adverse effect on Network Associates' business, financial
condition and results of operation.
On April 24, 1997, Network Associates was served by 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 Network
Associates. Symantec alleges that Network Associates' computer software program
called "PC Medic" copies 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 Network Associates' "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 Network Associates from shipping any product containing
either an approximately 30-line routine found in Crash Guard 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 of distribution of [McAfee's] current
product." On December 19, 1997, the Court denied Symantec's motion to enjoin
sale or distribution of Network Associates' current PC Medic product. On
February 11, 1998, Symantec filed another motion seeking leave to again amend
its complaint to include additional allegations of trade secret
21
<PAGE> 29
misappropriation, unfair competition, interference with economic advantage and
contractual relations and violations of the Racketeer Influenced and Corrupt
Organization ("RICO"), in connection with the alleged use by Network Associates
employees of proprietary Symantec customer information. This motion is scheduled
for hearing on April 3, 1998. Symantec also filed a motion for a preliminary
injunction relating to these new allegations which is scheduled for hearing on
June 5, 1998. Trial is currently 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 Network
Associates and Symantec. Trend alleges that Network Associates' "WebShield" and
"GroupShield" products infringe a Trend patent which was issued on April 22,
1997. Trend's complaint seeks injunctive relief and unspecified money damages.
On June 6, 1997, Network Associates filed its answer denying any infringement.
Network Associates also filed counterclaims against Trend alleging unfair
competition, false advertising, trade libel, and interference with prospective
economic advantage. On September 19, 1997, Symantec filed a motion to sever
Trend's action against Network Associates from its action against Symantec.
Network Associates did not oppose Symantec's motion to sever, other than to
recommend a joint hearing on patent claim interpretation. On December 19, 1997,
the Court granted Symantec's motion to sever and adopted Network Associates'
recommendation regarding a joint hearing on patent claim interpretation. As a
result of the Court's decision, Trend's actions against Network Associates and
Symantec will proceed separately. Network Associates anticipates that the Court
will shortly reset the date for the joint patent claim interpretation hearing
for approximately September 1998. Thirty days after the joint patent claim
interpretation hearing, the Court has indicated it will set further discovery
and trial.
On May 6, 1997, RSA Data Security, Inc. ("RSA") filed a lawsuit against
PGP, a wholly owned subsidiary of Network Associates since December 9, 1997, in
San Mateo County Superior Court. RSA seeks a declaration from the court that
certain paragraphs of a license agreement between PGP and Public Key Partners
(the "License Agreement") have been terminated and certain other paragraphs have
survived RSA's purported termination of the License Agreement. RSA, which
purports to act on behalf of Public Key partners, also seeks an accounting of
PGP's sales of products subject to the License Agreement. PGP denies that RSA
has the authority to act on behalf of Public Key Partners, and denies that the
License Agreement has been breached or terminated in whole or in part. On May
22, 1997, PGP filed a motion to compel arbitration of the action pursuant to an
arbitration clause in the License Agreement. PGP's motion was granted on October
9, 1997. The Court stayed the state court proceedings and ordered the action to
arbitration. The arbitration proceedings are in the preliminary stages.
On October 14, 1997, RSA filed a patent infringement lawsuit against PGP in
the United States District court for the Northern District of California. RSA
alleges PGP has infringed one of the patents which was licensed to PGP under the
License Agreement. On November 4, 1997, PGP moved to stay the federal action,
or, in the alternative, compel it to arbitration. On December 23, 1997, RSA
filed a motion to amend its complaint to include Network Associates as
defendant. On March 2, 1998, the court granted PGP's motion to stay the federal
patent action. A status conference is scheduled for September 14, 1998, at which
time RSA may ask the court to lift the stay if the case has not been arbitrated
or settled by that time.
On September 15, 1997, Network Associates 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 Network Associates' VirusScan product infringes a Hilgraeve patent which
was issued on June 7, 1994. Hilgraeve's action seeks injunctive relief and
unspecified money damages. The case is in discovery.
Although Network Associates intends to defend itself vigorously against the
claims asserted against it in the foregoing actions or matters (including those
related to the use of the name Network Associates), there can be no assurance
that such pending litigation will not have a material adverse effect on Network
Associates' business, financial condition or operating results. The litigation
process is subject to inherent uncertainties and no assurance can be given that
Network Associates will prevail in any such matters, or will be able to obtain
licenses, on commercially reasonable terms, or at all, under any patents or
other intellectual property rights that may be held valid or infringed by
Network Associates or its products. Uncertainties inherent in the
22
<PAGE> 30
litigation process involve, among other things, the complexity of the
technologies involved, potentially adverse changes in the law and discovery of
facts unfavorable to Network Associates.
TIS. TIS's success is dependent in part on its proprietary technology. TIS
relies on a combination of patent, trade secret, copyright and trademark laws,
non-disclosure agreements and contractual provisions to establish and protect
its proprietary rights. TIS has received five patents and has five pending
domestic patent applications and two pending international patent applications
pursuant to the Patent Cooperation Treaty ("PCT") on its RecoverKey/KRT and
computer security technology. TIS has filed foreign applications under the
European Patent Convention for the countries of Austria, Belgium, Denmark,
France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Monaco,
Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Foreign patent
applications are also pending in Australia, Brazil, Canada, China, Japan, S.
Korea, Mexico, and the Russian Federation. TIS uses a printed "shrink-wrap"
license for users of its products in order to protect certain of its copyrights
and trade secrets. TIS attempts to protect its trade secrets and other
proprietary information through agreements with suppliers and non-disclosure and
non-competition agreements with employees and consultants and other security
measures.
There can be no assurance that TIS will seek patents on aspects of its
technology relating to its information security products, that any such patents
will issue or that any such additional patents will be sufficiently broad to
protect TIS's technology relating to its information security products. The
status of computer-related patents involves complex legal and factual questions
and the breadth of claims allowed is uncertain. Accordingly, there can be no
assurance that patent applications filed by TIS will result in patents being
issued or that its existing patents, and any patents that may be issued to it in
the future, will afford protection against competitors with similar technology;
nor can there be any assurance that patents issued to TIS will not be infringed
upon or designed around by others or that others will not obtain patents that
TIS would need to license or design around. If existing or future patents
containing broad claims are upheld by the courts, the holders of such patents
might be in a position to require companies to obtain licenses. There can be no
assurance that licenses that might be required for TIS's products would be
available on reasonable terms, if at all.
Despite TIS's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of TIS's products or to obtain and use
information that TIS regards as proprietary. Policing unauthorized use of TIS's
products is difficult, and, while TIS is unable to determine the extent to which
piracy of its software products exists, such piracy can be expected to be a
persistent problem, particularly in international markets and as a result of the
growing use of the Internet. Some courts have held that shrink-wrap licenses,
because they are not signed by the licensee, are not enforceable. The laws of
Maryland, which the shrink-wrap licenses purport to make the governing law, are
unclear on this subject. In addition, there can be no assurance that patent
applications filed by TIS will result in patents being issued or that its
existing patents, and any patents that may be issued to it in the future, will
afford protection against competitors with similar technology; nor can there be
any assurance that patents issued to TIS will not be infringed upon or designed
around by others or that others will not obtain patents that TIS would need to
license or design around.
TIS may also be subject to patent litigation. On February 13, 1998, Entrust
Technologies Limited and Entrust Technologies, Inc. (collectively, "Entrust")
filed a complaint in the United States District Court for the District of
Maryland against TIS for infringement of United States Patent No. 5,481,613. As
TIS has not been served with the complaint, the amount of liability, or the
potential impact on TIS's operations, if any, cannot be ascertained at this
time. In response to this threatened litigation, TIS is considering commencing
litigation proceedings against Entrust in defense of its own patent. In
addition, TIS has requested the United States District Court for the District of
Maryland for a declaratory judgment of invalidation and non-infringement of the
subject patent.
TIS licenses encryption and other portions of the software included in its
products from third parties and its success will depend in part on its continued
ability to use technology that is important to the functionality of its products
licensed from these or other parties. If its licenses were to be terminated and
TIS were unable to obtain licenses to similar software from others there could
be a material adverse effect on its financial condition or results of
operations.
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<PAGE> 31
Risks Associated with Information Security Market. The market for software
security products is in an early stage of development. Declines in demand for
TIS's and Network Associates' security products, whether as a result of
competition, technological change, the public's perception of the need for
security products, developments in the hardware and software environments in
which these products operate, general economic conditions or other factors,
could have a material adverse effect on TIS's or Network Associates' financial
condition or results of operations.
A well-publicized actual or perceived breach of network or computer
security could trigger a heightened awareness of computer abuse, resulting in an
increased demand for security products such as those offered by TIS and Network
Associates. Similarly, an actual or perceived breach of network or computer
security at one of TIS's or Network Associates' customers, regardless of whether
such breach is attributable to TIS's or Network Associates' products, could
adversely affect the market's perception of them and their financial condition
or results of operations. In addition, although the effectiveness of TIS's or
Network Associates' products is not dependent upon the secrecy of its
proprietary technology or licensed technology, the public disclosure of its
proprietary technology could result in a perception of breached security and
reduced effectiveness of TIS's or Network Associates' products, which could have
an adverse effect on TIS's or Network Associates' financial condition or results
of operations.
Network Associates Risks Associated with Failure to Manage Growth. Network
Associates' growth internally and through its numerous acquisitions has placed,
and any further expansion would continue to place, a significant strain on its
limited personnel, management and other resources. In the future, Network
Associates' ability to manage any growth, particularly with the anticipated
expansion of Network Associates' 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 Network Associates' business,
financial condition and results of operations.
RISKS RELATED TO INTERNATIONAL REVENUE AND ACTIVITIES
Network Associates. In 1997, 1996 and 1995, net revenue from international
licenses represented approximately 28%, 24% and 25%, respectively, of Network
Associates' net revenue. Historically, Network Associates has relied primarily
upon independent agents and distributors to market its products internationally.
Network Associates expects that international revenues will continue to account
for a significant percentage of net revenue. Network Associates also expects
that a significant portion of such international revenue will be denominated in
local currencies. To reduce the impact of foreign currency fluctuations, Network
Associates uses non-leveraged forward currency contracts. However, there can be
no assurance that Network Associates' 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 (such as the current economic turbulence in Asia),
political instability in emerging markets and difficulties in staffing and
managing foreign operations. There can be no assurance that these factors will
not have a material adverse effect on Network Associates' future international
license revenue. Further, in countries with a high incidence of software piracy,
Network Associates may experience a higher rate of piracy of its products.
In addition, a portion of Network Associates' international revenue is
expected to continue to be generated through independent agents. Since these
agents will not be employees of Network Associates and will not be required to
offer Network Associates' products exclusively, there can be no assurance that
they will continue to market Network Associates' products. Also, Network
Associates is likely to have limited control over its agents, limited access to
the names of the customers to whom the agents sell its products and limited
knowledge of the information provided by, or representations made by, these
agents to its customers.
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<PAGE> 32
TIS. In 1997, 1996 and 1995, net revenue from international sources
represented approximately 19.4%, 11.4% and 7.9% of TIS's revenues. TIS's
management expects that in the future sales outside North America will generate
a larger portion of TIS's total revenues. TIS's international business may be
subject to a variety of risks, including costs relating to the start-up of
direct operations in certain countries or regions, delays in expanding its
international distribution channels, difficulties in collecting international
accounts receivable from distributors or resellers and increased costs
associated with maintaining international marketing efforts. Some of TIS's
international sales are denominated in the local currency of the country in
which the sale was made, and in those cases TIS is subject to the risks
associated with fluctuations in currency exchange rates. A decrease in the value
of any of these foreign currencies relative to the U.S. dollar could affect the
profitability in U.S. dollars of TIS's products sold in these markets. In
addition, TIS is subject to the usual risks of doing business abroad, including
increases in duty rates, the introduction of non-tariff barriers and
difficulties in enforcement of intellectual property rights. There can be no
assurance that these factors will not have an adverse effect on TIS's financial
condition or results of operations.
Risks Relating to Cryptography Technology. Certain of Network Associates'
security products and certain of TIS's security products and the related
technology and associated assistance are subject to export restrictions
administered by the U.S. Department of State and the U.S. Department of
Commerce, which permit the export of encryption products only with the required
level of export license. In addition, these U.S. export laws prohibit the export
of encryption products to a number of countries deemed hostile by the U.S.
government. U.S. export regulations regarding the export of encryption
technology require either a transactional export license or the granting of
Department of Commerce Commodity jurisdiction. Because of U.S. governmental
controls on the exportation of encryption technology, TIS is unable to export
certain of its products unless they include RecoverKey/KRT. TIS has developed
RecoverKey/KRT to enable the interests of security and law enforcement agencies
to be protected while permitting the export of products with strong
cryptography. As result of this regulatory regime, foreign competitors facing
less stringent controls on their products may be able to compete more
effectively than Network Associates and TIS in the global market. While Network
Associates and TIS have obtained approval from the Department of Commerce to
export to certain end users, there can be no assurance that the U.S. government
will approve pending or future export license requests. Further, there can be no
assurance that the list of products and countries for which export approval is
required, and the regulatory policies with respect thereto, will not be revised
from time to time. Failure to obtain the required licenses and approvals or the
costs of compliance could have a material adverse effect on Network Associates'
and TIS's international revenues.
Network Associates' PGP network security products and TIS's security
products are dependent on the use of public key cryptography technology, which
depends in part on the application of certain mathematical principles known as
"factoring." The security afforded by public key cryptography technology is
predicated on the assumption that the factoring of the composite of large prime
numbers is difficult. Should an easy factoring method be developed, then the
security afforded by encryption products utilizing public key cryptography
technology would be reduced or eliminated. Furthermore, any significant advance
in techniques for attacking cryptographic systems could also render some or all
of Network Associates' and TIS's existing products and services obsolete or
unmarketable. There can be no assurance that such developments will not occur.
Moreover, even if no breakthroughs in factoring or other methods of attacking
cryptographic systems are made, factoring problems can theoretically be solved
by computer systems significantly faster and more powerful than those presently
available. If such improved techniques for attacking cryptographic systems are
ever developed, it could have a material adverse effect on Network Associates'
and TIS's business, operating results and financial condition.
To the extent that the government either decides to prohibit or otherwise
restrict the export of such products (including those with key recovery) or
decides to permit the export of such products without key recovery, those
decisions could have an adverse impact on the development of a market for the
RecoverKey-International (or CKE) products TIS plans to introduce in the future.
TIS Risks of Doing Business with the U.S. Government. Prior to 1996, the
principal source of TIS's total revenues was from governmental contracts. TIS
expects to continue to rely on existing and future research and development
contracts with agencies of the U.S. government for a portion of its revenues in
the near future.
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<PAGE> 33
TIS believes that the awarding to it of future government contracts will in part
be dependent upon the continued favorable reaction of government agencies to the
research, development and consulting capabilities of TIS. There can be no
assurance that TIS will be able to procure additional government contracts.
Minimum fee awards for TIS contracts are usually 3% to 7% of the contract costs,
but may be as low as 1% of the contracts costs, and the contracts are subject to
cancellation for the convenience of the governmental agencies. Although TIS has
been awarded contract fees of more than 1% in the past and there have been no
terminations of TIS's government contracts in the past, there can be no
assurance that minimum fee awards or cancellations will not occur in the future.
Reductions or delays in federal funds available for projects TIS is performing
could also have an adverse impact on TIS's government business. Contracts
involving the U.S. government are also subject to the risks of disallowance of
costs upon audit, changes in government procurement policies, the necessity to
participate in competitive bidding and, with respect to contracts involving
prime contractors or government-designated subcontractors, the inability of such
parties to perform under their contracts. Any of the foregoing events could have
a material adverse effect on TIS's financial condition or results of operations.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. Although Network Associates
and TIS believe that their products and systems are Year 2000 compliant, Network
Associates and TIS utilize third-party equipment and software that may not be
Year 2000 compliant. Failure of such third-party equipment or software to
operate properly with regard to the Year 2000 and thereafter could require
Network Associates or TIS to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on Network Associates'
business, operating results and financial condition. The business, operating
results and financial condition of Network Associates' and TIS's customers could
be adversely affected to the extent that they utilize third-party software
products which are not Year 2000 compliant. Furthermore, the purchasing patterns
of customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by Network Associates and
TIS, which could have a material adverse effect on Network Associates' or TIS's
business, operating results and financial condition.
In addition to the risk factors described above, the following risk
factors, incorporated by reference from Network Associates' Annual Report on
Form 10-K for fiscal year 1997, should be considered carefully by holders of TIS
Common Stock in evaluating whether to approve and adopt the Reorganization
Agreement and to approve the Merger: "Need to Expand and Develop An Effective
Professional Services Organization; Risks Related to Third-Party Professional
Services," "Reliance on Microsoft Technology," "Risk of Sabotage," "Risk of
False Detection of Viruses," "Product Liability," "Customer Purchase Decisions;
Potentially Longer Sales and Implementation Cycles for Certain Products Suites,"
"Supplier Dependence; Third Party Manufacturing," "Dependence Upon Key
Personnel," "Possible Price Volatility of Common Stock," and "Effect of Certain
Provisional Anti-Takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
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COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Network
Associates and TIS 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 0.323 of a share of Network Associates Common Stock is issued in
exchange for one share of TIS 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 Network Associates and TIS and notes thereto (which are included
elsewhere in or incorporated by reference in this 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>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
HISTORICAL -- NETWORK ASSOCIATES
Net income (loss) per
share -- diluted.................... $0.62 $ 0.89 $(0.41)
Book value per share(1)............... $3.55 $ 4.55 $ 5.23
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
HISTORICAL -- TIS
Net income (loss) per
share -- diluted.................... $0.17 $(0.32) $(0.63)
Book value per share.................. $0.30 $ 4.93 $ 3.01
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
PRO FORMA COMBINED NET INCOME (LOSS)
PER SHARE -- DILUTED
Per Network Associates share.......... $0.61 $ 0.81 $(0.50)
Equivalent TIS share(2)............... $0.20 $ 0.26 $(0.16)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C> <C> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(3)
Per Network Associates share........................................ $ 5.39
Equivalent TIS share................................................ $ 1.74
</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 TIS equivalent pro forma combined per share amounts are calculated by
multiplying the combined pro forma per share amounts by the Exchange Ratio
of 0.323 of a share of Network Associates Common Stock for each share of TIS
Common Stock.
(3) 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.
27
<PAGE> 35
COMPARATIVE MARKET PRICE DATA
Since their respective initial public offerings on October 6, 1992 (Network
Associates) and October 10, 1996 (TIS), Networks Associates Common Stock and TIS
Common Stock have traded on Nasdaq. TIS Common Stock is traded under the symbol
TISX. Since the December 1, 1997 combination with Network General Corporation,
Network Associates Common Stock has traded under the symbol NETA. Prior thereto,
Network Associates Common Stock traded under the symbol MCAF. The following
tables set forth, for the period indicated, the high and low closing sales
prices for Network Associates Common Stock and TIS Common Stock, as reported by
Nasdaq. The prices appearing in the tables below reflect the over the counter
market quotations which reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
NETWORK ASSOCIATES TIS
COMMON STOCK(1) COMMON STOCK
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995 CALENDAR YEAR
First Quarter....................... $ 8.85 $ 4.48 $ -- $ --
Second Quarter...................... 9.96 8.08 -- --
Third Quarter....................... 16.37 8.41 -- --
Fourth Quarter...................... 22.89 12.67 -- --
1996 CALENDAR YEAR
First Quarter....................... 28.50 14.33 -- --
Second Quarter...................... 35.00 23.78 -- --
Third Quarter....................... 46.92 30.83 -- --
Fourth Quarter...................... 52.50 41.75 17.75 10.00
1997 CALENDAR YEAR
First Quarter....................... 64.50 38.50 18.38 10.00
Second Quarter...................... 68.50 42.25 13.75 8.25
Third Quarter....................... 77.75 49.50 12.75 8.63
Fourth Quarter...................... 66.38 44.56 12.25 7.50
1998 CALENDAR YEAR
First Quarter (through March 23,
1998)............................. 72.00 47.00 22.94 7.63
</TABLE>
- ---------------
(1) Per share amounts for Network Associates 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.
On February 20, 1998, 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 $62.50 per share of Network Associates Common
Stock and $12.63 per share of TIS Common Stock. On March 23, 1998, the closing
prices on Nasdaq were $66.06 per share of Network Associates Common Stock and
$20 per share of TIS Common Stock.
Because the Exchange Ratio is fixed, changes in the market price of Network
Associates Common Stock will affect the market value of the Network Associates
Common Stock to be received by stockholders of TIS in the Merger. TIS
stockholders are urged to obtain current market quotations for Network
Associates Common Stock and TIS Common Stock prior to the TIS Special Meeting.
Neither Network Associates nor TIS has paid cash dividends. Network
Associates intends to retain earnings for development of its business and not
distribute earnings to stockholders as dividends for the foreseeable future. The
declaration and payment by Network Associates of any future dividends and the
amount thereof will depend upon Network Associates' results of operations,
financial condition, cash
28
<PAGE> 36
requirements, future prospects, limitations imposed by credit agreements or
senior securities and other factors deemed relevant by the Network Associates
Board.
TIS SPECIAL MEETING
DATE, TIME AND PLACE OF TIS SPECIAL MEETING
The TIS Special Meeting will be held at the offices of Piper & Marbury
L.L.P., 1200 Nineteenth Street, N.W., Washington, D.C. 20036, on [ ],
1998 at 10:00 a.m., local time.
PURPOSE
The purpose of the TIS Special Meeting is (i) to consider and vote upon a
proposal to approve and adopt the Reorganization Agreement and to approve the
Merger and (ii) to elect two directors to the TIS Board with terms expiring in
2001. If the Merger is approved by the TIS stockholders and the Merger is
consummated, each of the directors on the TIS Board immediately prior to the
Effective Time will cease to be a director of TIS at the Effective Time. 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. See "Additional Matter Being Submitted to a Vote of the TIS Stockholders."
RECORD DATE AND OUTSTANDING SHARES
Only stockholders of record of TIS Common Stock on the TIS Record Date are
entitled to notice of, and to vote at, the TIS Special Meeting. As of the TIS
Record Date, there were approximately 253 stockholders of record holding an
aggregate of approximately 13,882,789 shares of TIS Common Stock.
On or about March [ ], 1998, a notice meeting the requirements of Delaware
law was mailed to stockholders of record as of the TIS Record Date.
VOTE REQUIRED
Under Delaware law, the charter documents of TIS and Nasdaq rules, the
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of TIS Common Stock outstanding as of the TIS Record Date is
required to approve and adopt the Reorganization Agreement and to approve the
Merger. The two director nominees receiving the highest number of affirmative
votes of the shares entitled to vote on such matter shall be elected as TIS
directors. Each stockholder of record of TIS Common Stock on the TIS Record Date
will be entitled to cast one vote per share on each matter to be acted upon at
the TIS Special Meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of TIS Common Stock entitled to vote at the TIS 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 TIS 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. For purposes of electing
directors, votes withheld from the directors will be counted for purposes of
determining the presence or absence of a quorum but are not counted as
affirmative votes. A broker non-vote will be counted for purposes of determining
the presence or absence of a quorum but will have no other legal effect upon the
election of directors.
As of the TIS Record Date, Mr. Walker and Dr. Branstad, both TIS directors
and the two largest TIS stockholders, owned approximately 31% of the issued and
outstanding shares of TIS Common Stock. Mr. Walker and Dr. Branstad have each
entered into a Voting Agreement with Network Associates obligating them, among
other things, to vote their shares of TIS 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."
29
<PAGE> 37
PROXIES
Each of the persons named in the proxy is an officer of TIS. All shares of
TIS Common Stock that are entitled to vote and are represented at the TIS
Special Meeting either in person or by properly executed proxies received prior
to or at the TIS Special Meeting and not duly and timely revoked will be voted
at the TIS 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 TIS at or before the taking of the vote at the TIS 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 TIS before the taking of the vote at the TIS
Special Meeting; or (iii) attending the TIS Special Meeting and voting in person
(although attendance at the TIS 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 TIS at 3060 Washington
Road, Glenwood, Maryland 21738, Attention: Secretary, or hand-delivered to the
Secretary of TIS, in each case at or before the taking of the vote at the TIS
Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
All costs of solicitation of proxies will be borne by TIS. Brokers,
custodians and fiduciaries will be requested to forward proxy soliciting
materials to the owners of stock held in their names, and TIS will reimburse
them for their reasonable out-of-pocket costs. In addition, proxies may also be
solicited by certain directors, officers and employees of TIS personally or by
mail, telephone or telegraph following the original solicitation. Such persons
will not receive additional compensation for such solicitation.
NO APPRAISAL RIGHTS
In connection with the Merger, TIS stockholders are not entitled to
appraisal rights under the DGCL. See "Approval of the Merger and Related
Transactions -- No Appraisal Rights." Accordingly, TIS stockholders who do not
wish to receive shares of Network Associates Common Stock in exchange for their
shares of TIS Common Stock must liquidate their investment by selling their TIS
Common Stock prior to the consummation of the Merger.
30
<PAGE> 38
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 Proxy Statement/Prospectus as Annex A. Reference is also made to the
other Annexes hereto. Statements made in this 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 TIS 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 Proxy Statement/Prospectus.
BACKGROUND OF THE MERGER
As computer networks have proliferated and become more complex, management
information systems directors and other information technology professionals are
continually seeking integrated solutions for their network security and
management needs from a limited number of vendors. The combination of Network
Associates and TIS creates a complementary and comprehensive suite of product
offerings to serve the enterprise network security market. Following the Merger,
the combined company will be able to offer industry-recognized security products
that address multiple security needs, including firewalls, encryption,
authentication, intrusion detection and anti-virus solutions. In addition, these
security products are expected to be offered as part of a larger suite of
network security and management products under Network Associates' "Net Tools"
product umbrella.
In an effort to broaden their security product offerings, both Network
Associates and TIS each recently consummated an acquisition in the security
software market. In October 1997, TIS acquired Haystack Laboratories, Inc.
("Haystack"), a privately-held developer of intrusion detection and monitoring
software products. In December 1997, Network Associates acquired Pretty Good
Privacy, Inc. ("PGP"), a privately-held provider of applied cryptographic
solutions for securing corporate digital assets and protecting individual
privacy. Network Associates continually evaluates potential acquisitions of
complementary businesses, products and technologies.
In addition to the Haystack acquisition, since its initial public offering
in 1996, TIS has considered a number of other strategic combinations and
transactions. During the Spring and Summer of 1997, the TIS Board considered
various potential merger partners, including a possible three-way combination
with two other security software companies, and held preliminary discussions
with several other companies.
In the Fall of 1997, William L. Larson, the Chairman and Chief Executive
Officer of Network Associates, and Mr. Walker, the Chairman and Chief Executive
Officer of TIS, attempted to set up a meeting, which did not occur in light of
the October 13, 1997 announcement of the merger of McAfee and Network General
(which merger resulted in the creation of Network Associates.)
In November 1997, after Network Associates had agreed to acquire PGP, Mr.
Larson telephoned Mr. Walker to arrange a dinner meeting to discuss, on a
preliminary basis, Network Associates' possible interest in acquiring TIS.
At its regularly scheduled December 2, 1997 meeting, the TIS Board,
acknowledging the consolidation trend in the security software industry,
considered (i) the strategic alternatives available to TIS, including potential
additional acquisitions by TIS or an acquisition of TIS by a third party, (ii)
the best manner to respond to Network Associates' preliminary interest in
acquiring TIS, (iii) how best to identify other potential acquirors of TIS, and
(iv) how best to present TIS to such other potential acquirors.
31
<PAGE> 39
On December 8, 1997, Messrs. Larson and Walker had a dinner meeting during
which they discussed Network Associates' possible interest in acquiring TIS. An
additional conversation between Messrs. Walker and Larson occurred during late
December 1997 during which they set up a meeting for January 12, 1998 to further
discuss Network Associates' interest in a possible acquisition of TIS.
On January 12, 1998, Mr. Walker and another representative of TIS met at
the California offices of Network Associates with Mr. Larson and other
representatives of Network Associates (including Peter R. Watkins, Executive
Vice President of McAfee Total Virus Defense). During this meeting the parties
discussed in preliminary terms personnel and operating issues and potential
business opportunities that might result from a combination of the two
companies.
Subsequently arrangements were discussed for representatives of TIS and
Network Associates to meet on January 22, 1998 at TIS's offices in Maryland.
This meeting was postponed by TIS to allow time to explore other potential
business combinations as discussed below. Network Associates was not informed of
the reason for the postponement.
At its regularly scheduled January 20, 1998 meeting, the TIS Board again
reviewed its strategic alternatives and, with the advice of counsel, approved
the engagement of J.P. Morgan Securities Inc. and Updata Capital, Inc.
(collectively, the "Financial Advisors") to act as its financial advisors to
assist the TIS Board in actively soliciting proposals for the acquisition of
TIS. Gerald Popek, an outside board member of TIS, recused himself from
subsequent considerations of the sale of TIS because of his role as Chief
Technology Officer of Platinum Technologies, Inc., a party interested in
possibly acquiring TIS.
The Financial Advisors, with the assistance of TIS management and counsel,
contacted a select group of potential acquirors for TIS. These potential
acquirors consisted of leading hardware, software and service firms with an
interest in the security market. Of the potential acquirors contacted, five
accepted invitations to meet with TIS during the first three weeks of February.
One of the five companies subsequently chose not to continue with the process.
In late January 1998, TIS established a data room in the offices of its
legal counsel. After receiving confidentiality agreements, TIS invited potential
acquirors to attend management presentations and provided potential acquirors an
opportunity to review the data room materials. Representatives of another
interested bidder and Network Associates attended the TIS management
presentations during the first week of February. However, the management
presentation to the other two, planned for February 17, 1998 and February 18,
1998, respectively, were postponed by TIS due to the advanced status of the
negotiations described below. Representatives of all four were provided access
to the data room materials and three took advantage of the opportunity. In
addition, during the second week of February, TIS delivered to Network
Associates and its counsel duplicate copies of most of the materials contained
in the data room.
On February 12, 1998, Mr. Walker of TIS met with Mr. Larson and Mr. Watkins
of Network Associates at the Network Associates' California offices. In addition
to other Network Associates representatives, representatives of TIS's and
Network Associates' financial advisors were present. The parties discussed,
among other things, the strategic rationale for a combination between the two
companies, non-price terms of a potential combination and other issues and
matters related to a potential combination. The parties also scheduled a
follow-up meeting to be held at Network Associates' California offices on
February 20, 1998. On February 13, 1998 Network Associates' counsel delivered a
draft of a proposed reorganization agreement to TIS's Financial Advisors and
counsel.
On February 16, 1998, Mr. Walker and TIS's Financial Advisors met with
representatives and financial advisors for another bidder. During the meeting,
preliminary discussions were conducted regarding a possible purchase of TIS for
approximately $18.00 a share. During the day, TIS representatives discussed with
representatives of Network Associates (including Mr. Watkins) Network
Associates' interest in a transaction in this price range. Network Associates
continued to decline any discussion of pricing terms but reiterated their
continuing interest in a strategic combination and their ability to negotiate a
possible transaction at the meeting scheduled for February 20. TIS resumed
discussions with the other bidder.
32
<PAGE> 40
Commencing February 18, 1998, financial advisors and legal counsel for the
other bidder met with TIS, its legal advisors and the Financial Advisors in the
offices of TIS's legal counsel in Washington, D.C. for the purpose of
negotiating a definitive merger agreement. Negotiations continued through
February 20, 1998 and the drafting of a merger agreement was completed at
approximately noon (EST) on February 20 with work continuing on the disclosure
schedule through February 21 and 22. During the course of the negotiations, the
price of the shares of this bidder declined and the value of the acquisition to
TIS stockholders, based upon the fixed exchange ratio and the then prevailing
price for common stock of this bidder, was approximately $15.00 per share as of
the close of the market on February 20, 1998.
On February 19, 1998, Mr. Leslie G. Denend, Network Associates' President
and Chief Operating Officer, sent a letter by facsimile to Mr. Walker of TIS.
Mr. Denend's letter confirmed the February 20 meeting between TIS and Network
Associates and indicated that Network Associates believed that the synergies and
opportunities that existed between the two companies created significant
opportunities to enhance value to their respective stockholders. The letter
contained no reference to price terms.
During the evening of February 19, 1998 (EST), TIS's Financial Advisors
attempted unsuccessfully to contact representatives of Network Associates to
inform them that the meeting scheduled with TIS for February 20, 1998 would not
be held in view of the advanced status of negotiations with the other bidder.
On the morning of February 20, 1998, TIS's Financial Advisors successfully
contacted representatives of Network Associates and informed them that TIS and
the Financial Advisors would not be meeting with Network Associates in
California because of the advanced status of negotiations with the other bidder.
Early in the afternoon of February 20, 1998, Network Associates requested a
conference call between Mr. Larson of Network Associates and Mr. Walker of TIS.
During that call, Mr. Larson volunteered that Network Associates was still very
interested in proceeding and was preparing to submit a written offer for TIS
that day. TIS subsequently received, via facsimile, an offer from Network
Associates proposing a price of approximately $20.19 per share (based on an
exchange ratio of 0.323 shares of Network Associates Common Stock per share of
TIS Common Stock). The offer was subject to satisfactory negotiation of
definitive documentation, Network Associates' Board approval, consummation of
Network Associates' due diligence investigations of TIS, receipt of an option to
acquire 19.9% of the TIS Common Stock, a termination fee of 3% of the
transaction value and TIS's agreement to terminate all existing acquisition
discussions and to proceed with a transaction only with Network Associates.
After reviewing the Network Associates' written offer (but without agreeing
to its terms and after receiving advice from legal counsel), TIS and its
Financial Advisors indicated that TIS would be prepared to meet with Network
Associates and its financial and legal advisors in Washington, D.C. on Saturday,
February 21, 1998 for the purpose of determining if a transaction between
Network Associates and TIS was advisable.
Representatives of Network Associates (including Mr. Larson and Mr.
Watkins) and of its financial and legal advisors, met with representatives of
TIS (including Mr. Walker) and TIS's financial and legal advisers in the
Washington D.C. offices of TIS' legal counsel on February 21, 1998. During the
course of the day, the terms of a proposed merger agreement were negotiated.
On the afternoon of Saturday, February 21, after determining, with the
advice of counsel, that the Network Associates proposed agreement represented a
viable alternative to the existing offer, TIS's Financial Advisors informed
representatives of the other bidder that an unsolicited higher offer had been
received. Neither the identity of the higher bidder nor the higher price were
disclosed. The other bidder indicated that it would match any offer. However,
when informed that neither party had been nor would be appraised of the exact
terms of competitive offers, the other bidder indicated it would submit another
bid before the scheduled TIS Board meeting on Sunday, February 22.
On the evening of February 21 (EST), the TIS Board held a special meeting
to consider the two pending offers. The meeting included representatives of the
Financial Advisors and TIS's legal advisors who reviewed with the TIS Board the
results of their due diligence investigations and the terms of the proposed
merger agreements. In addition, J.P. Morgan outlined its fairness opinion
analysis. Substantially completed
33
<PAGE> 41
documents with respect to both merger proposals were provided to each board
member. There was a full discussion of the auction and negotiation process, the
terms of both offers, including the relative benefits of each, the implicit
premiums over the trading price of TIS Common Stock, the elements of the
fairness opinion to be delivered by J.P. Morgan and the fiduciary obligations of
the directors (particularly as it related to the no fiduciary out provisions of
the Network Associates offer).
On February 21 and 22, Network Associates and the other bidder and their
respective financial and legal advisors continued their legal due diligence
investigations on TIS.
At 5:00 p.m. (EST) on Sunday, February 22, the other bidder submitted an
amended offer to acquire TIS, raising its exchange ratio to increase the bid to
approximately $17.00 per share based upon the closing price for the other
bidder's common stock on Friday, February 20.
During the afternoon of February 22 (EST), the Network Associates Board met
telephonically to review the proposed transaction terms and documentation (which
had been delivered to each of them) and to discuss the strategic rationale and
other considerations (including potential cost savings and synergies) related to
the proposed acquisition.
Later that evening (EST), the Network Associates Board met again to, among
other things, receive the results of Network Associates' legal, financial and
technical due diligence investigations on TIS. Following these events, the
Network Associates Board unanimously approved Network Associates' acquisition of
TIS.
On the evening of February 22 (EST), the TIS Board met for a second time to
consider the two acquisition proposals. Present were the financial and legal
advisors to TIS. J.P. Morgan delivered its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated February 22, 1998)
that, as of such date and based upon and subject to certain matters stated in
such opinion, the consideration to be paid to TIS's stockholders in the proposed
merger with Network Associates was fair, from a financial point of view, to the
stockholders of TIS. Having reviewed the respective terms of each offer,
including the absence of a fiduciary out in the Network Associates offer, the
TIS Board (except for Dr. Popek, who, as indicated above, recused himself and
did not attend or participate in the meeting) unanimously approved the
acceptance of the offer from Network Associates.
As of February 22, 1998, representatives of Network Associates, Merger Sub
and TIS executed the Reorganization Agreement and the Stock Option Agreement and
the appropriate stockholders executed the Voting Agreements, the Affiliate
Agreements and the Noncompetition Agreement.
Prior to the opening of the market on February 23, 1998, Network Associates
and TIS issued a joint news release announcing the Merger.
REASONS FOR THE MERGER; TIS'S BOARD RECOMMENDATION
NETWORK ASSOCIATES REASONS FOR THE MERGER
The Network Associates Board has approved the Reorganization Agreement and
has identified several potential benefits of the Merger which they believe will
contribute to the success of both Network Associates and TIS following the
Merger. These potential benefits include the opportunity (i) to market Network
Associates' broader suite of network security and management products under the
Net Tools product umbrella to TIS's existing customer base; (ii) to leverage
Network Associates' extensive customer base and channels of distribution in
connection with the sales and marketing of TIS's products; (iii) to expand
Network Associates' professional services organization and (iv) to realize other
synergies and cost savings following the Merger.
TIS BOARD RECOMMENDATION; TIS'S REASONS FOR THE MERGER
The TIS Board has approved the Reorganization Agreement, has determined
that the Merger is fair to, and in the best interests of TIS and its
stockholders, and recommends that holders of shares of TIS Common Stock vote FOR
approval and adoption of the Reorganization Agreement and the Merger.
The TIS Board's decision to approve the Reorganization Agreement and the
Merger was based in significant part upon its assessment of the trends
developing in the security software industry, and the changes
34
<PAGE> 42
which may come about in such market as a result of increasing competition,
consolidation and customer demands. The TIS Board believes that companies which
are able to provide customers with an integrated software security solution,
will be better-positioned to compete in such environment in the long term. In
addition, the TIS Board believes that TIS will face increased competition as
larger network security and management companies such as Network Associates and
Computer Associates International, Inc. expand their suite of product offerings
through acquisition and/or internal development to include a broad array of
security and network management products and as customers increasingly seek to
purchase total solutions from a limited number of vendors. Network Associates
was viewed by the TIS Board as a well-managed company, with very high quality
products. A potential merger with Network Associates was also considered to be
complementary with TIS's long term objectives and provides an opportunity to
offer a comprehensive security solution through the combination of TIS's
security products with Network Associates's technology.
In addition to the foregoing, TIS identified several other potential
strategic benefits of the Merger that TIS believes will contribute to the
success of the Merger. These potential benefits include:
(i) the potential realization of synergies and cost savings associated
with combining the underlying organizations and technologies of TIS and
Network Associates;
(ii) the opportunity for TIS to leverage Network Associates'
significantly greater financial resources and marketing capabilities;
(iii) the opportunity to greatly increase the available sales force to
market TIS's products by marketing such products through Network
Associates's extensive direct sales force;
(iv) the opportunity to broaden and expand TIS's international
distribution channels by using Network Associates' extensive sales and
distribution presence internationally; and
(v) the opportunity to market TIS's products to Network Associates'
larger and generally different installed base of customers.
TIS further evaluated the merits of the Network Associates Common Stock and
concluded that the Network Associates Common Shares have appreciation potential
in the long term and represent a more liquid investment than the TIS Common
Stock and is followed by a much greater number of stock analysts.
In the course of its deliberations, the TIS Board reviewed with TIS's
management a number of other factors relevant to the Merger. In particular, the
TIS Board considered, among other things: (i) the proposed terms of the Merger;
(ii) the results of TIS's auction process and the likelihood of realizing
superior benefits through alternative business strategies; (iii) information
concerning TIS's and Network Associates's respective businesses, historical
financial performances, operations and products, including public SEC and
analysts' reports and the due diligence reports from TIS's management and
financial advisors; (iv) the ability of Network Associates to enter into certain
additional acquisition transactions during the pendency of the Merger and the
potential impact thereof on the stock price of Network Associates Common Stock;
(v) comparative stock prices of TIS and Network Associates; (vi) comparative
volatility and trading volumes of the two companies' stock; (vii) an analysis of
the relative value that TIS might contribute to the future business and
prospects of Network Associates following the Merger; (viii) the compatibility
of the management and businesses of TIS and Network Associates; and (ix) the
detailed financial analysis presented by J.P. Morgan and Updata Capital, Inc.,
including the opinion of J.P. Morgan as of February 22, 1998 and based upon and
subject to certain matters stated in such opinion, the consideration to be paid
to TIS' shareholders in the proposed Merger was fair from a financial point of
view to the stockholders of TIS.
The TIS Board also considered certain risks arising in connection with the
Merger, including (i) the potential disruption of TIS's business that might
result from employee and customer uncertainty and lack of focus following
announcement of the Merger in connection with integrating the operations of TIS
and Network Associates; (ii) the possibility that the Merger might not be
consummated, (iii) the effects of the public announcement of the Merger on TIS's
sales and operating results, TIS's ability to attract and retain key management,
marketing and technical personnel and the progress of certain of its development
projects; (iv) the risk that the announcement of the Merger could result in
decisions by customers to cancel or delay
35
<PAGE> 43
purchases of products of TIS or Network Associates; (v) the risk that Network
Associates's stock price might decline substantially prior to the closing, thus
reducing the value per share to be received by TIS's stockholders in the Merger;
(vi) the risk associated with attempting to integrate Network Associates's other
security products with TIS's products; (vii) the risk that the other benefits
sought to be achieved by the Merger will not be achieved; and (viii) other risks
described under the caption "Risk Factors." In the view of the TIS Board, these
considerations were not sufficient, either individually or in the aggregate, to
outweigh the advantages of the proposed merger in the manner in which it was
proposed.
The foregoing discussion of the information and factors considered by the
TIS Board is not intended to be exhaustive but is believed to include all
material factors considered by the TIS Board. In view of the wide variety of
factors, both positive and negative, considered by the TIS Board, the TIS Board
did not find it practical to, and did not, quantify or otherwise assign relative
weights to the specific factors considered. After taking into consideration all
of the factors set forth above, the TIS Board continues to believe that the
Merger is in the best interests of TIS and its stockholders and continues to
recommend approval and adoption of the Reorganization Agreement and the Merger.
OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated January 21, 1998, TIS retained J.P.
Morgan as its financial advisor and to deliver a fairness opinion in connection
with the proposed Merger.
At the meeting of the TIS Board on February 22, 1998, J.P. Morgan rendered
its oral opinion that, as of such date, the consideration to be paid to TIS'
stockholders in the proposed Merger was fair from a financial point of view to
such stockholders. J.P. Morgan has also delivered a written opinion to the TIS
Board, dated February 22, 1998, that, as of such date, the consideration to be
paid to TIS' stockholders in the proposed Merger was fair from a financial point
of view to such stockholders. No limitations were imposed by TIS' Board upon
J.P. Morgan with respect to the investigations made or procedures followed by it
in rendering its opinions.
The full text of the written opinion of J.P. Morgan dated February 22,
1998, which sets forth the assumptions made, matters considered and limits on
the review undertaken, is attached hereto as Annex B and is incorporated herein
by reference. TIS' stockholders are urged to read the opinion in its entirety.
J.P. Morgan's written opinion is addressed to the TIS Board, is directed only to
the consideration to be paid in the Merger and does not constitute a
recommendation to any TIS stockholder as to how such stockholder should vote at
the TIS Meeting. The summary of the opinion of J.P. Morgan set forth in this
Proxy Statement/Prospectus is qualified in its entirety by reference to the full
text of such opinion.
In arriving at its opinions, J.P. Morgan reviewed, among other things, the
Reorganization Agreement; the audited financial statements of TIS for the fiscal
year ended December 27, 1996 and the unaudited quarter ended September 26, 1997,
the audited financial statements of Networks Associates for the fiscal year
ended December 31, 1997, and the unaudited financial statements of TIS for the
fiscal year ended December 26, 1997; current and historical market prices of TIS
Common Stock and Networks Associates Common Stock; certain publicly available
information concerning the business of TIS and of certain other companies
engaged in businesses comparable to those of TIS, and the reported market prices
for certain other companies' securities deemed comparable; publicly available
terms of certain transactions involving companies comparable to TIS and the
consideration paid for such companies; the terms of other business combinations
deemed relevant by J.P. Morgan; certain internal financial analyses and
forecasts prepared by TIS and its management; and certain agreements with
respect to outstanding indebtedness or obligations of TIS. J.P. Morgan also held
discussions with certain members of the management of TIS and Networks
Associates with respect to certain aspects of the Merger, the past and current
business operations of TIS and Networks Associates, the financial condition and
future prospects and operations of TIS and Networks Associates, and certain
other matters believed necessary or appropriate to J.P. Morgan's inquiry. In
addition, J.P. Morgan visited certain representative facilities of TIS and
reviewed such other financial studies and analyses and considered such other
information as it deemed appropriate for the purposes of its opinion.
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J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by TIS and Network Associates or otherwise reviewed by J.P.
Morgan, and J.P. Morgan has not assumed any responsibility or liability
therefor. J.P. Morgan has not conducted any valuation or appraisal of any assets
or liabilities, nor have any valuations or appraisals been provided to J.P.
Morgan. In relying on financial analyses and forecasts provided to J.P. Morgan,
J.P. Morgan has assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of TIS to which such analyses or forecasts relate. J.P. Morgan has
also assumed that the Merger will have the tax consequences described in this
Proxy Statement in discussions with, and materials furnished to, J.P. Morgan by
representatives of TIS, and that the other transactions contemplated by the
Reorganization Agreement will be consummated as described in the Reorganization
Agreement and this Proxy Statement.
The projections furnished to J.P. Morgan for TIS were prepared by the
management of TIS. TIS does not publicly disclose internal management
projections of the type provided to J.P. Morgan in connection with J.P. Morgan's
analysis of the Merger, and such projections were not prepared with a view
toward public disclosure. These projections were based on numerous variables and
assumptions that are inherently uncertain and may be beyond the control of
management, including, without limitation, factors related to general economic
conditions, general market conditions for TIS' products, potential sales of
products to commercial customers, and prevailing interest rates. Accordingly,
actual results could vary significantly from those set forth in such
projections.
J.P. Morgan's opinions are based on economic, market and other conditions
as in effect on, and the information made available to J.P. Morgan as of, the
date of such opinions. Subsequent developments may affect the written opinion
dated February 22, 1998, and J.P. Morgan does not have any obligation to update,
revise, or reaffirm such opinion. J.P. Morgan expressed no opinion as to the
price at which Networks Associates Common Stock will trade at any future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion.
Public Trading Multiples. Using publicly available information, J.P. Morgan
compared selected financial data of TIS with similar data for selected publicly
traded companies engaged in businesses which J.P. Morgan judged to be analogous
to those of TIS. The companies selected by J.P. Morgan were Axent Technologies,
Inc. ("Axent"), Check Point Software Technologies Ltd., Cylink Corp., Networks
Associates, Inc., Secure Computing Corp., and Security Dynamics Technologies,
Inc. These companies were selected, among other reasons, because each serves
principally the market for network security software products. For each
comparable company, publicly available financial performance through the twelve
months ended December 31, 1997 was measured. J.P. Morgan selected the median
value among such companies for the following multiples: aggregate firm value
(equity value plus net debt at time of announcement) as a multiple of sales; and
per-share equity trading value as a multiple of consensus research analysts'
calendar year 1998 earnings-per-share estimates, as reported by First Call.
Earnings before interest and taxes ("EBIT") multiples were not used because
implied values were not meaningful based on TIS' financial performance for the
twelve months ended December 26, 1997. These multiples were then applied to TIS'
sales, as estimated by management for the twelve months ended December 26, 1997,
and consensus research analysts' calendar year 1998 earnings-per-share
estimates, yielding implied trading values for TIS Common Stock of approximately
$12 to $20.25 per share. First Call is a financial data service that monitors
and publishes a compilation of earnings estimates produced by selected research
analysts regarding companies of interest to institutional investors.
Selected Transaction Analysis. J.P. Morgan reviewed the publicly available
financial terms of three recent transactions in the network security software
industry: the acquisition by Axent of Raptor Systems, Inc. ("Raptor Systems");
the acquisition by McAfee Associates Inc. of Network General; and the
acquisition by FTP Software, Inc. of Firefox Communications Inc. ("Firefox
Communications"). J.P. Morgan observed multiples of aggregate firm value (equity
value plus net debt at time of announcement) to the latest twelve
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months revenue of 8.0 times, 4.6 times, and 3.7 times, for Raptor Systems,
Network General, and Firefox Communications, respectively; aggregate value to
the latest twelve months EBIT of 53.7 times and 22.1 times for Raptor Systems
and Network General, respectively, and forward-twelve-months price-to-earnings
multiples of 35.4 times, 30.1 times, and 24.1 times for Raptor Systems, Network
General, and Firefox Communications, respectively. J.P. Morgan selected the mean
among such transactions for aggregate firm value as a multiple of latest twelve
months sales, and the mean forward-twelve-months price-to-earnings multiple,
applied the multiples to TIS' latest twelve months sales, as estimated by
management for the fiscal year ended December 26, 1997, and consensus research
analysts' calendar year 1998 earnings-per-share estimates, as reported by First
Call, and arrived at an estimated range of equity values for TIS Common Stock of
approximately $12 to $18.50 per share. EBIT multiples were not used because
implied values were not meaningful based on TIS' financial performance for the
twelve months ended December 26, 1997.
Premium Analysis. J.P. Morgan also noted the premiums, based on the
Exchange Ratio and the closing price of Networks Associates Common Stock on
February 20, 1998, to various historic prices of TIS Common Stock. The premia to
TIS Common Stock's all-time high, all-time low, 52-week high, 52-week low,
52-week average, four week average, and last closing stock price prior to
announcement were 14%, 165%, 20%, 165%, 87%, 93%, and 60%, respectively. J.P.
Morgan also noted that the median control premium paid in 376 stock-for-stock
pooling transactions from 1993 through 1997 was 29%, based on final offer vs.
price five business days prior to initial offer.
Historical Exchange Ratio Analysis. J.P. Morgan reviewed the historical
trading prices for Networks Associates Common Stock and TIS Common Stock,
separately and in comparison to each other. J.P. Morgan also reviewed the ratios
of the daily closing stock prices of TIS Common Stock to Networks Associates
Common Stock for each day over various periods, starting as far back as October
10, 1996 (the date of the initial public offering (the "IPO") of TIS Common
Stock) and ending February 20, 1998 (the last trading date preceding J.P.
Morgan's presentation at the February 22, 1998 meeting of the TIS Board), and
computed the premium or discount represented by the Exchange Ratio in relation
to these ratios. The ratios of the closing stock prices of TIS Common Stock to
Networks Associates Common Stock for the various periods ending February 20,
1998 were as follows: 0.217 for the period since TIS' IPO on October 10, 1996;
0.199 for the previous year; 0.187 for the previous six months; 0.186 for the
previous 30 days; 0.181 for the previous 5 days; and 0.202 for February 20,
1998; and with respect to the low and high ratios for the previous year, 0.138
and 0.353, respectively. J.P. Morgan observed that the Exchange Ratio
represented a premium of approximately 49%, 63%, 73%, 73%, 79%, 60%, 135%, and
- -9%, respectively, over the aforementioned ratios of TIS stock prices to
Networks Associates stock prices.
Contribution Analysis. J.P. Morgan analyzed the pro forma contribution of
each of TIS and Networks Associates to the combined entity, if the Merger were
to be consummated, and reviewed certain historical and estimated future
operating and financial information including, among other things, the sales,
operating income, and net income of TIS and Networks Associates, and the pro
forma sales, operating income, and net income of the combined entity resulting
from the Merger based on (i) actual historical information available in certain
publicly available financial statements, (ii) internal financial analyses and
forecasts for TIS prepared by management and (iii) financial analyses and
forecasts for Networks Associates published by Wall Street research analysts.
Such analysis did not take into account any potential synergies or cost savings
that might be realized after the Merger. Such analysis indicated that, based on
management forecasts, TIS would contribute on a pro forma basis to the combined
entity resulting from the Merger (i) 6.5% of 1997 sales and 8.2% of 1998 sales,
(ii) 3.9% of 1998 operating income, (iii) 3.8% of 1998 net income. These figures
compared to the pro forma ownership of the TIS shareholders in the combined
company of approximately 6.6%. J.P. Morgan observed that the contribution
analysis does not take into account the different multiples of revenue,
operating profit or earnings that the market ascribes to Networks Associates and
TIS.
Pro Forma Analysis of the Merger. J.P. Morgan analyzed certain pro forma
effects of the Merger on the earnings and capitalization of Networks Associates.
With respect to 1998, such analysis was based on First Call consensus estimates
for Networks Associates and TIS without assumed pre-tax annual synergies. Based
on such analysis, J.P. Morgan observed that, based on the Exchange Ratio and
assuming that the Merger was treated as a pooling-of-interest business
combination for accounting, before taking into account any one-time
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advisory or restructuring charges, the Merger would result in an earnings per
share dilution for Networks Associates shareholders of 3.4 percent and 3.2
percent for calendar years 1998 and 1999, respectively, without synergies.
The summary set forth above does not purport to be a complete description
of the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set forth
above and their analyses must be considered as a whole and that selecting
portions thereof, without considering all of its analyses, could create an
incomplete view of the processes underlying its analyses and opinion. J.P.
Morgan based its analyses on assumptions that it deemed reasonable, including
assumptions concerning general business and economic conditions and
industry-specific factors. The other principal assumptions upon which J.P.
Morgan based its analyses are set forth above under the description of each such
analysis. J.P. Morgan's analyses are not necessarily indicative of actual values
or actual future results that might be achieved, which values may be higher or
lower than those indicated. Moreover, J.P. Morgan's analyses are not and do not
purport to be appraisals or otherwise reflective of the prices at which
businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to advise TIS with
respect to the Merger and to deliver an opinion to TIS' Board with respect to
the Merger on the basis of such experience and its familiarity with TIS.
Specifically, J.P. Morgan acted as lead underwriter in TIS's IPO in October
1996. In addition, J.P. Morgan has advised TIS since its IPO on various other
potential, unconsummated transactions in the network security industry.
TIS has agreed to pay J.P. Morgan a fee for its financial advisory services
in connection with the Merger. Pursuant to its engagement letter, TIS has agreed
to pay J.P. Morgan, in the event the Merger is consummated, a fee of 0.75
percent of the aggregate amount of consideration received by TIS and/or its
stockholders in the Merger. In addition, TIS has agreed to reimburse J.P. Morgan
for all expenses incurred in connection with its services, and to indemnify J.P.
Morgan against certain liabilities and expenses arising out of or in conjunction
with its services, including certain liabilities under the Federal securities
law.
J.P. Morgan and its affiliates maintain banking and other business
relationships with TIS and its affiliates, for which it receives customary fees.
In the ordinary course of their businesses, affiliates of J.P. Morgan may
actively trade the debt and equity securities of TIS or Networks Associates for
their own accounts or for the accounts of customers and, accordingly, they may
at any time hold long or short positions in such securities.
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 TIS
Common Stock. This discussion does not deal with all income tax considerations
that may be relevant to particular TIS 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 TIS 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 TIS Common Stock were or are acquired
or shares of Network Associates Common Stock were or are disposed of.
Furthermore, no foreign, state or local tax considerations are addressed herein.
ACCORDINGLY, TIS 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.
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The following discussion is based upon interpretations 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
Network Associates, Merger Sub, TIS and/or TIS stockholders.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code, with each of Network Associates, Merger Sub and
TIS 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 TIS Common Stock
upon their receipt of Network Associates Common Stock in the Merger solely
in exchange for TIS Common Stock;
(b) The aggregate tax basis of the Network Associates Common Stock
received in the Merger by a TIS stockholder (including any fractional
shares deemed received, as described below) will be the same as the
aggregate tax basis of TIS Common Stock surrendered in exchange therefor;
(c) The holding period of the Network Associates Common Stock received
in the Merger by a TIS stockholder will include the period during which the
stockholder held the TIS Common Stock surrendered in exchange therefor,
provided that the TIS Common Stock is held as a capital asset at the time
of the Merger;
(d) Cash payments received by holders of TIS Common Stock in lieu of a
fractional share will be treated as if a fractional share of Network
Associates Common Stock has been issued in the Merger and then redeemed by
Network Associates. A stockholder of TIS 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 Network Associates, Merger Sub or TIS 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, Network Associates and
TIS will each have received an opinion from their respective legal counsel,
Wilson Sonsini Goodrich & Rosati, a Professional Corporation ("WSGR"), and Piper
& Marbury L.L.P. ("Piper & Marbury"), 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 Network Associates,
Merger Sub and TIS, including representations in certificates delivered to
counsel by the respective managements of Network Associates, Merger Sub and TIS.
A successful IRS challenge to the reorganization status of the Merger would
result in a TIS stockholder recognizing gain or loss with respect to each share
of TIS 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 Network Associates Common Stock received in exchange
therefor. In such event, a stockholder's aggregate basis in the Network
Associates 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 TIS stockholder would
recognize gain to the extent the stockholder received (directly or indirectly)
consideration other than Network Associates Common Stock in exchange for the
stockholder's TIS Common Stock or to the extent that the Network Associates
Common Stock was considered to be received in exchange for services or property
other than solely for TIS Common Stock. All or a portion of such gain or income
may be taxable as ordinary income.
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TIS 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 TIS Common Stock and a description
of the Network Associates 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 March 13, 1998 Network Associates and
TIS 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 Network
Associates and TIS. 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 TIS or businesses of Network Associates or TIS
by Network Associates. Private parties may also seek to take legal action under
the antitrust laws under certain circumstances.
Based on information available to them, Network Associates and TIS 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, Network Associates and TIS 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 Network Associates of letters from Coopers & Lybrand L.L.P., Network
Associates' independent public accountants, and Ernst & Young LLP, TIS's
independent public accountants, regarding the respective accounting firms'
concurrence with Network Associates' management's and TIS'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 TIS, (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
TIS's Common Stock is traded on such a system, Nasdaq, and because the TIS
stockholders are being offered stock of Network Associates, which is also traded
on Nasdaq, and cash in lieu of fraction shares, stockholders of TIS will not
have appraisal rights with respect to the Merger. The DGCL does not provide
appraisal rights to stockholders of a corporation, such as Network Associates,
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 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, Network
Associates, TIS 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
[ ], 1998.
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, TIS or the holders of any of the following securities:
(a) each share of TIS Common Stock issued and outstanding immediately
prior to the Effective Time, other than any shares of TIS Common Stock to
be canceled pursuant to the Reorganization Agreement, will be canceled and
extinguished and automatically converted into the right to receive 0.323 of
a share (the "Exchange Ratio") of Network Associates Common Stock upon
surrender of the certificate representing such share of TIS Common Stock;
(b) each share of TIS Common Stock held by TIS or owned by Merger Sub,
Network Associates or any direct or indirect wholly-owned subsidiary of TIS
or of Network Associates immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof;
(c) all options to purchase TIS Common Stock then outstanding under
TIS's Amended and Restated Employee Stock Option Plan (the "Employee Option
Plan"),TIS's Amended and Restated 1996 Directors Stock Option Plan (the
"Directors' Plan") and Amended and Restated 1996 Stock Option Plan (the
"1996 Option Plan" and together with the Employee Option Plan and the
Directors' Plan, the "TIS Stock Option Plans") shall be assumed by Network
Associates in accordance with the Reorganization Agreement; and
(d) each share of Common Stock, $0.01 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.
Subject to the consummation of the Merger, each purchase right under TIS's
Employee Stock Purchase Plan ("ESPP") will be deemed to constitute a purchase
right to acquire, on the same terms and conditions as were applicable under the
ESPP immediately prior to the Effective Time, a number of shares of Network
Associates Common Stock determined as provided in the ESPP, except that the
purchase price of such shares of Network Associates Common Stock under each
assumed purchase right will be the lower of (i) the quotient determined by
dividing eighty-five percent (85%) of the fair market value of the TIS Common
Stock on the offering date of each assumed offering by the Exchange Ratio or
(ii) eighty-five percent (85%) of the fair market value of the Network
Associates Common Stock on each exercise date of the assumed offering occurring
after the Effective Time.
The Exchange Ratio will 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 Network Associates
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Common Stock or TIS Common Stock), reorganization, recapitalization,
reclassification or other like change with respect to Network Associates Common
Stock or TIS Common Stock occurring on or after February 22, 1998 and prior to
the Effective Time.
No fraction of a share of Network Associates Common Stock will be issued by
virtue of the Merger, but in lieu thereof each holder of shares of TIS Common
Stock who would otherwise be entitled to a fraction of a share of Network
Associates Common Stock (after aggregating all fractional shares of Network
Associates Common Stock that otherwise would be received by such holder) shall
receive from Network Associates 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 Network Associates Common Stock for the five most
recent days that Network Associates Common Stock has traded ending on the
trading day immediately prior to the Effective Time, as reported on Nasdaq.
Promptly after the Effective Time, Network Associates shall make available
to the Exchange Agent for exchange the shares of Network Associates Common Stock
issuable pursuant to the Reorganization Agreement in exchange for outstanding
shares of TIS 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 TIS Common Stock may be entitled
pursuant to the Reorganization Agreement.
At or promptly after the Effective Time, Network Associates, acting through
the Exchange Agent, will deliver to each TIS 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 TIS
Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF TIS
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 TIS Common Stock outstanding as of
February 28, 1997, an aggregate of approximately 4.5 million shares of Network
Associates Common Stock will be issued to TIS stockholders in the Merger, and
Network Associates will assume TIS options in exchange for options to purchase
up to approximately 551,000 additional shares of Network Associates Common
Stock. Based upon the number of shares of Network Associates Common Stock issued
and outstanding as of February 28, 1997, and after giving effect to the issuance
of Network Associates Common Stock as described in the previous sentence, the
TIS Common Stock outstanding immediately prior to the Merger would be converted
into, and have voting power with respect to, approximately 6.3% of Network
Associates' total issued and outstanding shares, the holders of former TIS
options would hold options exercisable for 0.1% of Network Associates' total
issued and outstanding shares (assuming the exercise of only such former TIS
options). The foregoing numbers of shares and percentages are subject to change
in the event that the capitalization of either Network Associates or TIS changes
subsequent to February 28, 1998 and prior to the Effective Time, and there can
be no assurance as to the actual capitalization of Network Associates or TIS at
the Effective Time or of Network Associates 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 TIS with TIS 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
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Merger Sub immediately prior to the Effective Time will remain as officers of
the surviving corporation, until their successors are duly elected or appointed
or qualified.
CONDUCT OF TIS'S AND NETWORK ASSOCIATES' 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, TIS (and each of its subsidiaries) shall, except to the extent
that Network Associates 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, TIS will promptly notify Network
Associates 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 TIS's disclosure schedule, without the
prior written consent of Network Associates, 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, TIS
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
February 22, 1998 and as previously disclosed in writing or made available
to Network Associates, 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 TIS 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 TIS or its subsidiaries, except repurchases of
unvested shares at cost in connection with the termination of the
employment relationship with any employee pursuant to stock option or
purchase agreements in effect on February 22, 1998;
(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) shares of TIS Common Stock pursuant to the exercise of stock
options therefor outstanding as of February 22, 1998, and (ii) shares of
TIS 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 subsidiaries);
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(h) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a 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 TIS 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 TIS, except sales of 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
TIS, 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 $250,000;
(m) Except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which TIS 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 TIS's
products or products licensed by TIS other than in the ordinary course of
business consistent with past practice;
(o) Materially revalue any of its 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
Network Associates' ability to account for the Merger as a pooling of
interests whether or not otherwise permitted by the provisions of the
Reorganization Agreement;
(q) Engage in any action with the intent to directly or indirectly
adversely impact any of the transactions contemplated by the Reorganization
Agreement; or
(r) Agree in writing or otherwise to take any of the actions described
in (a) through (q) above.
Pursuant to the Reorganization Agreement, except as permitted by the terms
of the Reorganization Agreement, without the prior written consent of TIS,
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 Associates 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;
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(b) Take any action that would be reasonably likely to interfere with
Network Associates' 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 substantially all of the assets of any corporation or
other business entity (other than TIS), whether by merger, consolidation,
stock tender or otherwise, provided, however, that nothing contained in the
Reorganization Agreement prevents Network Associates from doing any of the
foregoing until such time as the consideration paid by Network Associates
(as determined in good faith by the Network Associates Board as of the time
such acquisition is approved by such Board or as of such other time as such
Board may determine) to acquire such voting securities or assets (in any
individual case or in the aggregate) shall exceed $300,000,000.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains representations and warranties by
Network Associates, Merger Sub and TIS relating to a number of matters,
including: (i) the due organization of Network Associates, TIS and their
respective subsidiaries; (ii) the capital structure of Network Associates and
TIS; (iii) the authorization, execution, delivery and enforceability of the
Reorganization Agreement and related matters; (iv) the filing of documents and
financial statements by Network Associates and TIS with the SEC and the accuracy
of information contained therein; (v) the absence of certain material adverse
changes or events; and (vi) the accuracy of information provided for this Proxy
Statement/Prospectus.
In addition, the Reorganization Agreement contains representations and
warranties by TIS relating to a number of additional matters, including: (i) the
obligations with respect to capital stock of TIS; (ii) taxes, tax returns and
tax deficiencies; (iii) the possession of leasehold interests in real properties
necessary for the conduct of business; (iv) intellectual property rights; (v)
compliance with laws; (vi) material litigation; (vii) brokers' and finders'
fees; (viii) employee benefit plans; (ix) environmental matters including
hazardous materials, hazardous materials activities and environmental permits;
(x) agreements, contracts and commitments; (xi) the ability to account for the
Merger as a pooling of interests; (xii) change of control payments; (xiii) the
non-applicability of Section 203 of the DGCL to the transactions contemplated by
the Merger; and (xiv) customs and tariffs.
The Reorganization Agreement also contains representations and warranties
by Network Associates relating to the valid issuance of Network Associates
Common Stock pursuant to the Reorganization Agreement.
NO SOLICITATION
Pursuant to the Reorganization Agreement, until the earlier of the
Effective Time or termination of the Reorganization Agreement pursuant to its
terms, TIS 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
Acquisition 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 may reasonably be
expected to lead to, any Acquisition Proposal. The Reorganization Agreement
provides that TIS and its subsidiaries shall immediately cease any and all
existing activities, discussions or negotiations with any parties conducted
theretofore with respect to any Acquisition Proposal. Without limiting the
foregoing, it is understood that any action taken by any officer, director or
employee of TIS or any of its subsidiaries or any investment banker, attorney or
other advisor or representative of TIS or any of its subsidiaries that if taken
by TIS would constitute a breach by TIS of the immediately preceding two
sentences shall be deemed to be a breach of the Reorganization Agreement by TIS.
An "Acquisition 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 TIS or any of its subsidiaries
(other than the purchase of TIS's products in the ordinary course of business)
or
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more than a 20% interest in the total voting securities of TIS 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 20% or more of
the total voting securities of TIS or any of its subsidiaries or any merger,
consolidation, business combination, sale of substantially all the assets,
recapitalization, liquidation, dissolution or similar transaction involving TIS
or any of its subsidiaries, other than the transactions contemplated by the
Reorganization Agreement.
Pursuant to the Reorganization Agreement, neither the TIS Board nor any
committee thereof may (i) withdraw or modify, or propose publicly to withdraw or
modify, in a manner adverse to Network Associates 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 TIS to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement with respect to any Acquisition 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, TIS 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
Acquisition Proposal.
In addition, pursuant to the Reorganization Agreement, TIS is required to
advise Network Associates as promptly as practicable, orally and in writing, of
any request for non-public information which TIS reasonably believes would lead
to an Acquisition Proposal or of any Acquisition Proposal, the material terms
and conditions of such request or Acquisition Proposal, and the identity of the
person making any such request, Acquisition Proposal or inquiry. TIS must also
keep Network Associates informed in all material respects of the status and
details (including material amendments or proposed amendments) of any such
request, Acquisition Proposal or inquiry.
Nothing contained in the Reorganization Agreement shall prohibit TIS 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 TIS's stockholders if, in the good faith judgment of the majority
of the members of the Board of Directors of TIS, after consultation with
independent legal counsel, failure to so disclose would be inconsistent with
applicable laws; provided that none of TIS nor its Board of Directors nor any
committee thereof shall 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 Acquisition
Proposal.
TERMINATION FEE
TIS has agreed to pay to Network Associates the sum of $9,000,000 (the
"Termination Fee") if:
(i) the Merger Agreement is terminated because the required approval
of the stockholders of TIS is not obtained by reason of the failure to
obtain the required vote at a meeting of TIS stockholders duly convened
therefor or at any adjournment thereof (unless the failure to obtain the
required stockholder approval is primarily the result of a material adverse
effect (as defined) on Network Associates); or
(ii) the Merger Agreement is terminated by Network Associates if (a)
the TIS Board or any committee thereof withdraws or modifies in a manner
adverse to Network Associates its approval or recommendation of the Merger
or the Reorganization Agreement, (b) TIS fails to include in the Proxy
Statement/Prospectus the recommendation of the TIS Board in favor of
approval of the Merger and the Reorganization Agreement, (c) the TIS Board
fails to reconfirm such recommendation within five business days after a
written request to do so, (d) the TIS Board or any committee thereof
recommends any Acquisition Proposal, (e) the TIS Board or any committee
thereof resolves to do any of the foregoing or (f) TIS or any of its
officers or directors participates in any discussions or negotiations in
breach of their obligations described under "-- No Solicitation".
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Payment of the fees described above will 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 TIS
Common Stock (each a "TIS Stock Option") under the TIS Stock Option Plans,
whether or not exercisable, will be assumed by Network Associates. Each TIS
Stock Option so assumed by Network Associates under the Reorganization Agreement
will continue to have, and be subject to, the same terms and conditions set
forth in the applicable TIS Stock Option Plan immediately prior to the Effective
Time (including, without limitation, any repurchase rights or vesting
provisions), except that (i) each TIS Stock Option will be exercisable (or will
become exercisable in accordance with its terms) for that number of whole shares
of Network Associates Common Stock equal to the product of the number of shares
of TIS Common Stock that were issuable upon exercise of such TIS Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of Network Associates Common
Stock, and (ii) the per share exercise price for the shares of Network
Associates Common Stock issuable upon exercise of such assumed TIS Stock Option
will be equal to the quotient determined by dividing the exercise price per
share of TIS Common Stock at which such TIS Stock Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent.
It is intended that TIS Stock Options assumed by Network Associates shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent TIS Stock Options qualified as incentive
stock options immediately prior to the Effective Time.
Subject to the consummation of the Merger, each purchase right under TIS's
ESPP will be deemed to constitute a purchase right to acquire, on the same terms
and conditions as were applicable under the ESPP immediately prior to the
Effective Time, a number of shares of Network Associates Common Stock determined
as provided in the ESPP, except that the purchase price of such shares of
Network Associates Common Stock under each assumed purchase right will be the
lower of (i) the quotient determined by dividing eighty-five percent (85%) of
the fair market value of the TIS Common Stock on the offering date of each
assumed offering by the Exchange Ratio or (ii) eighty-five percent (85%) of the
fair market value of the Network Associates Common Stock on each exercise date
of the assumed offering occurring after the Effective Time.
Network Associates will file a registration statement on Form S-8
registering the shares of Network Associates Common Stock issuable with respect
to assumed TIS 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
TIS OUTSIDE DIRECTOR OPTIONS
The number of shares exercisable pursuant to options issued under the TIS
Directors' Plan is subject, pursuant to the terms of such plan and option
agreements issued pursuant thereto, to acceleration of one-half of all unvested
options as a result of the Merger. Assuming the Merger is consummated on or
before May 1, 1998 and based on options outstanding as of the TIS Record Date,
the two outside directors of TIS would each be entitled to exercise options in
respect of an additional 1,847 shares of TIS Common Stock as a result of the
Merger.
CHANGE OF CONTROL AGREEMENTS
TIS has separation agreements with the following TIS officers: Gina L.
Dubbe, Hamayoon Tajalli, Harvey Weiss, Ronald Kaiser, Alan Burk and Martha
Branstad. These agreements provide that if the employee is terminated under
certain circumstances, or if the employee resigns following the occurrence of
certain circumstances or a reduction in compensation by 15% or more, such
employee will be entitled to
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continuation of the employee's regular base salary, without bonus but with
health, dental and/or life insurance benefits, and options vesting benefits for
a period of 12 months. There can be no assurances that after the Merger TIS will
be able to retain the services of such TIS officers.
INDEMNIFICATION
From and after the Effective Time, Network Associates will fulfill and
honor and will cause the surviving corporation to fulfill and honor in all
respects the obligations of TIS pursuant to any indemnification agreements
between TIS and its directors and officers as of the Effective Time (the
"Indemnified Parties") and any indemnification provisions under TIS's
Certificate of Incorporation (the "TIS Certificate") or Bylaws as in effect on
February 22, 1998. 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 TIS Certificate and Bylaws of TIS 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 TIS, unless such modification is required by law.
For a period of six years after the Effective Time, Network Associates will
cause the surviving corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by TIS's directors' and
officers' liability insurance policy on terms comparable to those applicable to
the current directors and officers of TIS; provided, however, that in no event
will Network Associates or the surviving corporation be required to expend
annual premiums in excess of $200,000 for such coverage (or such coverage as is
available for an annual premium of $200,000).
STOCK OWNERSHIP
The executive officers and directors of TIS own in the aggregate 4,427,479
shares of TIS Common Stock as of the TIS Record Date and options exercisable
within 60 days of the TIS Record Date to purchase 328,921 shares of TIS Common
Stock, representing approximately 32% of the votes entitled to be cast by
holders of TIS Common Stock issued and outstanding as of the TIS Record Date,
and 33.5% of such votes assuming exercise of all vested options held by all such
persons.
STOCK OPTION AGREEMENT
As an inducement to Network Associates to enter into the Merger Agreement,
TIS entered into the Stock Option Agreement. A copy of the Stock Option
Agreement is attached as Annex C to this Proxy Statement/Prospectus. Pursuant to
the Stock Option Agreement, TIS granted to Network Associates an irrevocable
option (the "Option") to acquire up to a number of shares of TIS Common Stock
equal to 19.9% of the issued and outstanding shares as of the first date, if
any, upon which an Exercise Event (as defined below) will occur (the "Option
Shares"), in the manner set forth below (i) by paying cash at a price of $20.00
per share (the "Exercise Price") and/or, at Network Associates' election, (ii)
by exchanging therefor Network Associates Common Stock at a rate for each Option
Share, of a number of shares of Network Associates Common Stock equal to the
Exercise Price divided by the average closing sale prices during the previous 30
trading days of Network Associates Common Stock on the Nasdaq National Market
immediately preceding the date of the closing of the particular Option exercise.
The Option may be exercised following the occurrence of an Exercise Event.
An "Exercise Event" occurs immediately prior to the consummation of a Target
Acquisition. A "Target Acquisition" is any of the following transactions or
series of related transactions: (i) a merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving TIS pursuant to which the stockholders of TIS 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 Stock Option Agreement);
(ii) a sale or other disposition by TIS of assets (excluding inventory and used
equipment sold in
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the ordinary course of business) representing in excess of 40% of the fair
market value of TIS'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 TIS), 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 TIS. Consummation by Network Associates
of the Merger or any other acquisition with TIS will not constitute a Target
Acquisition. The economic benefit derived by Network Associates under the Stock
Option Agreement shall not exceed $12,000,000, less any Termination Fee paid to
Network Associates under the Reorganization Agreement, and Network Associates
shall promptly account to TIS for any such excess. In addition, in lieu of
delivery and receipt of the TIS Shares issuable in connection with an Exercise
Event, either Network Associates or TIS may elect to have the economic benefit,
if any, payable to Network Associates pursuant to the immediately preceding
sentence be paid in cash promptly to Network Associates.
The Option shall terminate upon the earlier to occur of the following: (i)
the Effective Time; (ii) 12 months following the termination of the
Reorganization Agreement if a third person or group shall have made and not
withdrawn a proposal or entered into an agreement with TIS with respect to a
Target Acquisition on or prior to the date of such terminations, and if, as is
more fully described in, and subject to the limitations contained in, the Stock
Option Agreement, such termination is effected or a result of (a) the Merger
having not been consummated by July 31, 1998 by TIS; (b) the occurrence of
circumstances under which Network Associates is entitled to receive the
Termination Fee (including failure to receive the required TIS stockholder
approval of the Merger); and (c) certain uncured material breaches by TIS of its
representations, warranties or covenants under the Reorganization Agreement; and
(iii) six months after the date on which the Reorganization Agreement is
terminated by a party as described in paragraph (ii)(b) or (ii)(c) above, if at
the time of such termination there shall be no outstanding third person or group
offer or agreement with TIS with respect to any Target Acquisition (provided
that, if during the pendency of such six-month period any such proposal is made
or agreement is entered into, the Option shall not terminate until six months
after the date such offer or agreement is made or entered into).
In any case, if the Option is exercisable but cannot be exercised by reason
of any applicable government order or because the waiting period related to the
issuance of the Option Shares under the HSR Act shall not have expired or been
terminated, then the Option shall not terminate until the tenth business day
after such impediment to exercise shall have been removed or shall have become
final and not subject to appeal. Notwithstanding any of the foregoing, the
Option may not be exercised if (i) Network Associates shall have breached in any
material respect any of its covenants or agreements contained in the
Reorganization Agreement or (ii) the representations and warranties of Network
Associates contained in the Reorganization Agreement shall not have been true
and correct in all material respects on and as of the date when made.
If Network Associates shall have exercised the Option, Network Associates
may thereafter deliver to TIS a written notice (a "Put Notice"), at any time
during which Network Associates may exercise the Option, specifying that it
wishes to sell (as specified in such Put Notice) all or a portion of the Option
Shares acquired as a result of such exercise at the price, and in the form,
described below. At any closing in respect of a Put Notice, (i) Network
Associates shall surrender to TIS the certificates evidencing the Option Shares
to be purchased by TIS at such Put closing and (ii) TIS shall deliver to Network
Associates a proportionate amount of the aggregate consideration paid by Network
Associates in connection with any exercise of the Option, together with interest
on such amounts at a per annum rate of 10%. In addition, the consideration to be
paid by TIS to Network Associates at any Put closing shall be in the form that
is proportionate to the form previously paid by Network Associates to TIS. By
way of example only, if (x) one third of the aggregate Option Shares shall have
been acquired for cash and two-thirds shall have been acquired for Network
Associates Common Shares, then (y) the consideration to be paid by TIS to
Network Associates at such Put closing shall consist of one-third cash and
two-thirds Network Associates Common Shares.
AFFILIATE AGREEMENTS
Each of the members of the TIS Board and certain officers of TIS has
entered into an agreement restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of TIS Common Stock
held by them prior to the Merger and the Network Associates Common Shares to be
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received by them in the Merger so as to comply with the requirements of
applicable federal securities laws and to help ensure that the Merger will be
treated as a pooling of interests for accounting and financial reporting
purposes. Pursuant to such agreements, such directors, officers and stockholders
have also acknowledged the resale restrictions imposed by Rule 145 under the
Securities Act on Network Associates Common Shares to be received by them in the
Merger.
VOTING AGREEMENTS
Mr. Walker and Dr. Branstad, both TIS directors and the two largest
stockholders of TIS, have each entered into a Voting Agreement with Network
Associates obligating them, among other things, to vote their shares of TIS
Common Stock in favor of the Merger. Mr. Walker and Dr. Branstad held in the
aggregate approximately 31% of the outstanding TIS Common Stock as of the TIS
Record Date. Consequently, Stockholder Approval will be obtained if holders of
additional shares of TIS Common Stock representing approximately 19% of the
outstanding shares of TIS Common Stock vote in favor of the approval and
adoption of the Reorganization Agreement and approval of the Merger. Pursuant to
these Voting Agreements, which are irrevocable, such persons have agreed to vote
all shares of TIS Common Stock of which they have beneficial ownership or
acquire beneficial ownership prior to the termination of the Voting Agreements
(i) in favor of approval and adoption of the Reorganization Agreement and
approval of the Merger and (ii) against approval of any proposal made in
opposition to or in competition with the consummation of the Merger or certain
actions which may impede, delay, discourage or adversely affect the Merger and
the transactions contemplated thereby. In addition, such persons have granted
irrevocable proxies to the Network Associates Board to vote such persons' TIS
Common Stock as indicated in the previous sentence.
NONCOMPETITION AGREEMENT
Stephen T. Walker, TIS's President and Chief Executive Officer, as a
condition to the Merger entered into a Noncompetition Agreement with Network
Associates providing that, for the period of the longer of (i) twenty-four (24)
months from the Effective Time and (ii) twelve (12) months after the termination
of any employment arrangement with Network Associates or any subsidiary after
the Closing Date (the "Restricted Period"), subject to limited exceptions, he
will not directly or indirectly own, manage, control, participate in, consult
with, render services for, allow his name to be used in connection with or in
any manner engage in any business directly competing with the businesses of TIS
or any of its subsidiaries as such businesses exist or are in process of
development on the Closing Date or otherwise engage in any network security,
firewall, encryption and network security policy management business, in each
case in certain geographic areas. In addition, Mr. Walker also agreed that
during the Restricted Period, he will not (i) induce or attempt to induce any
employee of Network Associates or any subsidiary (including Merger Sub and TIS)
to leave the employ of Network Associates or any subsidiary, or in any way
interfere with the relationship between Network Associates or any subsidiary and
any employee thereof, (ii) hire directly or through another entity any person
who was an employee of Network Associates or any subsidiary at any time during
the six months preceding such hiring, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of Network Associates or
any subsidiary to cease doing business with Network Associates or such
subsidiary, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and Network Associates or any
subsidiary, in each case in certain geographic areas.
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) TIS stockholder approval and adoption of
the Reorganization Agreement and approval of the Merger 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 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
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<PAGE> 59
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) Network Associates and TIS shall each have received written
opinions from their respective tax counsel (WSGR and Piper & Marbury,
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 Network Associates or TIS 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 Network Associates and TIS 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; and (v) the shares of Network Associates Common Stock
to be issued in the Merger shall have been approved for listing on Nasdaq.
In addition, the obligation of TIS 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
TIS: (i) the representations and warranties of Network Associates 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 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 Network Associates (TIS shall have received a
certificate with respect to the foregoing signed on behalf of Network Associates
by an authorized officer of Network Associates); (ii) Network Associates 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 TIS
shall have received a certificate to such effect signed on behalf of Network
Associates by an authorized officer of Network Associates; and (iii) no Material
Adverse Effect with respect to Network Associates shall have occurred since the
date of the Reorganization Agreement or be reasonably likely to occur.
Further, the obligations of Network Associates 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 Network Associates: (i) the representations and
warranties of TIS 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 TIS (Network Associates shall have received a certificate with respect to the
foregoing signed on behalf of TIS by an authorized officer of TIS); (ii) TIS
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 Network Associates
shall have received a certificate to such effect signed on behalf of TIS by the
Chief Executive Officer and the Chief Financial Officer of TIS; (iii) no
Material Adverse Effect with respect to TIS shall have occurred since the date
of the Reorganization Agreement or be reasonably likely to occur; (iv) Stephen
T. Walker shall have entered into the Noncompetition Agreement; (v) each of the
TIS Affiliates shall have entered into the TIS Affiliate Agreement and each of
such agreements will be in full force and effect as of the Effective Time; (vi)
Network Associates shall have received letters from each of Coopers & Lybrand
L.L.P. and Ernst & Young LLP dated within two business days prior to the
Effective Time regarding each firm's respective concurrence with Network
Associates' management's and TIS's management's conclusions as to the
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<PAGE> 60
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 (vii) TIS 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 TIS'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 TIS or Network Associates: (i) by mutual written consent duly
authorized by the Boards of Directors of Network Associates and TIS; (ii) by
either TIS or Network Associates if the Merger shall not have been consummated
by July 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 TIS or
Network Associates 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
TIS or Network Associates if the required approvals of the stockholders of TIS
contemplated by the Reorganization Agreement shall not have been obtained by
reason of the failure to obtain the required vote at a meeting of TIS
stockholders duly convened therefor or at any adjournment thereof (provided that
this right to terminate the Reorganization Agreement shall not be available to
TIS where the failure to obtain TIS stockholder approval shall have been caused
by the action or failure to act of TIS and such action or failure to act
constitutes a breach by TIS of the Reorganization Agreement); (v) by Network
Associates if (a) the Board of Directors of TIS or any committee thereof shall
have withdrawn or modified in a manner adverse to Parent its approval or
recommendation of the Merger or the Reorganization Agreement, (b) TIS shall have
failed to include in the Proxy Statement/Prospectus the recommendation of the
Board of Directors of TIS in favor of approval of the Merger and the
Reorganization Agreement, (c) the Board of Directors of TIS shall have failed to
reconfirm such recommendation within five business days after a written request
to do so, (d) the Board of Directors of TIS or any committee thereof shall have
recommended any Acquisition Proposal, (e) the Board of Directors of TIS or any
committee thereof shall have resolved to do any of the foregoing or (f) TIS or
any of its officers or directors shall participate in any discussions or
negotiations in breach of the non-solicitation covenants of TIS; (vi) by TIS,
upon a breach of any representation, warranty, covenant or agreement on the part
of Network Associates set forth in the Reorganization Agreement, or if any
representation or warranty of Network Associates 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 if such
inaccuracy in Network Associates' representations and warranties or breach by
Network Associates is curable by Network Associates through the exercise of its
commercially reasonable efforts, then TIS may not terminate the Reorganization
Agreement pursuant to this provision for thirty days after delivery of written
notice from TIS to Network Associates of such breach, provided Network
Associates continues to exercise commercially reasonable efforts to cure such
breach (it being understood that TIS may not so terminate the Reorganization
Agreement if it shall have materially breached the Reorganization Agreement or
if such breach by Network Associates is cured during such thirty day period); or
(vii) by Network Associates, upon a breach of any representation, warranty,
covenant or agreement on the part of TIS set forth in the Reorganization
Agreement, or if any representation or warranty of TIS 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
Associates may not terminate the Reorganization Agreement pursuant to this
provision if such inaccuracy in TIS's representations and warranties or breach
by TIS is curable by TIS through the exercise of its commercially reasonable
efforts for thirty days after delivery of written notice from Network Associates
to TIS of such breach, provided TIS continues to exercise commercially
reasonable efforts to cure such breach (it being understood that Network
Associates may not so terminate the Reorganization Agreement if it shall have
materially breached the Reorganization Agreement or if such breach by TIS is
cured during such thirty day period).
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF NETWORK ASSOCIATES CAPITAL STOCK
The authorized capital stock of Network Associates consists of 300,000,000
shares of Common Stock, $0.01 par value per share, and 5,000,000 shares of
Preferred Stock, $0.01 par value per share.
NETWORK ASSOCIATES COMMON STOCK
As of February 28, 1998, there were approximately 71.8 million shares of
Network Associates Common Stock outstanding. Network Associates Common Stock is
listed on Nasdaq under the symbol NETA. As of February 28, 1998, the outstanding
Network Associates Common Stock was held of record by approximately 948
stockholders. The holders of Network Associates 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
Network Associates Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Network Associates Board out
of funds legally available therefor. In the event of a liquidation, dissolution
or winding up of Network Associates, the holders of Network Associates 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 Associates Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Network Associates Common Stock. All
outstanding shares of Network Associates Common Stock are fully paid and
non-assessable, and the shares of Network Associates Common Stock to be
outstanding upon completion of the Merger will be fully paid and non-assessable.
NETWORK ASSOCIATES PREFERRED STOCK
Network Associates has 5,000,000 shares of Preferred Stock authorized, of
which one share has been designated Series A Preferred Stock and as of February
1, 1998, one share of Series A Preferred Stock is outstanding. The share of
Series A Preferred Stock was issued in connection with Network Associates'
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 Network Associates Common Stock
issuable in exchange for certain exchangeable non-voting shares of FSA
Corporation. As of February 1, 1998, such exchangeable shares of FSA Corporation
were exchangeable for 325,062 shares of Network Associates Common Stock.
The Network Associates 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 Network
Associates 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 Network Associates Common Stock. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of Network Associates.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Network Associates Common Stock is
Boston EquiServe and its telephone number is (617) 575-2000.
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<PAGE> 62
DESCRIPTION OF TIS CAPITAL STOCK
The authorized capital stock of TIS consists of 40,000,000 shares of Common
Stock, $0.01 par value per share, and 5,000,000 shares of Preferred Stock, $0.01
par value per share.
TIS COMMON STOCK
As of the TIS Record Date, there were 13,882,789 shares of TIS Common Stock
outstanding held of record by approximately 253 stockholders. TIS Common Stock
is listed on Nasdaq under the symbol TISX. Holders of TIS Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Pursuant to the TIS Certificate of Incorporation, the stockholders
do not have a right to take action by written consent unless such written
consent is unanimous nor may they cumulate votes in connection with the election
of Directors. The holders of TIS 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 TIS, the holders of TIS 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 TIS Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the TIS Common Stock. All outstanding shares of TIS Common Stock
are fully paid and non-assessable, and the shares of Network Associates Common
Stock which are received in exchange for the TIS Common Stock to be outstanding
upon completion of the Merger will be fully paid and non-assessable.
TIS PREFERRED STOCK
TIS has 5,000,000 shares of Preferred Stock authorized, of which 1,000,000
shares are designated Series A Preferred Stock and, as of the TIS 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 TIS 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 TIS Common Stock and the issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of TIS.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the TIS Common Stock is American Stock
Transfer and Trust Company and its telephone number is (212) 936-5100.
COMPARISON OF RIGHTS OF TIS AND NETWORK ASSOCIATES STOCKHOLDERS
After consummation of the Merger, the holders of TIS Common Stock who
receive Network Associates Common Stock under the terms of the Reorganization
Agreement will become stockholders of Network Associates. As stockholders of
TIS, their rights are presently governed by Delaware law, by the TIS Restated
Certificate of Incorporation, as amended (the "TIS Certificate"), and by the TIS
Amended and Restated By-laws (the "TIS By-laws"). As stockholders of Network
Associates, their rights will be governed by Delaware law, by Network
Associates' Second Restated Certificate of Incorporation, as amended (the
"Network Associates Certificate"), and by Network Associates' By-laws, as
amended (the "Network Associates By-laws"). The following discussion summarizes
the material differences between the rights of holders of TIS Common Stock and
holders of Network Associates Common Stock and differences between the charters
and by-laws of TIS and Network Associates. This summary does not purport to be
complete and is qualified in its entirety by reference to the TIS Certificate
and TIS By-laws, the Network Associates Certificate and the Network Associates
By-laws, and the relevant provisions of Delaware law.
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SPECIAL MEETING OF THE STOCKHOLDERS
The TIS By-laws provide that special meetings of the stockholders may be
called by the President, the Board of Directors or by the holders of a majority
of the outstanding shares of Common Stock. The Network Associates Certificate
provides that special meetings of the stockholders may be called by resolution
of the Board of Directors 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 by-laws.
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.
The TIS By-laws provide for actions by written consent of the stockholders if
such written consent is signed by all of the outstanding stockholders. The
Network Associates Certificate does not allow for actions by written consent of
the stockholders.
CUMULATIVE VOTING
Neither the Network Associates Certificate nor the TIS Certificate provides
for cumulative voting by stockholders in elections of directors.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The TIS By-laws provide that the number of directors shall be fixed from
time to time by resolution of the TIS Board or by resolution of the stockholders
of TIS, but in no event shall be less than three. The TIS By-laws provide for
division of its Board of Directors into three classes, as nearly equal in size
as possible, with staggered terms. The Network Associates Certificate and
Network Associates By-laws provide that the number of directors shall be
initially six and, thereafter, shall be fixed from time to time by the Network
Associates Board. The Network Associates Certificate also provides for three
classes of directors, as nearly equal in size as possible, with staggered terms.
The TIS Board and Network Associates Board are currently fixed at five members
and six members, respectively. Mr. John Bolger (a Class I Network Associates
director with his term expiring in 1999) will be leaving the Network Associates
Board effective April 30, 1998, at which time the size of the Network Associates
Board will be reduced to five members.
REMOVAL OF DIRECTORS
The Network Associates By-laws and the TIS By-laws 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 Network Associates and Trusted Information Systems, may only remove directors
for cause.
EXCULPATION OF DIRECTORS
Each of Network Associates and TIS has included in its Certificate of
Incorporation and By-laws 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 Network Associates By-laws and the TIS By-laws 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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AMENDMENT, REPEAL OF BY-LAWS
The TIS By-laws provide that the TIS By-laws can be amended or repealed
either by the affirmative vote of a majority of the Board present at a meeting
or by the affirmative vote of the holders of a majority of the shares of capital
stock outstanding. The Network Associates Certificate provides that the Network
Associates By-laws can be amended or repealed either by the affirmative vote of
a majority of the Board present at a meeting or by the affirmative vote of the
holders of at least sixty-six and two-thirds (66 2/3%) of the capital stock
outstanding.
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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 December 31, 1997
gives effect to the Merger as if it had occurred on December 31, 1997, and
combines the audited consolidated balance sheet of Network Associates as of
December 31, 1997 and the audited consolidated balance sheet of TIS as of
December 26, 1997. The unaudited pro forma combined statements of operations for
all periods presented give effect to the Merger as if it had occurred on January
1, 1995.
Network Associates and TIS estimate they will incur direct transaction
costs of approximately $10 million 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, Network Associates will incur an additional 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 operations. There can be no assurance that Network Associates 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 condensed 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 condensed financial statements
are based upon the respective historical consolidated financial statements and
notes thereto of Network Associates and TIS, incorporated by reference or
included elsewhere in this Proxy Statement/Prospectus, and do not incorporate,
nor do they assume, any benefits from cost savings or synergies of operations
resulting from the Merger.
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UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NETWORK PRO FORMA PRO FORMA
ASSOCIATES TIS ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and short term investments..................... $123,494 $ 1,290 $ -- $124,784
Marketable securities............................... 123,882 27,160 -- 151,042
Accounts receivable, net............................ 125,284 11,366 -- 136,650
Prepaid, other current assets and deferred
taxes.......................................... 57,612 5,126 -- 62,738
-------- ------- -------- --------
Total current assets........................ 430,272 44,942 -- 475,214
Marketable securities................................. 109,184 -- -- 109,184
Fixed assets, net..................................... 28,570 8,161 -- 36,731
Intangibles, deferred taxes and other assets.......... 33,905 665 -- 34,570
-------- ------- -------- --------
Total assets................................ $601,931 $53,768 $ -- $655,699
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 18,439 $ 568 $ -- $ 19,007
Accrued merger costs................................ -- -- 10,000 10,000
Accrued liabilities................................. 141,083 6,515 (3,600) 143,998
Deferred revenue.................................... 69,464 3,447 -- 72,911
Notes payable current............................... -- 152 -- 152
-------- ------- -------- --------
Total current liabilities................... 228,986 10,682 6,400 246,068
Notes payable and other long-term liabilities......... -- 2,353 -- 2,353
Deferred revenue less current portion and deferred
taxes............................................... 13,186 -- -- 13,186
-------- ------- -------- --------
Total liabilities........................... 242,172 13,035 6,400 261,607
Common stock and additional paid in capital........... 191,746 51,290 -- 243,036
Other................................................. (54) (694) -- (748)
Retained earnings..................................... 168,067 (9,863) (6,400) 151,804
Deferred stock compensation........................... -- (668) -- (668)
-------- ------- -------- --------
Total stockholders' equity.................. 359,759 40,733 (6,400) 394,092
-------- ------- -------- --------
Total liabilities & stockholders' equity.... $601,931 $53,768 $ -- $655,699
======== ======= ======== ========
</TABLE>
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenue................................................ $297,000 $449,169 $654,416
Operating costs and expenses:
Cost of net revenue...................................... 59,587 89,216 121,251
Research and development................................. 37,916 56,554 93,554
Marketing and sales...................................... 92,821 132,215 194,666
General and administrative............................... 23,336 36,211 58,053
Amortization of intangibles.............................. 1,356 3,169 858
Acquired in-process research and development and other
non-recurring charges................................. 19,936 30,669 179,335
-------- -------- --------
Total operating costs and expenses............... 234,952 348,034 647,717
-------- -------- --------
Income from operations..................................... 62,048 101,135 6,699
Other income............................................... 8,691 9,651 18,055
-------- -------- --------
Net income before tax...................................... 70,739 110,786 24,754
Provision for income taxes................................. 27,054 49,887 61,674
-------- -------- --------
Net income (loss).......................................... $ 43,685 $ 60,899 $(36,920)
======== ======== ========
Net income (loss) per share -- diluted..................... $ 0.61 $ 0.81 $ (0.50)
======== ======== ========
Shares used in per share calculation -- diluted............ 71,283 75,435 73,119
======== ======== ========
</TABLE>
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NETWORK ASSOCIATES, INC.
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, 1995, 1996 and 1997 reflect the combination of the financial
statements of Network Associates for the years ended December 31, 1995, 1996 and
1997 and the financial statements of TIS for the years ended December 29, 1995,
December 27, 1996 and December 26, 1997.
These unaudited pro forma combined financial statements reflect the
issuance of 4,455,062 shares of Network Associates Common Stock in exchange for
an aggregate of 13,792,762 shares of TIS Common Stock (outstanding as of
December 31, 1997) in connection with the Merger, based on the Exchange Ratio of
0.323 set forth in the following table:
<TABLE>
<S> <C>
TIS Common Stock outstanding as of December 31, 1997........ 13,792,762
Exchange Ratio.............................................. 0.323:1.0
Number of shares of Network Associates Common Stock
exchanged................................................. 4,455,062
Number of shares of Network Associates Common Stock
Outstanding at December 31, 1997.......................... 69,920,883
----------
Number of shares of Network Associates Common Stock
outstanding after the completion of the Merger............ 74,375,945
==========
</TABLE>
The actual number of shares of Network Associates Common Stock to be issued
will be determined at the Effective Time based on the number of shares of TIS
Common Stock outstanding at that date.
(2) PRO FORMA COMBINED BALANCE SHEET
(a) Network Associates and TIS estimate they will incur direct transaction
costs of approximately $10 million 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, Network Associates 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 Network
Associates 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.
61
<PAGE> 69
NETWORK ASSOCIATES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following are the historical results of operations of Network
Associates and TIS and their pro forma combined amounts to reflect the Merger as
if it were effected for all periods presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Total revenues:
Network Associates....................... $278,910 $421,794 $612,193
TIS...................................... 18,090 27,375 42,223
-------- -------- --------
$297,000 $449,169 $654,416
======== ======== ========
Cost of revenues:
Network Associates....................... $ 48,722 $ 76,913 $108,216
TIS...................................... 10,865 12,303 13,035
-------- -------- --------
$ 59,587 $ 89,216 $121,251
======== ======== ========
Research and development:
Network Associates....................... $ 36,771 $ 52,244 $ 85,021
TIS...................................... 1,145 4,310 8,533
-------- -------- --------
$ 37,916 $ 56,554 $ 93,554
======== ======== ========
Sales and marketing:
Network Associates....................... $ 92,295 $122,638 $181,017
TIS...................................... 526 9,577 13,649
-------- -------- --------
$ 92,821 $132,215 $194,666
======== ======== ========
General and administrative:
Network Associates....................... $ 20,134 $ 30,315 $ 43,060
TIS...................................... 3,202 5,896 14,993
-------- -------- --------
$ 23,336 $ 36,211 $ 58,053
======== ======== ========
Amortization of intangibles:
Network Associates....................... $ 1,356 $ 3,169 $ 858
TIS...................................... -- -- --
-------- -------- --------
$ 1,356 $ 3,169 $ 858
======== ======== ========
Acquired in-process research and
development and other non-recurring
charges:
Network Associates....................... $ 19,936 $ 30,669 $175,800
TIS...................................... -- -- 3,535
-------- -------- --------
$ 19,936 $ 30,669 $179,335
======== ======== ========
Other Income (expense):
Network Associates....................... $ 8,799 $ 9,548 $ 14,743
TIS...................................... (108) 103 3,312
-------- -------- --------
$ 8,691 $ 9,651 $ 18,055
======== ======== ========
Income taxes:
Network Associates....................... $ 26,154 $ 51,284 $ 61,320
TIS...................................... 900 (1,397) 354
-------- -------- --------
$ 27,054 $ 49,887 $ 61,674
======== ======== ========
Net income (loss):
Network Associates....................... $ 42,341 $ 64,110 $(28,356)
TIS...................................... 1,344 (3,211) (8,564)
-------- -------- --------
$ 43,685 $ 60,899 $(36,920)
======== ======== ========
</TABLE>
62
<PAGE> 70
NETWORK ASSOCIATES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(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 Network Associates' and TIS's
historical statements of operations.
SHARES USED IN PRO FORMA PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS EXCEPT CONVERSION
NUMBER)
<S> <C> <C> <C>
Shares used in per share calculations
Historical -- Network Associates (diluted)....... 68,693 72,221 68,748
------ ------ ------
Historical -- TIS (diluted)...................... 8,019 9,952 13,532
Conversion Number................................ 0.323 0.323 0.323
------ ------ ------
71,283 75,435 73,119
------ ------ ------
</TABLE>
63
<PAGE> 71
NETWORKS ASSOCIATES, INC.
BUSINESS
Network Associates is a leading developer and provider of network security
and management software products. Network Associates has historically derived a
significant majority of its revenues from the licensing of its flagship McAfee
anti-virus products and Sniffer network fault and performance management
products. Network Associates is currently focusing its efforts on broadening its
revenue base by providing network security and management solutions to
enterprise customers, targeting in particular the Windows NT/Intel platform. In
furtherance of this strategy, Network Associates recently organized its products
into four product suites -- McAfee Total Virus Defense and PGP Total Network
Security (together comprising "Net Tools Secure") and Sniffer Total Network
Visibility and McAfee Total Service Desk (together comprising "Net Tools
Manager"). These four product suites together form an integrated solution called
"Net Tools".
The following table depicts Network Associates' product suites:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET TOOLS
- -----------------------------------------------------------------------------------------------
NET TOOLS SECURE NET TOOLS MANAGER
- -----------------------------------------------------------------------------------------------
MCAFEE TOTAL VIRUS PGP TOTAL NETWORK SNIFFER TOTAL NETWORK MCAFEE TOTAL SERVICE
DEFENSE SECURITY VISIBILITY DESK
- -----------------------------------------------------------------------------------------------
</TABLE>
Net Tools Secure is designed to protect the enterprise from viruses,
hackers, thefts, lost data and threats to data security at all points of entry.
McAfee Total Virus Defense is a multi-tiered approach to virus protection
covering the client, server and Internet gateway; and PGP Total Network Security
combines security products with desktop encryption software and key management
tools. Net Tools Manager is a network management and service desk solution
designed to make computer networks more efficient and users more productive.
Sniffer Total Network Visibility is a comprehensive set of products and services
for network fault and performance management (also known as analysis and
monitoring); and McAfee Total Service Desk is designed to integrate robust help
desk applications with asset management software. Network Associates also
provides product support, education and consulting services.
Many of Network Associates' network security and management products,
including its industry-leading network security products for anti-virus
protection and Sniffer software-based fault and performance solutions for
managing computer networks, are also available as stand-alone products or as
part of smaller product suites. Network Associates is also a leader in
electronic software distribution, which is the principal means by which it
markets its products and one of the principal ways it distributes its software
products to its customers. Network Associates generally utilizes a two-year
subscription model for licensing its non-Sniffer products to corporate clients
and is in the process of developing a two-year subscription model for licensing
its Sniffer products as well.
RECENT DEVELOPMENTS
ZERO COUPON DEBENTURES
On February 13, 1998, Network Associates completed a private placement of
zero coupon convertible subordinated debentures due in 2018 (the "Debentures").
The Debentures, with an aggregate face amount at maturity of $885.5 million,
generated net proceeds to Network Associates of approximately $337.6 million
(after deducting the fee paid to the initial purchaser of the Debentures but no
other expenses of the placement). The initial price to the public for the
Debentures was $391.06 per $1,000 of face amount at maturity, which equates to a
yield to maturity over the term of the bonds of 4.75% (on a semi-annual bond
equivalent basis). The Debentures are convertible into Network Associates Common
Stock at the rate of 5.692 shares per $1,000 of face amount at maturity, which
equates to an initial conversion price of $68.70 per share. The Debentures are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) and effectively subordinated in right of payment to all
indebtedness and other liabilities of Network
64
<PAGE> 72
Associates' subsidiaries. The Debentures may be redeemed for cash at the option
of Network Associates beginning on February 13, 2003. At the option of the
holder, Network Associates will purchase the Debentures as of February 13, 2003,
February 13, 2008 and February 13, 2013 at purchase prices (to be paid in cash
or Network Associates Common Stock or any combination thereof, at the election
of Network Associates and subject to certain conditions) equal to the initial
issue price plus accrued original issue discount to such dates. The Debentures
may also be redeemed at the option of the holder if there is a Fundamental
Change (as defined) at a price equal to the issue price plus accrued original
issue discount to the date of redemption, subject to adjustment.
PENDING MAGIC SOLUTIONS ACQUISITION
Network Associates agreed in early March 1998 to acquire Magic Solutions, a
privately held provider of internal help desk and asset management solutions. In
the acquisition, a wholly owned subsidiary of Network Associates will merge with
and into Magic Solutions; Magic Solutions will become a wholly owned subsidiary
of Network Associates; and the existing Magic Solutions stock and option holders
will receive approximately $110,000,000 in cash. The acquisition, which is
expected to close early in the second quarter of 1998, is subject to customary
conditions to closing including Magic Solutions stockholder approval. The Magic
Solutions acquisition, which will broaden Network Associates' suite of help desk
product offerings, is subject to a number of risks, including the difficulties
of assimilating the two companies' sales forces, product offerings, marketing
activities, research and development efforts and technologies. These
difficulties may be compounded in light of the integration activities
surrounding the Merger. The proposed acquisition will be accounted for as a
purchase and Network Associates currently expects to incur, upon closing, a
charge to earnings related to purchased in-process research and development of
approximately $90 million. See "Risk Factors -- Difficulties of Integrating Two
Companies" and "-- Risks Associated with Network Associates Acquisitions
Generally."
65
<PAGE> 73
TRUSTED INFORMATION SYSTEMS, INC.
BUSINESS
TIS provides comprehensive security solutions for protection of computer
networks, including global Internet-based systems, internal networks and
individual workstations and laptops and is a leading provider of firewall and
intrusion detection products. TIS, which was founded in 1983 to engage in
computer security consulting, draws upon the expertise of a senior management
team with an average of more than 20 years of experience in computer security
and networking issues in industry and government. TIS emphasizes the robustness
of its security solutions, its long experience with computer security and
cryptography issues and its ability to provide comprehensive solutions to
customers. TIS also emphasizes its strong reputation with corporate and
government computer security professionals in the United States and abroad as a
pioneer in the field of computer network security. TIS's customers include the
following or subsidiaries thereof: Chrysler Corporation, E.I. duPont de Nemours
and Company (DuPont), Microsoft Corporation, NationsBank Corporation, Royal
Dutch Shell Company (Shell International B.V.), Sears Corporation, and Swiss
Bank Corporation.
TIS develops, markets, licenses and supports the Gauntlet(R) family of
firewall products. These products allow customers to create "trusted" networks
that are protected from access, theft and damage by unauthorized users from
"untrusted" networks such as the Internet and also enable the creation of
virtual private networks ("VPN's") through the encrypted transmission of
information across untrusted networks. TIS's Gauntlet Internet Firewall,
introduced in 1994, was derived from the TIS Internet Firewall Toolkit which has
been available on the Internet since 1993 and has been downloaded more than
75,000 times to more than 50,000 users worldwide. In January 1996, TIS initiated
a telemarketing program to upgrade TIS Internet Firewall Toolkit users to the
Gauntlet family of firewall products. Through December 1997, more than 7,500
Gauntlet Internet Firewalls have been licensed to customers. To build, maintain
and enhance customer relationships, TIS also offers a full range of consulting
in information security policies and planning to its customers. TIS further
provides research and development and consulting to government agencies,
including the National Security Agency ("NSA") and Defense Advanced Research
Projects Agency ("DARPA"), in areas such as next generation firewalls,
distributed trusted operating systems, Internet domain name services,
international cryptography and advanced cryptographic key handling and recovery
techniques.
In October 1997, TIS acquired Haystack Laboratories Inc. ("Haystack").
Haystack, maker of Stalker(R) intrusion detection products, was complementary to
TIS because the multi-dimensional network and server security market is an
emerging market in which the Stalker family of products provide high end
intrusion detection products that are complementary to TIS products, and because
Haystack has a similar focus on industry leaders as customers and partners. In
addition, the Stalker based technology provides a solid base for future products
which can be easily integrated with TIS' Gauntlet firewall family.
Prior to founding TIS in 1983, Stephen T. Walker, Chairman and Chief
Executive Officer, spent over 20 years working on computer security issues for
the U.S. government at the NSA and the Advanced Research Projects Agency
("ARPA"), the predecessor agency of DARPA.
66
<PAGE> 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
TIS currently has two operating divisions: the Commercial Division and the
Advanced Research and Engineering ("AR&E") Division.
THE COMMERCIAL DIVISION
The Commercial Division derives revenues from TIS's Gauntlet family of
firewall products, its commercial consulting services, its Stalker line of
intrusion detection products, and from its RecoverKey exportable cryptography
enabling products. The Commercial Division accounted for 31.9%, 59.5%, and 77.2%
of TIS's total revenues in 1995, 1996 and 1997, respectively. TIS expects that
the Commercial Division will account for an increased percentage of total
revenues in future years.
Prior to 1996, TIS distributed its only revenue producing product, the
Gauntlet Internet Firewall which was introduced in 1994, exclusively through
resellers and a small sales administration staff. TIS presently has more than
170 persons to develop, promote, sell and deliver its network security products
and services, including the Gauntlet family of firewall products. Prior to 1996,
TIS's Gauntlet Internet Firewall was licensed as software or as software and
hardware on one platform, frequently combined (or "bundled") with installation
for pricing purposes. Since April 15, 1996, installation for the Gauntlet family
of firewall products has been offered as a separate (or "unbundled") optional
service provided to customers.
During 1996 TIS began to incur substantial increases in its selling,
general and administrative expenses as it began to build its marketing and sales
efforts to support sales of the Gauntlet Internet Firewall product and of its
other products introduced in 1996: the Gauntlet Intranet Firewall, the Gauntlet
Net Extender, the Gauntlet PC Extender, the Gauntlet Internet Firewall, Stalker,
WebStalker and certain of its RecoverKey exportable cryptography products.
During 1997, TIS continued to expand its selling and general and administrative
expenses at a lesser rate.
TIS offers a full range of consulting in information security planning and
product support. TIS's commercial consulting practice offers expert technology
research services, consultation on security issues associated with products and
services, corporate information security policy development, architectural and
diagnostic security analysis services, firewall configuration and maintenance
support, and training for corporate network and security administration
personnel. These services are carried out by a staff of over 30 persons with
substantial information security experience in both commercial and government
organizations.
THE ADVANCED RESEARCH AND ENGINEERING DIVISION
The Advanced Research and Engineering Division (the "AR&E Division")
consists primarily of research, development and consulting in computer and
related security systems, currently including major contracts with three
agencies of the U.S. government: the NSA, Air Force Rome Laboratories ("RL") and
DARPA. Revenues from the AR&E Division increased consistently through 1995, but
decreased in 1996 and 1997. The aggregate award value of TIS's current active
government contracts at December 26, 1997 was approximately $37.5 million. TIS's
active contracts with DARPA, which range in value from $0.5 million to $9.1
million have all commenced and will expire through 2001. While TIS expects to
continue to obtain government contracts for its AR&E Division, it does not
anticipate that revenues from such contracts will attain the levels realized in
1995.
Most of TIS's government contracts provide for compensation to TIS in the
form of reimbursement of costs plus a fee. Gross profit under government
contracts generally represents the fee plus recovered operating expenses. Under
these government contracts, TIS is entitled to recover associated direct labor
costs, overhead and selling, general and administrative expenses, including
allowable research and development expenses. Selling, general and administrative
expenses allowable under government contracts include salaries and benefits,
marketing, bid and proposal costs, management, accounting, legal and contract
administration and certain other administrative expenses.
67
<PAGE> 75
Under its government contracts, TIS bears the risk that recoverable
expenses billed by TIS are subject to review and audit by the Defense Contract
Audit Agency (the "DCAA"). The DCAA has performed audits of TIS's cost
accounting system through 1995. Pursuant to their terms, these contracts are
also subject to termination at the convenience of the applicable government
agency. If the contract is terminated, TIS would typically be reimbursed for its
costs to the date of termination plus the cost of any orderly termination and
would be paid a portion of the fee.
RESULTS OF OPERATIONS
TIS's fiscal 1996 and 1997 statements of operations include the results of
Haystack Laboratories, Inc., giving effect to the merger with Haystack which
occurred on October 16, 1997, and which was accounted for under the pooling of
interests method of accounting. Prior period consolidated statements of
operations and balance sheets do not give effect to the merger with Haystack, as
the effect of the business combination was not material to the financial
statements of TIS.
FISCAL 1997 COMPARED TO FISCAL 1996.
Revenues. TIS's total revenues increased 54.2% to $42,222,683 in 1997 from
$27,375,268 in 1996. Commercial product revenues increased 97.1% to $28,782,406
in 1997 from $14,602,736 in 1996, primarily because of increased sales of
licenses of Gauntlet Internet Firewalls and intrusion detection products
directly to customers and through TIS's resellers. Commercial consulting
services revenues increased 128.6% to $3,834,400 in 1997 from $1,677,285 in
1996, primarily because of TIS's efforts to implement new management over and
competitively staff its commercial consulting practice and its focus on high end
corporate customer needs for information security consulting contracts during
the second half of 1997. Government contract revenues decreased 13.4% to
$9,605,877 in 1997 from $11,095,247 in 1996, primarily because of an expected
decrease in revenues, following TIS's completion of a $16.1 million research
contract which began in 1994 and was completed in the first four months of 1997.
Gross Profit. Gross profit increased 93.7% to $29,187,815 in 1997 from
$15,071,958 in 1996 primarily due to the increase in TIS's commercial revenues,
particularly its higher margin software and license products. The gross profit
associated with commercial products increased 120.2% to $24,551,355 in 1997 from
$11,151,982 in 1996, primarily because of increased shipments of Gauntlet
firewall products and a continual revenue shift towards software and license
only products, away from lower margin hardware software combined solutions as
the security market becomes more familiar with firewall technology. The gross
profit on commercial consulting services increased 130.2% to $1,587,754 in 1997
from $689,591 in fiscal 1996, primarily because of increased revenues. Gross
profit from TIS's government contracts decreased 5.6% to $3,048,706 in 1997 from
$3,230,385 in 1996, primarily because of lower related revenues.
As a percentage of related revenues, gross profit on commercial products
increased to 85% in 1997 from 76% in 1996, primarily due to increased margins on
sales through TIS's resellers and because of a higher level of software and
license only revenues than lower margin hardware software product combinations .
As a percentage of related revenues, gross profit on commercial consulting and
government contracts remained substantially unchanged at 41% and 30%,
respectively, for fiscal years 1996 and 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 85.1% to $28,641,944 in 1997 from $15,472,859
in 1996, due primarily to the increase in personnel and related operating costs
associated with the increase in TIS's commercial products sales, as well as
TIS's efforts towards developing the infrastructure to support the current and
future commercial growth during the first half of fiscal 1997.
Non-recurring transaction and other related costs. In connection with TIS's
acquisition of Haystack Laboratories, Inc., in the fourth quarter of fiscal 1997
for approximately 2.1 million shares of TIS common stock, TIS incurred
non-recurring transaction and other related costs of $3,534,957. These costs
consisted primarily of fees paid to outside consultants, legal fees, and
accounting fees of approximately $2.8 million and employee related costs of
approximately $0.7 million.
Research and Development Expenses. Research and development expenses, which
do not include such expenses directly reimbursed under government contracts,
increased 98.0% to $8,532,987 in 1997 from
68
<PAGE> 76
$4,309,891 in 1996. This increase primarily resulted from TIS's efforts in
developing the new members of the Gauntlet family of firewall products and the
Stalker intrusion detection product lines. These efforts included developing new
members of the Gauntlet family of firewall products, the Microsoft Windows NT
and Sun Microsystems' Solaris firewall product versions and, RecoverKey
exportable cryptography enabling products, as well as the reseller versions of
TIS's Stalker technology products.
Other income and expense. Interest income increased by 266.8% to $1,901,561
in 1997 from $518,404 in 1996, primarily due to interest earned for the entire
fiscal 1997 period on cash and marketable securities generated by the proceeds
from TIS's initial public offering, which occurred in October of 1996. Interest
expense decreased 37.4% to $259,750 in 1997 from $415,243 in 1996 due
principally to the fourth quarter fiscal 1996 payoff of all of TIS's borrowings
under debt other than its mortgage notes. TIS recorded $1,670,377 in non
operating gains and losses in connection with its sale during the third quarter
of fiscal 1997 of the 100,000 shares of Cybercash (NASDAQ: CYCH) stock it had
received as founders stock in 1994.
FISCAL 1996 COMPARED TO FISCAL 1995.
Revenues. TIS's total revenues increased 51.3% to $27,375,268 in 1996 from
$18,090,087 in 1995. Commercial product revenues increased 241.9% to $14,602,736
in 1996 from $4,270,294 in 1995, primarily because of increased sales of
licenses of Gauntlet Internet Firewalls and Stalker intrusion detection products
directly to customers and through TIS's resellers. Commercial consulting
services revenues increased 12.4% to $1,677,285 in 1996 from $1,491,661 in 1995,
primarily because of TIS's completion of a substantial number of commercial
consulting contracts during the third and fourth quarters of 1996. Government
contract revenues decreased 10.0% to $11,095,247 in 1996 from $12,327,502 in
1995, primarily because of TIS's reallocation of personnel to its commercial
activities.
Gross Profit. Gross profit increased 108.6% to $15,071,958 in 1996 from
$7,225,140 in 1995 primarily due to the increase in TIS's commercial product
sales. The gross profit associated with commercial products increased 256.4% to
$11,151,982 in 1996 from $3,128,642 in 1995, primarily because of increased
shipments of Gauntlet firewall products. The gross profit on commercial
consulting services increased 12.4% to $689,591 in 1996 from $613,715 in fiscal
1995, primarily because of increased revenues. Gross profit from TIS's
government contracts decreased 7.3% to $3,230,385 in 1996 from $3,482,783 in
1995, primarily because of lower related revenues.
As a percentage of related revenues, gross profit on commercial products
increased to 76% in 1996 from 73% in 1995, primarily due to increased margins on
sales through TIS's resellers. As a percentage of related revenues, gross profit
on commercial consulting and government contracts remained virtually unchanged
at 41% and 29%, respectively, for fiscal years 1996 and 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 315.1% to $15,472,859 in 1996 from $3,727,701
in 1995, due primarily to the substantial increase in personnel and related
operating costs associated with the increase in TIS's commercial products sales,
as well as TIS's efforts towards developing the infrastructure to support the
current and future commercial revenue growth.
Research and Development Expenses. Research and development expenses, which
do not include such expenses directly reimbursed under government contracts,
increased 276.5% to $4,309,891 in 1996 from $1,144,737 in 1995. This increase
primarily resulted from TIS's efforts in developing the new members of the
Gauntlet family of firewall products announced in April of 1996 and of its
intrusion detection products. These efforts included developing new members of
the Gauntlet family of firewall products, the Microsoft Windows NT and Sun
Microsystems' Solaris firewall product versions and its RecoverKey exportable
cryptography enabling products.
Interest and Other Expense. Interest expense increased 161.5% to $415,243
in 1996 from $158,778 in 1995 due to TIS's increased borrowings under its short
term lines of credit and its construction credit line. Interest income increased
by 931.1% to $518,404 in 1996 from $50,276 in 1995 due primarily to interest
earned on cash and marketable securities generated by the proceeds from TIS's
initial public offering, which occurred in October of 1996.
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QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statement of
operations data for each of the four quarters in 1996 and 1997, which has been
restated to give effect to TIS' merger with Haystack Laboratories, Inc., as well
as the percentage of TIS's revenues represented by each item. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained herein and include all
adjustments (consisting only of normal recurring adjustments) that TIS considers
necessary for a fair presentation of such information when read in conjunction
with TIS's Consolidated Financial Statements and accompanying notes. TIS
believes that quarter-to-quarter comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1996 1996 1996 1996 1997 1997
--------- -------- ------------- ------------ --------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Government contracts...... $2,432 $2,920 $ 2,881 $ 2,862 $ 2,566 $ 2,200
Commercial products....... 1,619 2,536 4,066 6,380 5,573 6,532
Commercial consulting
services................ 247 287 505 640 797 915
------ ------ ------- ------- ------- -------
4,298 5,743 7,452 9,882 8,936 9,647
Cost of revenues:
Government contracts...... 1,774 2,090 1,979 2,021 1,818 1,461
Commercial products....... 479 745 967 1,259 1,136 803
Commercial consulting
services................ 166 164 267 392 395 552
------ ------ ------- ------- ------- -------
2,419 2,999 3,213 3,672 3,349 2,816
Gross profit:
Government contracts...... 658 830 902 841 748 739
Commercial products....... 1,140 1,791 3,099 5,121 4,437 5,729
Commercial consulting
services................ 81 123 238 248 402 363
------ ------ ------- ------- ------- -------
1,879 2,744 4,239 6,210 5,587 6,831
Operating expenses:
Selling, general and
administrative.......... 2,152 2,968 4,077 6,276 7,054 7,668
Research and
development............. 427 702 1,295 1,885 2,088 2,145
Non-recurring transaction
and other related
costs................... -- -- -- -- -- --
------ ------ ------- ------- ------- -------
2,579 3,671 5,372 8,161 9,142 9,813
------ ------ ------- ------- ------- -------
Income (loss) from
operations................ (700) (927) (1,133) (1,951) (3,555) (2,982)
Other income (expense):
Interest income........... 7 23 33 455 500 523
Interest expense.......... (89) (74) (172) (80) (54) (59)
Non-recurring gain on sale
of marketable
securities.............. -- -- -- -- -- --
------ ------ ------- ------- ------- -------
(82) (51) (139) 375 446 464
------ ------ ------- ------- ------- -------
Income (loss) before income
taxes..................... (782) (978) (1,272) (1,576) (3,109) (2,518)
Income tax provision
(benefit)................. (315) (372) (354) (356) (836) (643)
------ ------ ------- ------- ------- -------
Net loss.................... $ (467) $ (606) $ (918) $(1,220) $(2,273) $(1,875)
====== ====== ======= ======= ======= =======
Net loss per share and net
loss per share, assuming
dilution.................. $(0.05) $(0.07) $ (0.10) $ (0.10) $ (0.17) $ (0.14)
Weighted average shares
outstanding, and weighted
average shares
outstanding, assuming
dilution.................. 8,359 9,082 9,280 12,663 13,247 13,312
<CAPTION>
FISCAL QUARTER ENDED
----------------------------
SEPTEMBER 26, DECEMBER 26,
1997 1997
------------- ------------
DOLLARS IN THOUSANDS
<S> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Government contracts...... $ 2,402 $ 2,438
Commercial products....... 7,875 8,802
Commercial consulting
services................ 930 1,193
------- -------
11,207 12,433
Cost of revenues:
Government contracts...... 1,685 1,593
Commercial products....... 1,119 1,173
Commercial consulting
services................ 512 788
------- -------
3,316 3,554
Gross profit:
Government contracts...... 717 845
Commercial products....... 6,756 7,629
Commercial consulting
services................ 418 405
------- -------
7,891 8,879
Operating expenses:
Selling, general and
administrative.......... 7,262 6,658
Research and
development............. 2,162 2,138
Non-recurring transaction
and other related
costs................... -- 3,535
------- -------
9,424 12,331
------- -------
Income (loss) from
operations................ (1,533) (3,452)
Other income (expense):
Interest income........... 448 431
Interest expense.......... (66) (81)
Non-recurring gain on sale
of marketable
securities.............. 1,670 --
------- -------
2,052 350
------- -------
Income (loss) before income
taxes..................... 519 (3,102)
Income tax provision
(benefit)................. 657 1,176
------- -------
Net loss.................... $ (138) $(4,278)
======= =======
Net loss per share and net
loss per share, assuming
dilution.................. $ (0.01) $ (0.31)
Weighted average shares
outstanding, and weighted
average shares
outstanding, assuming
dilution.................. 33,385 13,731
</TABLE>
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<PAGE> 78
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1996 1996 1996 1996 1997 1997
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS AS A PERCENTAGE
OF REVENUES:
Revenues:
Government contracts....... 56.6% 50.8% 38.7% 29.0% 28.7% 22.8%
Commercial products........ 37.7 44.2 54.6 64.6 62.4 67.7
Commercial consulting
services................. 5.7 5.0 6.7 6.4 8.9 9.5
----- ----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Government contracts....... 41.3 36.3 26.7 20.5 20.3 15.1
Commercial products........ 11.1 13.0 13.0 12.7 12.7 8.3
Commercial consulting
services................. 3.9 2.9 3.4 4.0 4.5 5.8
----- ----- ----- ----- ----- -----
56.3 52.2 43.1 37.2 37.5 29.2
----- ----- ----- ----- ----- -----
Gross profit................. 43.7 47.8 56.9 62.8 62.5 70.8
----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and
administrative........... 50.1 51.7 54.7 63.5 78.9 79.5
Research and development... 9.9 12.2 17.4 19.0 23.4 22.2
Non-recurring transaction
and other related
costs.................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
60.0 63.9 72.1 82.5 102.3 101.7
----- ----- ----- ----- ----- -----
Loss from operations......... (16.3) (16.1) (15.2) (19.7) (39.8) (30.9)
Other income (expense):
Interest income............ 0.2 0.1 0.1 4.6 5.6 5.4
Interest expense........... (2.1) (1.0) (2.0) (0.9) (0.6) (0.6)
Non-recurring gain on sale
of marketable
securities............... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Income (loss) before income
taxes...................... (18.2) (17.0) (17.1) (16.0) (34.8) (26.1)
Income tax provision
(benefit).................. (7.3) (6.5) (4.8) (3.6) (9.4) (6.7)
----- ----- ----- ----- ----- -----
Net loss..................... (10.9) (10.5) (12.3) (12.4) (25.4) (19.4)
===== ===== ===== ===== ===== =====
SELECTED INFORMATION AS A
PERCENTAGE OF RELATED
REVENUES:
Gross profit by product line:
Government contracts....... 27.0 28.4 31.3 29.4 29.2 33.6
Commercial products........ 70.4 70.7 76.2 80.3 79.6 87.7
Commercial consulting
services................. 32.8 42.9 47.1 38.7 50.4 39.7
----- ----- ----- ----- ----- -----
43.7 47.8 56.9 62.8 62.5 70.8
----- ----- ----- ----- ----- -----
<CAPTION>
FISCAL QUARTER ENDED
----------------------------
SEPTEMBER 26, DECEMBER 26,
1997 1997
------------- ------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS AS A PERCENTAGE
OF REVENUES:
Revenues:
Government contracts....... 21.4% 19.6%
Commercial products........ 70.3 70.8
Commercial consulting
services................. 8.3 9.6
----- -----
100.0 100.0
Cost of revenues:
Government contracts....... 15.0 12.8
Commercial products........ 10.0 9.4
Commercial consulting
services................. 4.6 6.4
----- -----
29.6 28.6
----- -----
Gross profit................. 70.4 71.4
----- -----
Operating expenses:
Selling, general and
administrative........... 64.8 53.6
Research and development... 19.3 17.2
Non-recurring transaction
and other related
costs.................... -- 28.4
----- -----
84.1 99.2
----- -----
Loss from operations......... (13.7) (27.8)
Other income (expense):
Interest income............ 4.0 3.5
Interest expense........... (0.6) (0.7)
Non-recurring gain on sale
of marketable
securities............... 14.9 --
----- -----
Income (loss) before income
taxes...................... 4.6 (25.0)
Income tax provision
(benefit).................. 5.8 9.5
----- -----
Net loss..................... (1.2) (34.4)
===== =====
SELECTED INFORMATION AS A
PERCENTAGE OF RELATED
REVENUES:
Gross profit by product line:
Government contracts....... 29.9 34.7
Commercial products........ 85.8 86.7
Commercial consulting
services................. 44.9 34.0
----- -----
70.4 71.4
----- -----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, TIS has financed its operations and the purchase of
property and equipment through the issuance of common stock, borrowings under
short-term lines of credit, secured notes payable and stockholder loans and by
the generation of cash from operations. Cash and cash equivalents were
$1,290,075 at December 26, 1997 and $3,237,147 at December 27, 1996, and
marketable securities were $27,160,179 at December 26, 1997, as compared to
$39,066,569 at December 27, 1996. TIS used cash in operations of $12,055,815 and
$4,268,107, respectively, for fiscal years 1997 and 1996, but provided cash from
operations of $1,237 for fiscal year 1995. Net cash provided by or used in
operations for the fiscal year 1995 consisted primarily of net income, plus
growth in TIS's accounts payable, accrued expenses and deferred revenues, offset
by growth in TIS's accounts receivable. For the year ended December 27, 1996,
TIS used cash to fund its net loss of $3,211,121, which was the primary
component of the net cash used in operating activities for the period, and to
fund the growth in its accounts receivable and unbilled receivables of
$2,187,758, offset by cash provided from increasing various accrued expenses.
For the year ended December 26, 1997, TIS used cash to
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<PAGE> 79
fund its net loss of $8,564,170 and to fund the growth in its accounts
receivable and unbilled receivables of $5,519,912, offset by cash provided from
increasing various accrued expenses. The decline in cash provided by operations
in fiscal years 1996 and 1997 as compared to previous years was primarily the
result of funds consumed as TIS began to expand its commercial activities and
introduce new products.
During fiscal years 1995, 1996 and 1997, TIS used cash in investing
activities of $2,095,829, $3,457,150, and $2,311,308, respectively, to purchase
property and equipment. Of these amounts, approximately $1,340,000 and
$1,520,000 in 1995 and 1996, respectively, were spent in connection with the
purchase or construction of TIS's Glenwood, MD facilities. TIS also used cash of
$36,628,126 in investing activities during fiscal 1996 to purchase marketable
securities, and provided cash of $9,468,390 in investing activities during
fiscal 1997 through the sale of marketable securities.
TIS provided cash in financing activities for fiscal year 1995 of
$1,885,931, primarily through net borrowings offset by cash used to repurchase
stock from a former officer. TIS generated cash from financing activities for
fiscal year 1996 of $47,312,707, primarily from net proceeds from the issuance
of 3,910,000 shares of common stock in October 1996 in an initial public
offering, and generated cash from financing activities for fiscal year 1997 of
$1,455,835 primarily from net proceeds from the issuance of stock upon the
exercise of stock options.
At December 29, 1995, TIS had various short-term line of credit
arrangements with Mercantile Bank aggregating $2 million. Also in 1995, TIS
negotiated a construction loan in the amount of $1.8 million to provide for the
expansion of its facilities at its Glenwood, Maryland location. During 1996, TIS
arranged for additional credit agreements and modified existing credit
agreements with Mercantile Bank to provide for additional borrowings to fund TIS
prior to its initial public offering. Subsequent to September 27, 1996, in
conjunction with TIS's initial public offering, TIS paid off and terminated
these line of credit arrangements, and converted its construction loan into
mortgage notes payable to Mercantile Bank with a fixed interest rate, secured by
the underlying properties.
As of December 26, 1997, TIS had no material commitments for capital
expenditures.
On February 22, 1998 TIS entered into the Merger Agreement with Network
Associates. While TIS continues from time to time to evaluate potential
acquisitions of business, products and technologies that could complement or
expand its business, TIS has no plans, agreements or commitments for any such
acquisitions and, except as contemplated by the Merger Agreement, is not engaged
in any negotiations with respect thereto.
TIS has not engaged in any hedging activities to date. Exposure to currency
risk is not significant.
While TIS may require additional financing to fund development of new
products and expansion of its domestic and international operations, it believes
that the net proceeds from TIS's 1996 offering, together with existing cash and
cash equivalents and cash generated from operations will be sufficient to
finance its product development and operating needs through December 1998.
YEAR 2000 COMPLIANCE MATTERS
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900 and
2000. This is frequently referred to as the "Year 2000 Problem." During fiscal
1997, TIS initiated programs to address this issue. Utilizing both internal and
external resources, TIS is in the process of defining, assessing and converting,
or replacing various programs, hardware and instrumentation systems to make them
Year 2000 compatible. TIS's Year 2000 project is comprised of two
components -- business applications and equipment. The business applications
component consists of TIS's business computer systems, as well as the computer
systems of third-party suppliers or customers whose Year 2000 problems could
potentially impact TIS.
TIS currently runs its internal business applications on two systems and is
considering the conversion of one of those systems (the one which TIS believes
is not year 2000 compliant), to the other, which it believes
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<PAGE> 80
to be year 2000 compliant. TIS is assessing the extent to which its operations
are vulnerable to this operation and has not yet determined the extent of that
vulnerability, but believes that its conversion will substantially alleviate
these concerns. TIS has not yet determined what impact, if any, the proposed
Merger with Network Associates will have on these concerns.
ADDITIONAL MATTER BEING SUBMITTED TO A VOTE OF THE TIS STOCKHOLDERS
PROPOSAL TWO -- ELECTION OF TIS DIRECTORS
TIS's directors are divided into three classes. The number of TIS directors
is determined from time to time by the TIS Board and is currently fixed at five
(5) members. A single class of directors is elected each year at TIS's annual
meeting of stockholders. Subject to transition provisions, each director elected
at each such meeting will serve for a term ending on the date of the third
annual meeting of stockholders after his or her election and until his or her
successor has been elected and duly qualified.
Two directors are to be elected at this Special Meeting to serve until the
2001 Annual Meeting of Stockholders, and until such director's successor is
elected and duly qualified. In the event the nominee is unable or unwilling to
serve as a nominee, the proxies may be voted for any substitute nominee
designated by the present TIS Board or the proxy holders to fill such vacancy,
or the TIS Board may be reduced in accordance with the Bylaws of TIS. The TIS
Board has no reason to believe that the person named will be unable or unwilling
to serve as a nominee or as a director if elected. IF THE MERGER IS APPROVED BY
THE TIS STOCKHOLDERS AND THE MERGER IS CONSUMMATED, EACH OF THE DIRECTORS ON THE
TIS BOARD IMMEDIATELY PRIOR TO THE EFFECTIVE TIME WILL CEASE TO BE A DIRECTOR OF
TIS AT THE EFFECTIVE TIME. 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.
TIS DIRECTORS TO BE ELECTED AT THE SPECIAL MEETING
Martha A. Branstad, age 56, has been an Executive Vice President and a
Director of TIS since 1986, Chief Operating Officer of TIS since 1993 and
President of the Advanced Research & Engineering Division since January 1996.
From August 1984 to August 1985, Dr. Branstad served as the Program Director,
Software Engineering for the National Science Foundation, and was responsible
for directing academic research grants in software engineering and computational
mathematics. During the period from September 1978 to September 1985, Dr.
Branstad worked in various positions within the National Bureau of Standards,
including Manager, Software for Parallel Processing and manager, Software
Engineering. Prior to that time, Dr. Branstad managed a software research group
for the National Security Agency ("NSA"). Dr. Branstad holds a B.S. in
mathematics from Iowa Sate University, an M.S. degree in mathematics from the
University of Wisconsin and a Ph.D. in computer science from Iowa State
University.
Charles W. Stein, age 57, has been Director of TIS since May 1996. Mr.
Stein has over 35 years of experience in the computer and communications
industry. Since April 1997, Mr. Stein has been President of Stein Venture
Management, a management consulting firm. From January 1997 to April 1997, Mr.
Stein served as the Chairman of the Board of Directors of Netrix Corporation, an
electronic components company. From February 1987 to December 1996, he served as
the President, Chief Executive Officer and Director of Netrix Corporation. Prior
to that time, Mr. Stein was a Vice President with BBN Communications Corporation
where he was responsible for marketing and later the Professional Services
Division. Mr. Stein holds a B.S. degree in mathematics from Tufts University.
TIS DIRECTORS WHOSE TERMS EXPIRE IN 1999
Stephen T. Walker, age 54, founded TIS in May 1983 and has continuously
served as President, Chief Executive Officer, Chairman of the Board and a
Director. From 1980 to 1983, Mr. Walker was the Director of the Information
Systems for the Office of the Assistant Secretary of Defense for Communications,
Command, Control and Intelligence (C3I), Pentagon. In recognition of Mr.
Walker's contributions, he was awarded the Secretary of Defense Meritorious
Civilian Service Medal in 1984, and the first National Computer System
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<PAGE> 81
Security Award in 1988. Mr. Walker holds a B.S. degree in electrical engineering
from Northeastern University and an M.S. degree in electrical engineering from
the University of Maryland.
Gerald J. Popek, age 51, has been a Director of TIS since May 1996. He has
served as Chief Technology Officer of Platinum Technology, Inc. ("Platinum")
since August 1995 and is responsible for participating in the setting of overall
corporate technology and product strategy, enterprise security and open systems
issues. From January 1982 to August 1995, Dr. Popek was the founder and Chairman
of Locus Computing Corporation, an organization dedicated to open systems based
distributed computing which was acquired by Platinum. Additionally, since 1987
Dr. Popek has been a senior faculty member in the Computer Science Department at
UCLA, conducting research on computer security, distributed UNIX systems,
replication and mobile computing. Dr. Popek holds a B.S. degree in nuclear
engineering from New York University and S.M. and Ph.D. degrees in applied
mathematics from Harvard University.
TIS DIRECTOR WHOSE TERM EXPIRES IN 2000
Harvey L. Weiss, age 55, has been Executive Vice President of TIS,
President of the Commercial Division and a Director of TIS since March 1996, and
has been Secretary of TIS since May 1996. Prior to that time, from February 1994
to March 1996, Mr. Weiss served as President of Public Sector Worldwide Division
for Unisys Corporation. From July 1991 to December 1993, Mr. Weiss was the Vice
President of Sales and the President and Chief Operating Officer of Thinking
Machines Corporation. Prior to that time, Mr. Weiss served in various senior
capacities at Digital Equipment Corporation. Thinking Machines Corporation
sought bankruptcy protection under Chapter 11 of the Bankruptcy Code in August
1994. Mr. Weiss holds a B.S. degree in mathematics from the University of
Pittsburgh.
Unless marked otherwise, proxies received will be voted for the election of
the nominees named above.
RECOMMENDATION OF THE TIS BOARD
THE TIS BOARD RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES NAMED
ABOVE.
TIS BOARD OF DIRECTORS AND COMMITTEES
The TIS Board met 8 times during 1997. All of the directors attended more
than 75% of all meetings of the TIS Board and meetings of Committees of the TIS
Board on which such director served.
The Audit Committee currently consists of Mr. Walker, Dr. Popek and Mr.
Stein. This committee, which was formed in June 1996 and met 3 times during
1997, recommends the firm to be appointed as independent auditors to audit TIS's
financial statements, discusses the scope and results of the audit with the
independent auditors, reviews with management and the independent auditors TIS's
interim and year-end operating results, considers the adequacy of the internal
accounting controls and audit procedures of TIS and reviews the non-audit
services to be performed by the independent auditors.
The Compensation Committee currently consists of Mr. Walker, Dr. Popek and
Mr. Stein. The Compensation Committee, which was formed in June 1996 and met 3
times during 1997, reviews and recommends the compensation arrangements for
management of TIS and administers TIS's stock option plans.
The TIS Board currently does not have a nominating committee or a committee
performing the functions of a nominating committee. Although there are no formal
procedures for stockholders to nominate persons to serve as directors, the TIS
Board will consider recommendations from stockholders, which should be addressed
to Stephen T. Walker, President, Chief Executive Officer, and Chairman of the
TIS Board, at TIS's address.
TIS directors who are not currently employees of TIS are entitled to
receive a fee of $750 per meeting attended in person, are reimbursed for certain
reasonable expenses incurred in attending each meeting of the TIS Board and
receive awards of stock options under the Second Amended and Restated 1996
Directors' Stock Option Plan.
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<PAGE> 82
TIS EXECUTIVE OFFICERS
In addition to Mr. Walker, Dr. Branstad and Mr. Weiss, the following are
the executive officers of TIS:
Homayoon Tajalli, age 39, has been an Executive Vice President of TIS since
December 1993, and from October 1987 until December 1995 was responsible for all
aspect of TIS's Trusted Mach operating system development activities. From
January 1996 until the present, Mr. Tajalli served as the General Manager of
Cryptographic Products. From February 1983 to October 1987, Mr. Tajalli held
various management positions with Digital Equipment Corporation, including
Senior Technical Software Manager, technical Software Manager/Software
Consultant and Principal Software Specialist. Mr. Tajalli holds B.S. and M.S.
degrees in electrical engineering from the University of Maryland.
Gina Dubbe, age 36, joined TIS in 1996 and serves as Executive Vice
President of Corporate Marketing. Ms. Dubbe oversees the planning, development
and implementation of TIS s worldwide corporate and product marketing
strategies. Until late 1997, her role at TIS was Vice President of Sales. From
1994 to 1996, Ms. Dubbe was the Director of Federal Operations at the Interleaf
Corporation. Prior to that time Ms. Dubbe served in various management
capacities for PRC and Oracle Corporation. Ms. Dubbe is a Licensed Professional
Engineer with a B.S. in Industrial Engineering and a M.S. in Engineering.
Ronald W. Kaiser, age 44, joined TIS in May 1996 as Executive Vice
President and Chief Financial Officer. From November 1994 through January 1996,
Mr. Kaiser served as Chief Financial Officer of American Communications
Services, Inc. ("ACSI"), a regional competitive access provider of
telecommunications services, and since February 1996, Mr. Kaiser has served as a
consultant to ACSI. From April 1993 to November 1994, Mr. Kaiser served as Vice
President of Finance, Treasurer and Chief Financial Officer at ADAK
Communications Corporation, a manufacturer and distributor of telecommunications
digital access controllers. ADAK Communications Corporation sought bankruptcy
protection under Chapter 11 of the Bankruptcy Code in February 1996. From 1990
through 1993, Mr. Kaiser served as Vice President -- Finance and Treasurer of a
subsidiary of George Fischer AG, a Swiss corporation. Mr. Kaiser received B.A.
degrees in accounting and pre-law from Michigan State University.
Mr. Steven B. Lipner resigned from TIS as the Executive Vice President and
Network Security Product Line Manager in May 1997.
Officers of TIS are elected by the TIS Board on an annual basis and serve
until their successors have been duly elected and qualified.
There are no family relationships among any of the directors or executive
officers of TIS.
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<PAGE> 83
TIS EXECUTIVE COMPENSATION
The following table sets forth certain annual compensation information for
TIS's Chief Executive Officer and each of the other officers of TIS whose annual
salary exceeded $100,000 for the year ended December 26, 1997 (collectively, the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES ALL
OTHER ANNUAL UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS($)(1) COMPENSATION OPTIONS/SARS COMPENSATION($)(8)
- --------------------------- ---- ------- ----------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen T. Walker......... 1997 240,000 $104,031 $ 5,531(2) -- $58,405
President and Chief 1996 216,931 157,407 6,867(2) -- --
Executive Officer 1995 195,952 146,026 4,472(2) -- --
Martha A. Branstad........ 1997 200,013 63,865 8,640(2) -- --
Executive Vice President 1996 175,107 51,008 5,427(2) -- --
and Chief Operating 1995 148,784 40,594 11,170(2) -- --
Officer
Harvey L. Weiss........... 1997 200,012 63,865 5,531(2) -- 11,457
Executive Vice President, 1996 153,309(9) 86,388 1,162(2) 258,364(6) --
Secretary and Director 1995 -- -- -- -- --
Gina Dubbe................ 1997 125,008 -- 231,521(2,7) -- --
Executive Vice President 1996 117,315 -- 46,097(2,7) 77,516(3) --
1995 -- -- -- -- --
Homayoon Tajalli.......... 1997 167,298 51,857 970(2) -- 40,742
Executive Vice President 1996 145,001 32,525 332(2) 214,563(4) --
1995 136,571 29,484 198(2) -- --
Ronald W. Kaiser.......... 1997 143,664 41,943 1,372(2) -- --
Executive Vice President 1996 80,479(10) 18,448 323(2) 92,018(5) --
& Chief Financial Officer 1995 -- -- -- -- --
</TABLE>
- ---------------
(1) TIS's executive officers are eligible for annual cash bonuses. Such bonuses
are based upon achievement of individual or corporate performance
objectives determined by the TIS Board.
(2) Includes the payment by TIS of the annual premium for certain term life
coverage pursuant to a benefit program, and in the case of Mr. Walker and
Dr. Branstad, for 1996 and 1995, includes payment by TIS of the premium for
buy-sell life insurance.
(3) Options vested 25% on January 2, 1997; with the remaining 75% vesting in
equal monthly increments over the next 3 years.
(4) Options vested 50% on April 19, 1997; with the remaining vesting 25% over
year 2, 15% over year 3, and 10% over year 4 in equal monthly increments
within each year.
(5) Options vested 25% on May 3, 1997; with the remaining 75% vesting in equal
monthly increments over the next 3 years.
(6) Options vested 25% on March 4, 1997; with the remaining 75% vesting in
equal monthly increments over the next 3 years.
(7) In October 1997, Gina Dubbe was promoted to Executive Vice President. In
her prior position as Vice President of Sales and Marketing her incentive
program included commission compensation based upon the commercial division
sales. Her commission payments in 1997 and 1996 were $231,309 and $45,906,
respectively.
(8) Represents a one time payout of vacation hours earned in excess of 180
hours.
(9) Mr. Weiss joined TIS in March, 1996. His 1996 annual salary would have been
$200,000 had he been with TIS for the entire fiscal year.
(10) Mr. Kaiser joined TIS in May, 1996. His 1996 annual salary would have been
$135,000 had he been with TIS for the entire fiscal year.
No options were granted to any of the Named Officers during 1997.
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<PAGE> 84
The following table sets forth certain information regarding options to
purchase Common Stock as of December 27, 1996 by each of the Named Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen T. Walker.............. -- $ -- -- -- $ -- $ --
Martha A. Branstad............. -- -- -- -- -- --
Harvey L. Weiss................ -- -- 113,057 145,307 561,328 721,449
Gina Dubbe..................... 33,000 229,845 4,149 73,367 20,600 364,267
Homayoon Tajalli............... -- -- 143,043 71,520 710,208 355,097
Ronald W. Kaiser............... -- -- 36,432 55,586 180,885 275,984
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the Common Stock on the
date of exercise less the exercise price payable for such shares, multiplied
by the number of shares.
(2) Calculated on the basis of $7.625 per share, the fair market value of the
Common Stock at December 26, 1997, less the exercise price payable for such
shares, multiplied by the number of shares underlying the option.
TIS does not have any employment agreements with any of the above Named
Officers, but does have separation agreements with Ms. Dubbe, and Dr. Branstad
and with Messrs. Weiss, Tajalli and Kaiser, which may compensate them and
provide for certain benefits for up to one year after their services are
separated, in the event of certain circumstances.
COMPENSATION COMMITTEE REPORT ON TIS EXECUTIVE COMPENSATION
The Compensation Committee reviews and recommends the compensation
arrangements for management of TIS and administers TIS' stock option plans. The
Compensation Committee of the TIS Board was established in June 1996 immediately
following the establishment of TIS's current TIS Board. The Committee consists
of three members, two of whom are outside directors. None of the non-employee
directors has any interlocking or other relationship with TIS that would call
into question his independence as a Committee member.
The Committee's philosophy regarding executive compensation is to offer
competitive and fair compensation which will attract and retain key executives,
and to reward executives and hold them accountable for TIS's overall
performance. In setting compensation levels, the Committee reviews compensation
of executives at comparable companies, general economic conditions, the
competitive nature of TIS's industry and the existing compensation structures of
TIS, which have been established to give consideration to government guidelines
for comparability with similar industry compensation levels. The total
compensation of executive officers consists of three components: base salary;
bonus; and stock option awards.
During late 1997, TIS contracted with William M. Mercer, Inc., an
independent Human Resources consulting firm to conduct a review of its executive
compensation program, as well as a study of TIS's overall compensation programs.
This review was conducted over the remainder of 1997 and consisted of
comparisons of the executive officer team's salaries, bonuses and stock option
awards to several similar companies and to industry averages for similar size
companies.
Base Salary. In determining the appropriate level of base salaries, the
Compensation Committee considers responsibility, prior experience and
accomplishments and the relative importance of the position in achieving TIS
objectives. The Compensation Committee also sets base salaries at levels
necessary to retain key employees, including consideration for information
provided by TIS's outside independent consultants.
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<PAGE> 85
Bonuses. Bonuses were awarded based upon achievement of individual or
corporate performance objectives determined by the TIS Board from time to time.
Factors considered by the Compensation Committee in awarding bonuses in fiscal
1997 included achievement of revenue and profitability goals established at the
beginning of the year.
Stock Option Grants. TIS currently maintains a 1996 Option Plan. The 1996
Option Plan provides for grants to employees, officers and consultants of TIS.
The number of options granted to each executive officer is subjective based upon
individual performance, future potential, and abilities to impact TIS's
performance. In addition, the shares owned by the named executives and their
respective option positions were considered in determining such option grants.
The Committee's basis for compensation for TIS's Chief Executive Officer
has been to remain consistent with its compensation policy for all executive
officers of TIS. The 1997 base compensation of the Chief Executive Officer
reflects an increase of 10.6%, whereas the bonus reflects a decrease of 33.9%,
compared to the compensation and bonus levels of the previous year.
Section 162(m) of the Internal Revenue Code generally limits to $1,000,000
the tax deductible compensation paid to the Chief Executive Officer and the four
highest-paid executive officers who are employed as executive officers on the
last day of the year. However, the limitation does not apply to
performance-based compensation provided certain conditions are satisfied.
None of the TIS's compensation payments for fiscal 1997 exceeded the tax
deductibility limit set forth in Section 162(m) nor is it expected that
compensation to be paid in fiscal 1998 will exceed that limit. The Compensation
Committee will continue to monitor TIS's executive compensation with the impact
of Section 162(m) where appropriate and consistent with TIS's compensation
policy.
Stephen T. Walker
Gerald J. Popek
Charles W. Stein
TIS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
TIS's Compensation Committee was formed in June 1996 and the members of the
committee are Mr. Walker, Dr. Popek and Mr. Stein. Neither Dr. Popek nor Mr.
Stein was at any time during the fiscal year ended December 26, 1997 or at any
other time, an officer or employee of TIS. Mr. Walker has been an officer and
Director of TIS since May 1983. No executive officer of TIS serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as members of TIS's Board or Compensation
Committee.
78
<PAGE> 86
TIS PERFORMANCE GRAPH
The following graph shows a month-by-month comparison of cumulative total
shareholder return on TIS Common Stock, based on the market price of TIS Common
Stock assuming reinvestment of dividends, with the cumulative total return of
companies in the Nasdaq National Market and the Russell 2000 Index for the
period beginning October 10, 1996, the day TIS Common Stock began trading,
through February 27, 1998.
COMPARISON OF CUMULATIVE TOTAL RETURNS*
LOGO
TIS SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires TIS officers and directors, and
persons who own more than 10% of a registered class of TIS equity securities, to
file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than 10% beneficial owners are required to by the SEC's
regulations to furnish TIS with copies of all Section 16(a) reports that they
file.
SEC rules require TIS to disclose all known delinquent Section 16(a)
filings by its officers, directors and 10% stockholders in this Proxy
Statement/Prospectus. Based solely on its review of the copies of reports
received by it, or written representations from certain reporting persons that
no such reports were required by those persons, TIS believes that during the
fiscal year of 1997, all filing requirements applicable to its officers,
79
<PAGE> 87
directors, and greater than 10% beneficial owners were complied with, except
that Dr. Branstad did not timely file a Form 4.
TIS PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of TIS's Common stock as of February 22, 1998 for (i) each person
known by TIS to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director of TIS, (iii) each of the TIS Named Officers,
and (iv) all directors and executive officers of TIS as a group. Unless
otherwise indicated (i) the persons named in the table have sole voting and
investment power with respect to all shares of TIS Common Stock shown as
beneficially owned by them, subject to community property laws where applicable,
and (ii) the address for the persons named in the table is 3060 Washington Road,
Glenwood, Maryland 21738.
<TABLE>
<CAPTION>
TIS COMMON STOCK
BENEFICIALLY OWNED
AS OF
FEBRUARY 22, 1997(1)
----------------------
NUMBER OF
NAME SHARES PERCENT
---- --------- -------
<S> <C> <C>
Martha A. Branstad(2).................................. 1,433,462 10.3%
Ronald W. Kaiser(3).................................... 46,781 *
Gerald J. Popek(4)..................................... 3,068 *
Charles W. Stein(5).................................... 6,068 *
Homayoon Tajalli(6).................................... 212,480 1.5%
Stephen T. Walker(7)................................... 2,859,325 20.6%
Harvey L. Weiss(8)..................................... 135,895 1.0%
Gina Dubbe(9).......................................... 44,758 *
Stephen E. Smaha....................................... 876,841 6.3%
All directors and executive officers as a group
(8 persons)(10)...................................... 4,741,837 33.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
and includes voting and investment power with respect to shares. Shares of
TIS Common Stock subject to options currently exercisable or exercisable
within 60 days after February 22, 1998 are deemed outstanding for computing
the percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.
(2) Includes 460,094 shares held in a trust over which Dr. Branstad is the
Trustee, and includes 460,094 shares held in a trust over which Dr.
Branstad's husband is the Trustee and over which Dr. Branstad exercises
voting and investment power. Also includes 20,241 shares held by members of
Dr. Branstad's family over which Dr. Branstad exercises voting and
investment power; 375 shares held by Dr. Branstad's husband; and 71 shares
issuable upon exercise of outstanding options held by Dr. Branstad's
husband.
(3) Includes 44,099 shares issuable upon exercise of outstanding options.
(4) Includes 3,068 shares issuable upon exercise of outstanding options.
(5) Includes 3,068 shares issuable upon exercise of outstanding options.
(6) Includes 118,860 shares issuable upon the exercise of outstanding options.
Also includes 14,751 shares held by Mr. Tajalli's wife.
(7) Includes 147,230 shares held in a trust over which Mr. Walker is the
Trustee, and includes 147,230 shares held in a trust over which Mr.
Walker's wife is the Trustee and over which Mr. Walker does not exercise
voting or investment power. Mr. Walker disclaims beneficial ownership of
the latter 147,230 shares. Also includes 1,521 shares held by Mr. Walker's
wife.
(8) Includes 134,584 shares issuable upon exercise of outstanding options.
80
<PAGE> 88
(9) Includes 10,608 shares issuable upon exercise of outstanding options.
(10) See footnotes (3), (4), (5), (6), (8) and (9) above. Includes
314,358 shares issuable upon exercise of outstanding options; and excludes
options which may otherwise become vested upon consummation of the Merger.
LEGAL MATTERS
The validity of the shares of Network Associates Common Stock to be issued
pursuant to the Reorganization Agreement and the federal income tax consequences
of the Merger will be passed upon for Network Associates 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 TIS by Piper &
Marbury L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of Network Associates, Inc. at
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, have been incorporated by reference in this 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.
The consolidated financial statements of Trusted Information Systems, Inc.
at December 27, 1996 and December 26, 1997 and for each of the three years in
the period ended December 26, 1997 appearing in this Proxy Statement/Prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
Representatives of Ernst & Young LLP are expected to be present at the TIS
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.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, TIS stockholders may present
proper proposals for inclusion in TIS's proxy statement and for consideration at
the next annual meeting of its stockholders by submitting such proposals to TIS
in a timely manner. As noted in TIS'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 TIS no later than December 19,
1997, and must otherwise have complied with the requirements of Rule 14a-8.
81
<PAGE> 89
TRUSTED INFORMATION SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 27, 1996 and
December 26, 1997......................................... F-3
Consolidated Statements of Operations for the years ended
December 29, 1995, December 27, 1996 and December 26,
1997...................................................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 29, 1995, December 27, 1996 and
December 26, 1997......................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 29, 1995, December 27, 1996 and December 26,
1997...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Trusted Information Systems, Inc.
We have audited the accompanying consolidated balance sheets of Trusted
Information Systems, Inc. as of December 27, 1996 and December 26, 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 26, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Trusted Information Systems, Inc. at December 27, 1996 and December 26, 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 26, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
March 2, 1998
F-2
<PAGE> 91
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1996 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,237,147 $ 1,290,075
Marketable securities..................................... 39,066,569 27,160,179
Accounts receivable, net of allowance of $174,592 and
$700,389 for 1996 and 1997, respectively............... 6,208,367 11,365,888
Unbilled receivables...................................... 1,746,370 2,108,761
Prepaid expenses and other current assets................. 983,231 2,537,079
Refundable income taxes................................... 1,507,121 480,000
----------- -----------
Total current assets.............................. 52,748,805 44,941,982
Property and equipment, net................................. 6,851,062 8,161,497
Other assets................................................ 355,593 664,962
----------- -----------
Total assets...................................... $59,955,460 $53,768,441
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,044,914 $ 568,425
Accrued expenses.......................................... 4,505,385 6,515,196
Deferred income taxes..................................... 403,324 --
Deferred revenue.......................................... 2,280,126 3,446,422
Notes payable, current portion............................ 150,857 152,811
----------- -----------
Total current liabilities......................... 8,384,606 10,682,854
Notes payable, net of current portion....................... 2,424,355 2,276,345
Other non-current liabilities............................... 47,365 76,607
----------- -----------
Total liabilities................................. 10,856,326 13,035,806
Commitments
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 13,235,890 and 13,792,762 shares issued and
outstanding at December 27, 1996 and December 26, 1997,
respectively........................................... 132,359 137,928
Additional paid-in capital................................ 49,702,117 51,152,383
Unrealized gains, net of income taxes of $932,838......... 1,495,162 --
Foreign currency translation adjustment................... 12,663 (26,712)
Retained deficit.......................................... (1,298,884) (9,863,054)
Deferred stock compensation............................... (944,283) (667,910)
----------- -----------
Total shareholders' equity........................ 49,099,134 40,732,635
----------- -----------
Total liabilities and shareholders' equity........ $59,955,460 $53,768,441
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 92
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Government contracts.................................. $12,327,502 $11,095,247 $ 9,605,877
Commercial products................................... 4,270,924 14,602,736 28,782,406
Commercial consulting services........................ 1,491,661 1,677,285 3,834,400
----------- ----------- -----------
18,090,087 27,375,268 42,222,683
Cost of revenues:
Government contracts.................................. 8,844,719 7,864,862 6,557,171
Commercial products................................... 1,142,282 3,450,754 4,231,051
Commercial consulting services........................ 877,946 987,694 2,246,646
----------- ----------- -----------
10,864,947 12,303,310 13,034,868
----------- ----------- -----------
Gross profit............................................ 7,225,140 15,071,958 29,187,815
Operating expenses:
Selling, general and administrative................... 3,727,701 15,472,859 28,641,944
Research and development.............................. 1,144,737 4,309,891 8,532,987
Non-recurring transaction and other related costs..... -- -- 3,534,957
----------- ----------- -----------
4,872,438 19,782,750 40,709,888
----------- ----------- -----------
Income (loss) from operations........................... 2,352,702 (4,710,792) (11,522,073)
Other income (expense):
Interest income....................................... 50,276 518,404 1,901,561
Interest expense...................................... (158,778) (415,243) (259,750)
Non-recurring gain on sale of marketable securities... -- -- 1,670,377
----------- ----------- -----------
(108,502) 103,161 3,312,188
----------- ----------- -----------
Income (loss) before income taxes....................... 2,244,200 (4,607,631) (8,209,885)
Income tax provision (benefit).......................... 900,137 (1,396,510) 354,285
----------- ----------- -----------
Net income (loss)....................................... $ 1,344,063 $(3,211,121) $(8,564,170)
=========== =========== ===========
Earnings (loss) per share............................... $ 0.18 $ (0.32) $ (0.63)
=========== =========== ===========
Earnings (loss) per share assuming dilution............. $ 0.17 $ (0.32) $ (0.63)
=========== =========== ===========
Weighted average shares outstanding..................... 7,333,676 9,952,120 13,531,876
=========== =========== ===========
Weighted average shares outstanding assuming dilution... 8,018,579 9,952,120 13,531,876
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 93
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
--------------------- ADDITIONAL CURRENCY RETAINED DEFERRED
NUMBER PAID-IN UNREALIZED TRANSLATION EARNINGS STOCK
OF SHARES AMOUNT CAPITAL GAINS ADJUSTMENT (DEFICIT) COMPENSATION
---------- -------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 30, 1994, AS
PREVIOUSLY REPORTED.............. 7,516,079 $ 75,161 $ 359,200 -- $ (6,103) $ 1,038,263 --
Adjustment for pooling of
interests........................ 1,378,726 13,787 644,709 -- -- (430,827) --
---------- -------- ----------- ----------- -------- ----------- -----------
BALANCE AT DECEMBER 30, 1994, AS
RESTATED......................... 8,894,805 88,948 1,003,909 -- (6,103) 607,436 --
Net income for 1995................ -- -- -- -- -- 1,344,063 --
Exercise of stock options.......... 6,453 64 3,169 -- -- -- --
Repurchase of common stock......... (588,921) (5,889) (362,369) -- -- (39,262) --
Translation adjustment............. -- -- -- -- 982 -- --
---------- -------- ----------- ----------- -------- ----------- -----------
BALANCE AT DECEMBER 29,
1995............................. 8,312,337 83,123 644,709 -- (5,121) 1,912,237 --
Net loss for 1996.................. -- -- -- -- (3,211,121) --
Exercise of stock options.......... 646,979 6,470 341,454 -- -- -- --
Issuance of common stock net of
costs............................ 366,574 3,666 2,246,904 -- -- -- --
Sale of common stock, net of
related costs of $1,869,250...... 3,910,000 39,100 45,363,550 -- -- -- --
Unrealized gain on
available-for-sale securities,
net of tax....................... -- -- -- 1,495,162 -- -- --
Deferred stock compensation........ -- -- 1,105,500 -- -- -- (1,105,500)
Amortization of deferred stock
compensation..................... -- -- -- -- -- -- 161,217
Translation adjustment............. -- -- -- -- 17,784 -- --
---------- -------- ----------- ----------- -------- ----------- -----------
BALANCE AT DECEMBER 27,
1996............................. 13,235,890 132,359 49,702,117 1,495,162 12,663 (1,298,884) (944,283)
Net loss for 1997.................. -- -- -- -- -- (8,564,170) --
Exercise of stock options.......... 556,872 5,569 760,698 -- -- -- --
Stock Issued Compensation Plan..... -- -- 689,568 -- -- -- --
Gain on sale of available for-sale
securities, net of tax........... -- -- -- (1,495,162) -- -- --
Amortization of deferred stock
compensation..................... -- -- -- -- -- -- 276,373
Translation adjustment............. -- -- -- -- (39,375) -- --
---------- -------- ----------- ----------- -------- ----------- -----------
BALANCE AT DECEMBER 26, 1997....... 13,792,762 $137,928 $51,152,383 -- $(26,712) $(9,863,054) $ (667,910)
========== ======== =========== =========== ======== =========== ===========
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE AT DECEMBER 30, 1994, AS
PREVIOUSLY REPORTED.............. $ 1,466,521
Adjustment for pooling of
interests........................ 227,669
-----------
BALANCE AT DECEMBER 30, 1994, AS
RESTATED......................... $ 1,694,190
Net income for 1995................ 1,344,063
Exercise of stock options.......... 3,233
Repurchase of common stock......... (407,520)
Translation adjustment............. 982
-----------
BALANCE AT DECEMBER 29,
1995............................. 2,634,948
Net loss for 1996.................. (3,211,121)
Exercise of stock options.......... 347,924
Issuance of common stock net of
costs............................ 2,250,570
Sale of common stock, net of
related costs of $1,869,250...... 45,402,650
Unrealized gain on
available-for-sale securities,
net of tax....................... 1,495,162
Deferred stock compensation........ --
Amortization of deferred stock
compensation..................... 161,217
Translation adjustment............. 17,784
-----------
BALANCE AT DECEMBER 27,
1996............................. 49,099,134
Net loss for 1997.................. (8,564,170)
Exercise of stock options.......... 766,267
Stock Issued Compensation Plan..... 689,568
Gain on sale of available for-sale
securities, net of tax........... (1,495,162)
Amortization of deferred stock
compensation..................... 276,373
Translation adjustment............. (39,375)
-----------
BALANCE AT DECEMBER 26, 1997....... $40,732,635
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 94
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 1,344,063 $ (3,211,121) $ (8,564,170)
Adjustments:
Depreciation................................. 261,020 347,929 1,000,873
Deferred income taxes........................ (136,386) (102,244) 528,634
Amortization of deferred stock
compensation.............................. -- 161,217 276,373
Gain on sale of marketable securities........ -- -- (1,670,377)
Changes in operating assets and liabilities:
Accounts receivable and unbilled
receivables............................. (2,924,877) (2,187,758) (5,519,912)
Prepaid expenses and other current
assets.................................. (119,829) (724,793) (1,553,848)
Other assets.............................. 22,065 (292,146) (309,369)
Accounts payable.......................... 219,099 337,834 (476,489)
Accrued payroll and other accrued
expenses................................ 819,102 1,745,238 2,009,811
Other non-current liabilities............. -- 47,365 29,242
Income taxes payable/refundable........... (276,546) (1,629,295) 1,027,121
Deferred revenue.......................... 999,706 1,239,667 1,166,296
----------- ------------ ------------
Net cash provided by (used in) operating
activities..................................... 207,417 (4,268,107) (12,055,815)
INVESTING ACTIVITIES
Purchases of property and equipment............... (2,095,829) (3,457,150) (2,311,308)
Sale of marketable securities..................... -- -- 1,681,258
(Purchase)/Redemption of marketable securities.... -- (36,628,126) 9,468,390
----------- ------------ ------------
Net cash (used in) provided by investing
activities..................................... (2,095,829) (40,085,276) 8,838,340
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of
related costs.................................. -- 47,653,220 --
Proceeds from exercise of stock options and stock
issued compensation plan....................... 3,233 347,924 1,455,835
Repurchase of common stock........................ (407,520) -- --
Net borrowings (repayments) of short-term
borrowings..................................... 1,523,000 (1,523,000) --
Proceeds from issuance of notes payable........... 1,036,299 1,801,777 600,000
Repayments of notes payable....................... (269,081) (967,214) (746,057)
----------- ------------ ------------
Net cash provided by financing activities......... 1,885,931 47,312,707 1,309,778
----------- ------------ ------------
Effect of exchange rate changes on cash........... 982 17,784 (39,375)
----------- ------------ ------------
Net change in cash and cash equivalents........... (1,499) 2,977,108 (1,947,072)
Cash and cash equivalents at beginning of
period......................................... 261,538 260,039 3,237,147
----------- ------------ ------------
Cash and cash equivalents at end of period........ $ 260,039 $ 3,237,147 $ 1,290,075
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the period................... $ 162,724 $ 499,474 $ 263,723
=========== ============ ============
Income taxes paid during the period............... $ 1,176,683 $ 325,537 $ 0
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 95
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Description of Business
Trusted Information Systems, Inc. (the "Company" or "TIS") provides
comprehensive security solutions for the protection of computer networks,
including global Internet-based systems, internal networks and individual
workstations and laptops. The Company develops, markets, licenses, and supports
the Gauntlet family of firewall products, the Stalker line of intrusion
detection products and other network security products as well as TIS' patented
RecoverKey(TM) technology. In addition to providing leading edge information
security products, TIS performs an array of services in the areas of
cryptography, security consulting, training, and advanced research and
engineering for commercial and government customers on a worldwide basis.
Fiscal Periods
The Company's fiscal year is based on a 52-53 week year ending on the last
Friday in December. The years ended December 29, 1995, December 27, 1996 and
December 26, 1997 were 52-week years. Each of the Company's fiscal quarters
consists of a 13-week period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Trusted Information Systems U.K.
Limited ("TIS UK"), Trusted Information Systems GmbH ("TIS GmbH"), and Haystack
Laboratories ("Haystack"). The TIS UK subsidiary was established in 1992 to
conduct the Company's activities in the United Kingdom and the TIS GmbH
subsidiary was established in 1996 to conduct the Company's activities in
Germany. All material intercompany accounts and transactions have been
eliminated upon consolidation. Prior period consolidated financial statements
and corresponding notes to financial statements have been restated to give
effect to the merger unless the effect of the business combination was not
material to the financial statements of the Company (1995 was not restated due
to immateriality).
Revenues from the Company's European subsidiaries amounted to 3.1%, 3.8%
and 6.7% of total revenues for the years ended December 29, 1995, December 27,
1996, and December 26, 1997, respectively. Translation adjustments from foreign
operations are not significant in the current year nor is the risk associated
with foreign operations considered to be significant.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Initial Public Offering and Related Matters
Effective May 31, 1996, the Company consummated a tax-free reorganization
for the purposes of becoming a Delaware corporation by issuing 40 shares of a
new class of $.01 par value common stock in exchange for each share of the then
outstanding no par value Class A (voting) and Class B (non-voting) common stock.
The effect of this reorganization is reflected as if it had occurred at the
beginning of the earliest period presented.
F-7
<PAGE> 96
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
On August 30, 1996, the Board of Directors approved a 1-for-1.6301 reverse
stock split of the Company's common stock, which with stockholder approval
became effective on September 28, 1996. All references in the accompanying
financial statements to the number of shares of common stock and per share
amounts have been restated to reflect the reverse stock split.
In June 1996, the Company filed a registration statement with the SEC
permitting the Company to sell 3,910,000 shares of its common stock to the
public, including up to 510,000 shares to cover over-allotments. Pursuant to the
registration statement, the Company completed its initial public offering (IPO)
on October 10, 1996. The initial public offering resulted in proceeds to the
Company of approximately $45.4 million, net of approximately $1.9 million in
underwriting fees and offering expenses. The Company repaid approximately $4.9
million of its short-term borrowings and notes payable out of the proceeds.
Other Information Regarding Basis of Presentation
Amounts receivable, directly and indirectly, from government agencies
approximated 15.9% and 16.8% of total accounts receivable at December 27, 1996
and December 26, 1997, respectively. Sales to these agencies accounted for
approximately 68%, 41% and 23% of total revenues for the years ended December
29, 1995, December 27, 1996 and December 26, 1997, respectively.
Export sales, primarily to Europe, were 4.8%, 7.6%, and 12.7% of total
revenues for the years ended December 29, 1995, December 27, 1996, and December
26, 1997, respectively.
SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities
Marketable securities are classified as available-for-sale and are carried
at fair market value with unrealized gains and losses, net of taxes reported in
a separate component of shareholders' equity. At December 27, 1996, marketable
securities consisted of an investment in 100,000 shares of Cybercash, Inc. and
approximately $36.7 million in U.S. Government and U.S. Government-sponsored
securities, all with maturities of less than three months. At December 26, 1997,
marketable securities consisted of approximately $27.2 million in
government-sponsored securities with maturities of less than 9 months, carried
at cost, which approximates their fair value.
Realized gains in value judged to be other-than-temporary are included in
investment income. Interest and dividends are included in investment income. At
December 27, 1996, the common stock of Cybercash, Inc., which the Company
purchased in connection with the formation of the company, had a cost basis of
approximately $10,000 and an unrealized gain and estimated fair value of
approximately $1.5 million (net of taxes of $932,838). The Company sold the
Cybercash stock in the third quarter of 1997. Proceeds from this transaction
were $1,681,258 and a gross gain of $1,670,377 was realized on the sale.
Fair Value of Financial Instruments
The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable, marketable securities, accounts payable and long-term debt to
approximate the fair value of the respective assets and liabilities at December
27, 1996 and December 26, 1997. The Company performs periodic credit evaluations
of the financial condition of its customers and typically does not require
collateral from its customers.
F-8
<PAGE> 97
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
Property and Equipment
Property and equipment is stated at cost. Additions prior to fiscal year
1996 are depreciated on an accelerated basis using estimated useful lives of
20-40 years for buildings and improvements and 5-10 years for furniture and
equipment. Additions for fiscal years 1996 and 1997 are depreciated on a
straight line basis over similar lives.
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees. In October 1995, the Financial
Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based
Compensation, which encourages companies to recognize expense for stock-based
awards based on their estimated fair value on the date of grant. Statement No.
123, effective for 1996, does not require companies to change their existing
accounting for stock-based awards, but if the new fair value method is not
adopted, pro forma income and earnings per share data should be provided in the
footnotes to the financial statements. The Company's financial statements
supplementally disclose the required pro forma information as if the fair value
method had been adopted for 1996 and 1997. (See footnote 6.)
Revenue Recognition
Commercial Products and Services -- Revenues from the sale of goods,
including software products, are recognized upon shipment, when collection of
the receivable is probable and the Company has no significant remaining
obligations. In instances where the Company directly installs its products,
related installation revenues are recognized upon completion of installation.
Commercial consulting services are provided primarily on a time and materials
basis. The Company accounts for obligations under customer service, support and
maintenance agreements by deferring a pro rata portion of revenue and
recognizing it either ratably as the obligations are fulfilled or upon
completion of performance.
Government Contracts -- The Company enters into research and development
contracts with government agencies under various pricing arrangements. Revenue
from "cost-plus-fixed-fee" contracts is recognized on the basis of reimbursable
contract costs incurred during the period, plus a percentage of the fixed fee.
Revenue from "time and material" contracts is recognized on the basis of hours
utilized, plus other reimbursable contract costs incurred during the period.
Revenue from "firm-fixed-price" contracts is recognized on the percentage of
completion method. Under this method, individual contract revenues are recorded
based on the percentage relationship that contract costs incurred bear to
management's estimate of total contract costs. Losses, if any, are accrued when
their occurrence becomes known and the amount of the loss is reasonably
determined.
Under its government contracts, the Company is subject to audit by the
Defense Contract Audit Agency (DCAA) which could result in the renegotiation of
amounts previously billed. The DCAA has performed audits of the Company's costs
through 1995. Management believes that the results of such audits will not have
a material adverse effect on the Company's financial position or results of
operations.
Revenues recognized in excess of amounts billed to government agencies and
retainage related to long-term contracts have been recorded as unbilled
receivables in the accompanying balance sheets.
Research and Development
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standard No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or
F-9
<PAGE> 98
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
Otherwise Marketed, requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been insignificant. The distribution of products
incorporating encryption technology may be subject to U.S. government export
restrictions.
Advertising Costs
All advertising costs are expensed when incurred. Costs which are included
in expense for the years ended December 29, 1995, December 27, 1996, and
December 26, 1997 were approximately $28,700, $340,453 and $854,715,
respectively.
Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully dilutive earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
Recently Issued Accounting Standards
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income" which is effective for fiscal years beginning after December 15, 1997.
The Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Company will adopt
Statement No. 130 in the first quarter of 1998 and will provide the financial
statement disclosures as required by the Statement. The application of the new
rules will not have an impact on the Company's financial position or results
from operations.
In June 1997, FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial statements to shareholders. The Statement also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company will adopt Statement No. 131 in 1998 resulting in
additional segment disclosures as required by the Statement. The application of
the new rules will not have an impact on the Company's financial position or
results from operations.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which changes the requirements for revenue recognition of software licenses and
sales for transactions that the Company will enter into beginning January 1,
1998. The Company has not yet assessed what the impact of the SOP will be on the
1998 financial statements.
2. SUBSEQUENT EVENTS
Networks Associates, Inc. ("Network Associates") a Delaware corporation,
and Trusted Information Systems, Inc., a Delaware corporation ("TIS"), have
entered into an Agreement and Plan of Reorganization, dated as of February 22,
1998, (the "Reorganization Agreement"), among Network Associates, Thor
F-10
<PAGE> 99
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
Acquisition Corp., a wholly-owned subsidiary of Network Associates ("Merger
Sub"), and TIS. Pursuant to the Reorganization Agreement, Merger Sub will merge
with and into TIS, TIS will continue as the surviving corporation and will
become a wholly-owned subsidiary of Network Associates, and each outstanding
share of common stock of TIS, $0.01 par value ("TIS Common Stock"), will be
converted into the right to receive 0.323 of a share (the "Exchange Ratio") of
the common stock of Network Associates.
The Company has separation agreements with Gina Dubbe, Martha Branstad,
Harvey Weiss, Homayoon Tajalli, and Ronald Kaiser which may compensate them and
provide for certain benefits for up to one year after their services are
separated in the event of certain circumstances.
3. MERGERS AND ACQUISITIONS
On October 16, 1997, the Company acquired 100% of the outstanding stock of
Haystack Laboratories, Inc. ("Haystack"), an intrusion detection organization
based in Austin, Texas, for 2,098,935 shares of the Company's Common Stock. The
Company recognized approximately $3.5 million in non-recurring transaction and
other related costs in connection with the merger. The business combination was
accounted for by the pooling of interests method of accounting. As such, the
assets, liabilities and shareholders' equity of Haystack were combined with the
Company's respective accounts at recorded values. Prior period consolidated
financial statements and corresponding notes to financial statements have been
restated to give effect to the merger unless the effect of the business
combination was not material to the financial statements of the Company (1995
was not restated due to immateriality).
Included in the consolidated statements of operations for the year ended
December 26, 1997 are the following results of the previously separate
companies:
Period from December 28, 1996 to September 26, 1997 (approximating the
combination date).
<TABLE>
<CAPTION>
TIS HAYSTACK CONSOLIDATED
------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................ $28,481 $ 1,309 $29,270
Net loss................................ (2,069) $(2,215) $(4,264)
</TABLE>
The following is a reconciliation of revenues and net loss previously
reported by the Company for the year ended December 27, 1996, with the combined
amounts currently presented in the financial statements for that year:
Year Ended December 27, 1996
<TABLE>
<CAPTION>
TIS HAYSTACK CONSOLIDATED
------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................ $26,370 $ 1,005 $27,375
Net loss................................ $(2,164) $(1,047) $(3,211)
</TABLE>
In connection with the acquisition of Haystack, an escrow was established
of approximately 10% of the Company's shares issued to Haystack shareholders. In
March, 1998, a contingent claim, the amount of which was indeterminate at
December 26, 1997 and will be determined in accordance with the related escrow,
was filed by the Company against a portion of those shares.
F-11
<PAGE> 100
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of::
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1996 1997
------------ ------------
<S> <C> <C>
Land.............................................. $ 322,926 $ 322,926
Buildings and building improvements............... 4,657,585 4,783,818
Furniture and equipment........................... 3,214,021 5,091,510
Software.......................................... 254,659 515,765
Vehicles.......................................... -- 22,134
Leasehold improvements............................ 116,123 140,469
----------- -----------
8,565,314 10,876,622
Less: accumulated depreciation and amortization... (1,714,252) (2,715,125)
----------- -----------
$ 6,851,062 $ 8,161,497
=========== ===========
</TABLE>
5. NOTES PAYABLE
Notes payable to banks and others consists of the following:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1996 1997
------------ ------------
<S> <C> <C>
Small Business Administration mortgage note due in
monthly principal and interest (10.1% per annum)
installments of approximately $5,000 through 2009
Notes payable to a bank:........................... $ 405,052 $ 387,453
Mortgage note; principal due in monthly
installments of $10,000 and interest payable
monthly at a three year fixed rate of 8.46%,
balance due December, 2011.................... 1,750,000 1,640,000
Mortgage note; due in monthly principal and
interest (8.46% per annum) installments of
$4,128; balance due December 2011............. 420,160 401,703
---------- ----------
2,575,212 2,429,156
Less: current portion.............................. 150,857 152,811
---------- ----------
$2,424,355 $2,276,345
========== ==========
</TABLE>
In 1996, the Company modified its existing credit agreements and arranged
for additional credit agreements to fund the Company's growth prior to its
initial public offering. These short-term credit facilities were paid off in
conjunction with the Company's initial public offering.
The Company completed its expansion of its facilities at its Glenwood,
Maryland location in 1996, and substantially paid down the balance on its
construction loan of $1.8 million. This loan was then converted in December 1996
into a mortgage note which is collateralized by the underlying properties.
F-12
<PAGE> 101
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
Aggregate maturities of all notes payable at December 26, 1997 are as
follows:
<TABLE>
<S> <C>
1998..................................... $ 152,811
1999..................................... 158,746
2000..................................... 162,547
2001..................................... 166,723
2002..................................... 171,312
Thereafter............................... 1,617,017
----------
Total.................................... $2,429,156
==========
</TABLE>
6. STOCK OPTIONS
The Company has adopted the Amended and Restated Employee Stock Option Plan
("Employee Option Plan") and the 1996 Stock Option Plan ("1996 Option Plan")
which provide for the grant of incentive stock options and non-statutory stock
options to executives, employees and consultants. The Employee Option Plan
authorizes the issuance of options to acquire 6,134,593 shares of common stock
and at December 27, 1996, options to acquire 111,391 shares of common stock
under this plan were outstanding. No further options were granted under this
plan and no options related to this plan were outstanding at December 26, 1997.
The 1996 Option Plan authorizes the issuance of options to acquire 1,625,667
shares of common stock, and, at December 27, 1996 and December 26, 1997, options
to acquire 1,352,793 and 1,276,507 shares of common stock, respectively, were
outstanding under this plan.
The vesting period, contractual life, and the exercise price of each option
shall be determined by the respective plan administration committee. However,
for incentive stock options, the exercise price shall not be less than the fair
market value of the common stock on the date of the grant.
The Company has also adopted the 1996 Directors' Stock Option Plan
("Director Plan") which provides for the grant of non-statutory stock options to
non-employee directors of the Company. The Director Plan authorizes the issuance
of options to acquire 200,000 shares of common stock. On August 15, 1996 each of
the Company's two existing outside directors were granted options to purchase
9,202 shares of common stock at an exercise price of $7.04 per share, and
options to purchase 6,000 shares of common stock will be granted to each future
director upon initial election to the board of directors. The options vest
ratably over three years. Additionally, commencing in 1997, each director is
entitled to annual grants of options to purchase 1,250 shares of common stock.
Such annual options will vest in full at the earlier of (i) the first
anniversary of the date of the grant or (ii) the date of the next annual meeting
of stockholders. The exercise price of options granted under the Director Plan
will equal the closing price per share of the common stock on the date of grant.
As of December 27, 1996 and December 26, 1997, 18,404 and 20,904 options were
outstanding under the Director Plan at weighted per share prices of $7.04 and
$7.47, respectively.
Upon a change in control of the Company, as defined by the plans, 50% of
any outstanding unvested options under the 1996 Option Plan or the Director Plan
prior to the date of such change in control shall vest and be immediately
exercisable.
In connection with the initial public offering, the Company recorded
deferred compensation of $1,105,500 as a separate component of shareholders'
equity related to the issuance in June 1996 of options for 92,018 shares of the
Company's common stock. This deferred compensation is being amortized evenly
over the four-year vesting period of the options. At December 27, 1996 and
December 26, 1997, of the options for 92,018 shares, no options and options for
36,432 shares were exercisable, respectively.
F-13
<PAGE> 102
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
Option activity under the Employee Option Plan and the 1996 Option Plan is
as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING AVERAGE
UNDER THE PRICE PRICE
STOCK PLANS PER SHARE PER SHARE
----------- ------------- ---------
<S> <C> <C> <C>
Balance at December 30, 1994........... 1,205,188 $ .50 - .69 $ .60
Options granted...................... -- -- --
Options exercised.................... (6,453) .50 .50
Options canceled..................... (122,693) .50 - .69 .54
--------- ------------- -----
Balance at December 29, 1995........... 1,076,042 .50 - .69 .69
Options granted...................... 1,304,712 2.66 - 7.04 2.98
Options exercised.................... (646,979) .50 - 7.04 .54
Options canceled..................... (269,591) .50 - 7.04 .73
--------- ------------- -----
Balance at December 27, 1996........... 1,464,184 .69 - 7.04 2.73
Options granted...................... 583,749 .85 - 13.88 8.39
Options exercised.................... (556,872) .69 - 7.04 1.53
Options canceled..................... (214,554) .85 - 13.88 4.80
--------- ------------- -----
Balance at December 26, 1997........... 1,276,507 $ .69 - 13.88 $5.64
========= ============= =====
</TABLE>
Options exercisable at December 26, 1997 totaled 439,522 at a weighted
average per share price of $3.62.
The Company adopted Financial Accounting Standard No. 123 entitled
"Accounting for Stock-Based Compensation" ("FAS 123") as of December 27, 1996.
The provisions of FAS 123 allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose the
pro forma effects on net income and earnings per share had the fair value of the
options been expensed. TIS has elected to continue its practice of recognizing
compensation expense for its stock option incentive plans using the intrinsic
value based method of accounting (see Note 1) and to provide the required pro
forma information for stock options granted after December 29, 1995.
Accordingly, TIS recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date, or other measurement date, over the
amount an employee must pay to acquire the stock.
Pro Forma Disclosure
Had compensation expense for TIS' stock option incentive plans for options
granted after December 29, 1995 been determined based on the estimated fair
value at the grant dates for awards under those plans, TIS' pro forma net loss
and loss per share for 1996 would have been $3,652,402 a nd ($0.37),
respectively, and TIS' pro forma net loss and loss per share for 1997 would have
been $9,738,786 and ($0.72), respectively. Since no options were granted by the
Company, there is no pro forma effect for the year ended December 29, 1995. The
effects on 1996 and 1997 pro forma net income and earnings per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reported net income for future years due to
such things as the vesting period of the stock options and the potential for
issuance of additional stock options in future years.
The fair value of options granted after December 29, 1995, used as a basis
for the above pro forma disclosures, was estimated as of the date of grant using
a Black-Scholes option pricing model. The option pricing assumptions for 1996
include a dividend yield of 0%; an expected volatility of 1.414; a risk-free
interest
F-14
<PAGE> 103
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
rate of 6.13%; and an expected life of 4 years. The option pricing assumptions
for 1997 include a dividend yield of 0%, an expected volatility of 0.974, a
risk-free interest rate of 5.74%, and an expected life of 4 years.
Weighted-average fair value and exercise price per option granted during
1996 were $2.87 and $2.86, respectively for options whose exercise price was
equal to the fair value of the options on the date of the grant. For options
whose exercise price was less than the fair value on the date of the grant, the
weighted average fair value and exercise price per option granted during 1996
were $13.92 and $2.66, respectively. Weighted-average fair value and exercise
per option granted during 1997 were $7.98 and $11.31, respectively, for options
where exercise price was equal to the fair value of the options on the date of
the grant and no options were granted at less than the fair value on the date of
the grant. The weighted average contractual life for all options outstanding at
December 26, 1997 was 3.67 years.
The following table summarizes information regarding stock options
outstanding at December 26, 1997:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
OUTSTANDING CONTRACTUAL LIFE
-------------- ----------------
<S> <C> <C>
$ 2.66 790,213 3.33
$ 7.04 103,177 3.64
$13.875 23,000 4.22
$11.125 353,867 4.40
$12.625 6,250 4.49
--------- ----
Total........... 1,276,507 3.67
========= ====
</TABLE>
7. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.................. $ 70,718 $ 208,272
Other accrued expenses........................... 69,668 72,885
Accrued vacation................................. 208,454 230,082
Deferred revenues................................ 342,266 41,945
Deferred compensation............................ 65,212 168,997
Accrual to cash adjustment....................... 37,000 40,358
Tax credit carryforwards......................... -- 253,083
Net operating loss carryforwards................. 329,000 1,664,893
---------- ----------
1,122,318 2,680,515
Deferred tax liabilities:
Property and equipment........................... 144,240 299,768
Unbilled receivables............................. 49,154 68,754
Unrealized gain on marketable securities......... 936,728 --
Other............................................ 29,520 --
---------- ----------
1,159,642 368,522
Net deferred tax asset (liability)................. (37,324) 2,311,993
Less: valuation allowance.......................... 366,000 2,311,993
---------- ----------
Net deferred tax asset (liability)................. $ (403,324) $ -
========== ==========
</TABLE>
F-15
<PAGE> 104
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. At December
27, 1996 and December 26, 1997, management established a valuation allowance of
$366,000 and $2,311,993, respectively, to reduce the deferred tax assets to the
amount that will more likely than not be realized. The change in the valuation
allowance for the current year is an increase of $1,945,993.
At December 26, 1997, the Company had net operating loss carryforwards
approximating $3,463,000, which will expire in the year 2012. Approximately
$400,000 of the net operating loss carryforwards relates to deductions
associated with disqualifying dispositions of incentive stock options. The tax
benefit of these deductions, when realized through a valuation allowance
reduction, will be credited to additional paid in capital and will not reduce
future period income tax expense.
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................ $ 855,775 $(1,169,020) $(231,409)
State.............................. 180,748 (246,909) (31,443)
Foreign............................ -- -- 83,722
---------- ----------- ---------
1,036,523 (1,415,929) (179,130)
Deferred:
Federal............................ (125,518) 18,118 505,024
State.............................. (10,868) 1,301 28,391
---------- ----------- ---------
(136,386) 19,419 533,415
---------- ----------- ---------
Total income tax provision
(benefit).......................... $ 900,137 $(1,396,510) $ 354,285
========== =========== =========
</TABLE>
The Company's provision for income taxes resulted in effective tax rates
that varied from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expected federal income tax
provision at 34%.................. $763,028 $(1,567,642) $(2,791,361)
Expenses not deductible for tax
purposes.......................... 13,336 26,111 1,328,338
State income taxes, net of federal
benefit........................... 112,121 (199,101) (198,799)
Change in tax status................ -- 92,000 (253,083)
S Corp income not taxed at the
corporation level................. -- (66,000) --
Adjustment of prior year tax
expense........................... -- -- 248,565
Other............................... 11,652 (47,878) (9,090)
Foreign............................. -- -- 83,722
Change in valuation allowance....... -- 366,000 1,945,993
-------- ----------- -----------
$900,137 $(1,396,510) $ 354,285
======== =========== ===========
</TABLE>
F-16
<PAGE> 105
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
8. PROFIT SHARING AND STOCK PURCHASE PLAN
The Company has a 401(k) profit sharing plan covering all permanent U.S.
employees who work at least 20 hours per week and similar pension plans for
non-U.S. employees. Participants may make voluntary contributions to the plans
and the Company matches these contributions, up to 5% of the employee's salary.
In addition, the Company may make discretionary contributions to the plans.
Participant contributions vest immediately and Company contributions vest over a
six-year period. For the plan years ended December 29, 1995 and December 27,
1996, the Company paid the expenses of operating the plan which were
approximately $4,500 and $4,800, respectively. For the plan year ended December
26, 1997, forfeitures of $69,042 from terminated employees were used to pay
$6,861 in operating expenses of the plan and to reduce the Company's
contributions. Contributions to the plan charged to operations for the years
ended December 29, 1995, December 27, 1996 and December 26, 1997 totaled
$532,170, $880,478, and $815,350 respectively.
In May 1997, the Company introduced an Employee Stock Purchase Plan to
encourage and facilitate the purchase of Common Stock by employees of the
Company. Under the plan, employees of the Company who elect to participate may
purchase Common Stock at 85% of the fair market value of the Common Stock at the
lesser of the stock closing price on the commencement date or the ending date of
each offering period. The plan permits an enrolled employee to make
contributions through the use of payroll deductions. The aggregate amount of
stock which may be purchased under this plan is 400,000 shares. For fiscal 1997,
30,727 shares at a purchase price of $8.50 were paid for and issued on December
31, 1997.
9. COMMITMENTS
The Company leases certain office space in California, Maryland, and
Virginia, and sales satellite offices, under non-cancelable operating lease
agreements. Certain leases contain escalation clauses and require the Company to
pay its share of any increases in operating expenses and real estate taxes. Rent
expense was $281,381, $591,440 and $1,289,552 for the years ended December 29,
1995, December 27, 1996 and December 26, 1997, respectively. Future minimum
lease payments under all non-cancelable operating lease arrangements are
approximately as follows:
<TABLE>
<S> <C>
1998............................. $1,632,685
1999............................. 1,567,183
2000............................. 1,394,304
2001............................. 862,939
2002............................. 271,298
Thereafter....................... --
----------
Total............................ $5,728,409
</TABLE>
The Company maintains self-insurance programs for health care and
short-term disability costs with stop-loss insurance. Expense incurred for group
medical claims, program premiums and stop-loss limit charged to operations for
the years ended December 29, 1995, December 27, 1996 and December 26, 1997
totaled $621,378, $780,888, and $1,186,147 respectively.
10. RELATED PARTY TRANSACTIONS
The Company purchased property adjacent to its Glenwood, Maryland
headquarters from a related party on June 28, 1996 for $360,000 by assuming a
mortgage note payable (see Note 5) and the elimination of a receivable. Such
property had previously been rented by the Company from the related party. Rent
expense under the lease agreement for the years ended December 29, 1995 and
December 27, 1996 totaled approximately $47,000 and $24,000, respectively.
F-17
<PAGE> 106
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 26, 1997 AND FOR THE YEARS ENDED
DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997)
In August 1995, the Company issued a promissory note for the benefit of a
shareholder and former officer in the principal amount of $307,520 representing
the balance of monies due to him in connection with the repurchase by the
Company of 588,921 shares of common stock. This promissory note was paid in full
in September 1995.
11. COMPUTATION OF EARNINGS (LOSS) PER SHARE
The following schedule sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDING
--------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income (loss)................................. $1,344,063 $(3,211,121) $(8,564,170)
Denominator:
Denominator for basic earnings per
share -- weighted average shares............... 7,333,676 9,952,120 13,531,876
Effect of dilutive securities:
Stock options................................ 684,903 -- --
---------- ----------- -----------
Dilutive potential common shares............... 684,903 -- --
Denominator for diluted earnings per
share -- adjusted weighted average shares and
assumed conversions............................ 8,018,579 9,952,120 13,531,876
========== =========== ===========
Basic earnings (loss) per share................... $ 0.18 $ (0.32) $ (0.63)
========== =========== ===========
Diluted earnings (loss) per share................. $ 0.17 $ (0.32) $ (0.63)
========== =========== ===========
</TABLE>
Options to purchase 1,464,184 shares of common stock at a weighted average
per share price of $2.73 and 1,276,507 shares of common stock at a weighted
average per share price of $5.64 were outstanding during 1996 and 1997,
respectively, but were not included in the computation of diluted earnings per
share as the effect would be antidilutive.
F-18
<PAGE> 107
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
NETWORKS ASSOCIATES, INC.
THOR ACQUISITION CORP.
AND
TRUSTED INFORMATION SYSTEMS, INC.
DATED AS OF FEBRUARY 22, 1998
<PAGE> 108
PROJECT THOR
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I -- THE MERGER............................................ A-1
1.1 The Merger.................................................. A-1
1.2 Effective Time; Closing..................................... A-1
1.3 Effect of the Merger........................................ A-2
1.4 Certificate of Incorporation; Bylaws........................ A-2
1.5 Directors and Officers...................................... A-2
1.6 Effect on Capital Stock..................................... A-2
1.7 Surrender of Certificates................................... A-3
1.8 No Further Ownership Rights in Company Common Stock......... A-4
1.9 Lost, Stolen or Destroyed Certificates...................... A-4
Tax and Accounting Consequences.............................
1.10 A-4
Taking of Necessary Action; Further Action..................
1.11 A-4
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF COMPANY............ A-5
2.1 Organization of Company..................................... A-5
2.2 Company Capital Structure................................... A-5
2.3 Obligations With Respect to Capital Stock................... A-5
2.4 Authority................................................... A-6
2.5 SEC Filings; Company Financial Statements................... A-7
2.6 Absence of Certain Changes or Events........................ A-8
2.7 Taxes....................................................... A-8
2.8 Title to Properties; Absence of Liens and Encumbrances...... A-9
2.9 Intellectual Property....................................... A-10
Compliance; Permits; Restrictions...........................
2.10 A-12
Litigation..................................................
2.11 A-13
Brokers' and Finders' Fees..................................
2.12 A-13
Employee Benefit Plans......................................
2.13 A-13
Environmental Matters.......................................
2.14 A-16
Agreements, Contracts and Commitments.......................
2.15 A-17
Pooling of Interests........................................
2.16 A-18
Change of Control Payments..................................
2.17 A-18
Statements; Proxy Statement/Prospectus......................
2.18 A-18
Board Approval..............................................
2.19 A-18
Fairness Opinion............................................
2.20 A-18
Section 203 of the Delaware General Corporation Law Not
2.21 Applicable.................................................. A-18
Customs.....................................................
2.22 A-18
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB....................................................... A-19
3.1 Organization of Parent and Merger Sub....................... A-19
3.2 Parent and Merger Sub Capital Structure..................... A-19
3.3 Authority................................................... A-19
3.4 SEC Filings; Parent Financial Statements.................... A-20
3.5 Absence of Certain Changes or Events........................ A-20
3.6 Statements; Proxy Statement/Prospectus...................... A-20
3.7 Valid Issuance.............................................. A-21
</TABLE>
A-i
<PAGE> 109
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME.................. A-21
4.1 Conduct of Business by Company.............................. A-21
4.2 Conduct of Business by Parent............................... A-23
ARTICLE V -- ADDITIONAL AGREEMENTS................................. A-23
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations.............................. A-23
5.2 Meeting of Company Stockholders............................. A-24
5.3 Confidentiality; Access to Information...................... A-24
5.4 No Solicitation............................................. A-24
5.5 Public Disclosure........................................... A-25
5.6 Reasonable Efforts; Notification............................ A-25
5.7 Third Party Consents........................................ A-26
5.8 Stock Options and Employee Benefits......................... A-26
5.9 Form S-8.................................................... A-27
Indemnification.............................................
5.10 A-27
Nasdaq Listing..............................................
5.11 A-27
Company Affiliate Agreement.................................
5.12 A-27
Regulatory Filings; Reasonable Efforts......................
5.13 A-27
ARTICLE VI -- CONDITIONS TO THE MERGER............................. A-28
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... A-28
6.2 Additional Conditions to Obligations of Company............. A-28
6.3 Additional Conditions to the Obligations of Parent and
Merger Sub.................................................. A-29
ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER................... A-30
7.1 Termination................................................. A-30
7.2 Notice of Termination; Effect of Termination................ A-31
7.3 Fees and Expenses........................................... A-31
7.4 Amendment................................................... A-31
7.5 Extension; Waiver........................................... A-31
ARTICLE VIII -- GENERAL PROVISIONS................................. A-32
8.1 Non-Survival of Representations and Warranties.............. A-32
8.2 Notices..................................................... A-32
8.3 Interpretation; Knowledge................................... A-33
8.4 Counterparts................................................ A-33
8.5 Entire Agreement; Third Party Beneficiaries................. A-33
8.6 Severability................................................ A-33
8.7 Other Remedies; Specific Performance........................ A-33
8.8 Governing Law............................................... A-33
8.9 Rules of Construction....................................... A-34
Assignment..................................................
8.10 A-34
WAIVER OF JURY TRIAL........................................
8.11 A-34
</TABLE>
INDEX OF EXHIBITS
Exhibit A Form of Voting Agreement
Exhibit B Company Stock Option Agreement
Exhibit C Form of Affiliate Agreement
A-ii
<PAGE> 110
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
February 22, 1998, among Networks Associates, Inc., a Delaware corporation
("Parent"), Thor Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("Merger Sub"), and Trusted Information Systems, Inc., 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 Board of Directors of Company (i) has determined that the Merger
(as defined in Section 1.1) is consistent with and in furtherance of the
long-term business strategy of Company and fair to, and in the best interests
of, Company and its stockholders, (ii) has approved this Agreement, the Merger
and the other transactions contemplated by this Agreement and (iii) has
determined to recommend that the stockholders of Company adopt and approve this
Agreement and approve the Merger.
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of Company are entering into Voting Agreements in substantially the
form attached hereto as Exhibit A (the "Company Voting Agreements").
D. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, Company
shall execute and deliver a Stock Option Agreement in favor of Parent in
substantially the form attached hereto as Exhibit B (the "Company Stock Option
Agreement"). The Board of Directors of Company has approved the Company Stock
Option Agreement.
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 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). Unless the context otherwise requires, the term "Agreement" as
used herein refers collectively to this Agreement and Plan of Reorganization and
the Certificate of Merger. 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
<PAGE> 111
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 "Trusted Information Systems, Inc."
(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 initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time, until their
respective successors are duly appointed.
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 (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 0.3230 (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 Amended and Restated Employee Stock Option Plan (the "Employee
Option Plan"), Company's Amended and Restated 1996 Directors Stock Option
Plan (the "Directors' Plan") and Amended and Restated 1996 Stock Option
Plan (the "1996 Option Plan" and together with the Employee Option Plan and
the Directors' Plan, the "Company Stock Option Plans") shall be assumed by
Parent in accordance with Section 5.8 hereof. Rights outstanding under
Company's 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, $0.01 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.
A-2
<PAGE> 112
(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. Promptly after the Effective Time, 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 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
A-3
<PAGE> 113
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 customary 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.
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. 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.
A-4
<PAGE> 114
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 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 subsidiaries, each as amended to date, and
each such instrument is in full force and effect. Neither Company nor any of its
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 40,000,000 shares of Common Stock, $0.01 par value per share, of
which there were 13,825,196 shares issued and outstanding as of January 31, 1998
(with no shares held in treasury) and 5,000,000 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 January
31, 1998, Company had reserved an aggregate of 1,704,956 shares of Company
Common Stock, net of exercises, for issuance pursuant to the Company Stock
Option Plans and an aggregate of 369,273 shares of Company Common Stock for
issuance pursuant to the Company's ESPP. As of January 31, 1998, there were
options outstanding to purchase an aggregate of 1,394,687 shares of Company
Common Stock pursuant to the Company Stock Option Plans. In addition, as of May
28, 1998, the Company will be obligated to issue options to purchase 1,250
shares of Common Stock to each outside member of its Board of Directors pursuant
to the Directors' Plan in connection with the Company's 1998 annual meeting of
shareholders. As of May 28, 1998, the Company also will be obligated to issue
approximately 38,000 shares of Common Stock to employees of the Company 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 for
each person who held options to acquire shares of Company Common Stock as of
January 3, 1998, the name of the holder of such option, the exercise price of
such option, the number of shares as to which such option had vested at such
date, the vesting schedule for such option and whether the exercisability of
such option will be accelerated in any way by the transactions contemplated by
this Agreement, and indicates the extent of acceleration, if any.
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 equity security, 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
A-5
<PAGE> 115
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 equity
security of any 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 subscriptions,
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 subsidiaries is a
party or by which it is bound obligating Company or any of its 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 subsidiaries or obligating Company or any of
its subsidiaries to grant, extend, accelerate the vesting of or enter into any
such subscription, option, warrant, equity security, call, right, commitment or
agreement. As of the date of this Agreement and except as described in Section
2.3 of the Company Schedules, except as contemplated by this Agreement, there
are no registration rights and, to the knowledge of Company, there are no voting
trusts, proxies, rights plan, antitakeover plan 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 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 the Company Option Agreement and to consummate the
transactions contemplated hereby and thereby. 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 and the
Company Stock Option Agreement have been duly executed and delivered by Company
and, execution and delivery by Parent and Merger Sub, constitute 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 and the Company Option Agreement by Company do not, and the
performance of this Agreement and the Company Option 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 subsidiaries,
(ii) subject to obtaining the approval and adoption of this Agreement and the
approval of the Merger 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 subsidiaries or by which Company or any of its
subsidiaries or any of their respective properties is bound or affected other
than any conflict or violation which would not result in material liability to
the Company, 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 impair Company's rights or alter the rights or
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, concession, or other instrument or obligation to which Company or any
of its subsidiaries is a party or by which Company or any of its subsidiaries or
its or any of their respective assets are bound or affected. The Company
Schedules list all consents, waivers and approvals under any of Company's or any
of its 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
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benefits to Company or Surviving Corporation or, to the Company's knowledge,
Parent 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 in
connection with the execution and delivery of this Agreement and the Company
Stock Option 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 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 Parent or have a material adverse effect on the ability of the
parties hereto 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 October 10, 1996 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 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 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 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 normal and recurring
year-end adjustments. The balance sheet of Company contained in Company SEC
Reports as of September 26, 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.
(c) Company has heretofore furnished to Parent a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Company with the SEC pursuant to
the Securities Act or the Exchange Act.
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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 (as defined in
Section 8.3(c)) 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 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 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 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 (taking
into account applicable extensions) all federal and material 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.
(ii) Company and each of its 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, which amounts are material
individually or in the aggregate.
(iii) Neither Company nor any of its 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 subsidiaries, nor has
Company or any of its subsidiaries executed any unexpired waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) Except as set forth on Schedule 2.7 of the Company Schedules, no
audit or other examination of any Return of Company or any of its
subsidiaries by any Tax authority is presently in progress, nor has Company
or any of its subsidiaries been notified of any request for such an audit
or other examination.
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(v) No adjustment relating to any Returns filed by Company or any of
its subsidiaries has been proposed in writing formally or informally by any
Tax authority to Company or any of its 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) Except for any such agreement or arrangement solely between the
Company and its subsidiaries, neither Company nor any of its 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 subsidiaries have not been and will not be required to include any
material 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.
(xii) The Company Schedules list (A) any foreign Tax holidays, (B) any
intercompany transfer pricing agreements, or other arrangements that have
been established by Company or any of its subsidiaries with any Tax
authority and (C) any expatriate programs or policies affecting Company or
any of its subsidiaries.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company Schedules list the real property interests owned by Company
or any subsidiary as of the date of this Agreement. The Company Schedules list
all material real property leases to which Company or any subsidiary is a party
as of the date of this Agreement and each amendment thereto that is in effect as
of the date of this Agreement. All such current 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 $50,000.
(b) Each of Company and its subsidiaries 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.
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2.9 Intellectual Property.
(a) Each of Company and its subsidiaries owns, or is licensed or otherwise
possesses legally enforceable rights to use, all patents, trademarks, trade
names, service marks, copyrights, and any applications for such patents,
trademarks, trade names, service marks and copyrights, and all patent rights,
trade secrets, schematics, technology, know-how, computer software and tangible
or intangible proprietary information or material or other intellectual property
or proprietary rights that are used to conduct its business as currently
conducted (collectively, "Intellectual Property"). Each of Company and its
subsidiaries has taken reasonable measures to protect the proprietary nature of
each item of Intellectual Property that it considers confidential, and to
maintain in confidence all trade secrets and confidential information that it
presently owns or uses, except where the failure to own, license or possess
legally enforceable rights to use such Intellectual Property would not,
individually or in the aggregate, be expected to result in a material loss of
benefits or loss to the Company's business.
(i) Section 2.12(a)(i) of the Disclosure Schedule lists all material
patents and patent applications and all material trademarks, registered
copyrights, trade names and service marks owned by, or licensed exclusively
to, Company or any of its subsidiaries and which are currently used in
connection with the business of Company or its subsidiaries, including the
jurisdictions in which each such Intellectual Property right has been
issued or registered or in which any such application for such issuance or
registration has been filed.
(ii) Section 2.12(a)(ii) of the Disclosure Schedule lists all material
written licenses, sublicenses and other agreements to which Company or any
of its subsidiaries is a party and pursuant to which any person is
authorized to use any Intellectual Property rights (excluding (a) source or
object code end-user licenses granted to end-users in the ordinary course
of business that permit use of software products without a right to modify,
distribute or sublicense the same ("End-User Licenses")) and (b) licenses,
sublicenses or other agreements with resellers, distributors, original
equipment manufacturers and other third party intermediaries that grant
non-exclusive rights to use or modify (for purposes of establishing program
interfaces) and resell or sublicense source or object code which (A) did
not in any individual case represent $50,000 or more of revenues to the
Company in 1997 on a consolidated basis, (B) were in all material respects
in the standard forms of agreements provided by the Company to Acquiror,
and (C) the Company has no reason to believe it will be material to the
Company's or any of its subsidiaries' business or could reasonably be
expected to have a material loss to the Company.
(iii) Section 2.12(a)(iii) of the Disclosure Schedule lists all
material written licenses, sublicenses and other agreements as to which
Company or any of its subsidiaries is a party and pursuant to which Company
or any such Subsidiary is authorized to use any third party Intellectual
Property, including software ("Third Party Intellectual Property Rights")
which are incorporated in any existing product or service of Company or any
of its subsidiaries ("Embedded Products").
(iv) Section 2.12(a)(iv) of the Disclosure Schedule lists all material
written agreements or other arrangements under which Company or any of its
subsidiaries has provided or agreed to provide source code of any product
of the Company or any of its subsidiaries to any third party, except for
software development kits provided either to agent integration providers or
by shrink wrap licenses.
Company has made available to Acquiror correct and complete copies of all
such patents, registrations, applications (owned by Company or any of its
subsidiaries), and all licenses, sublicenses and agreements referred to above
and as amended to date. Except for retail purchases of software, neither Company
nor any of its subsidiaries is a party to any oral license, sublicense or
agreement which, if reduced to written form, would be required to be listed in
Section 2.12 of the Disclosure Schedule under the terms of this Section 2.12(a).
(b) With respect to each material item of Intellectual Property that
Company or any of its subsidiaries owns: (i) other than common law trademarks,
and subject to such rights as have been granted by Company or any of its
subsidiaries under non-exclusive license agreements and joint development
agreements entered into by Company or any of its subsidiaries (copies of which
have previously been made available or disclosed in writing to Acquiror),
Company or its subsidiaries possesses all right, title, interest in and to such
item; and
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(ii) such item is not subject to any outstanding judgment, order, decree,
stipulation or injunction that materially interferes with the conduct of
Company's or any of its subsidiaries' business as currently conducted. With
respect to each item of Third Party Intellectual Property Rights that is
material to the business of the Company or any of its subsidiaries: (i) the
license, sublicense or other agreement covering such item is legal, valid,
binding, enforceable and in full force and effect with respect to Company or its
subsidiaries, and, to Company's knowledge, is legal, valid, binding, enforceable
and in full force and effect with respect to each other party thereto; (ii)
neither Company nor any of its subsidiaries is in material breach or default
thereunder, and to Company's knowledge no other party to such license,
sublicense or other agreement is in material breach or default thereunder, and
no event has occurred which with notice or lapse of time would constitute a
material breach or default by Company or any of its subsidiaries or permit
termination, modification or acceleration thereunder by the other party thereto;
(iii) the underlying item of Third Party Intellectual Property is not subject to
any outstanding judgment, order, decree, stipulation or injunction to which
Company or any of is subsidiaries is a party or has been specifically named that
materially interferes with the conduct of Company's or any of its subsidiaries'
business as currently conducted, nor to Company's knowledge subject to any other
outstanding judgment, order, decree, stipulation, or injunction that materially
interferes with the conduct of Company's or any of its subsidiaries' business as
currently conducted.
(c) Except as set forth in Section 2.12 of the Disclosure Schedule, neither
Company nor any of its subsidiaries (i) has been named in any suit, action or
proceeding which involves a claim of infringement or misappropriation of any
Intellectual Property right of any third party or (ii) has received any written
notice alleging any such claim of infringement or misappropriation. Company has
made available to Acquiror correct and complete copies of all such suits,
actions or proceedings or written notices. To the Company's knowledge, the
manufacturing, marketing, licensing or sale of the products or performance of
the service offerings of Company and its subsidiaries do not currently infringe,
and have not infringed, any Intellectual Property right of any third party or to
Company's knowledge any patent rights of third parties; and to the knowledge of
Company, the Intellectual Property rights of Company and its subsidiaries are
not being infringed by activities, products or services of any third party.
(d) Except as set forth in Section 2.12 of the Disclosure Schedule, the
execution and delivery of this Agreement by the Company, and the consummation of
the transactions contemplated hereby, will neither cause the Company nor any of
its subsidiaries to be in violation or default under any license, sublicense or
agreement, nor terminate nor modify nor entitle any other party to any such
license, sublicense or agreement to terminate or modify such license, sublicense
or agreement, nor limit in any way the Company's or any of its subsidiaries'
ability to conduct its business or use or provide the use of the Intellectual
Property or intellectual property rights of others, which violation, default,
termination, modification or limitation would reasonably be expected,
individually or in the aggregate, to result in a material loss of benefit or
loss to the Company.
(e) Except for Embedded Products for which the Company has valid
non-exclusive licenses which are disclosed in Section 2.12 of the Disclosure
Schedule and which are adequate for each of the Company's and its subsidiaries'
business as presently conducted and except for usual and customary rights
retained by the United States government with respect to Intellectual Property
developed under research contracts with the Federal government (the "Retained
Fed Rights"), the Company is the sole and exclusive owner or the licensee of,
with all right, title and interest in and to the Intellectual Property (free and
clear of any liens or encumbrances), and has sole and exclusive rights (and is
not contractually obligated to pay any compensation to any third party in
respect thereof) to the use and distribution therefor or the material covered
thereby in connection with the services or products in respect of which the
Intellectual Property are being used, except where the failure to have such
rights would not reasonably be expected to result in a material loss of benefit
or loss to the Company. To the Company's knowledge, the government has never
exercised, and the Company has no notice that the government intends to
exercise, its rights to use or provide to others the use of the Retained Fed
Rights with respect to the Intellectual Property in a manner that would be
material to the Company's non-governmental business. The Retained Fed Rights do
not materially interfere with the conduct of the Company's business.
(f) The Company has heretofore delivered to Acquiror copies of the
Company's and each of its subsidiaries' standard forms of End-User Licenses.
Except as disclosed in Section 2.12 of the Disclosure
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Schedule (which describe the material variations from the standard form of
End-User License), neither the Company nor any of its subsidiaries has entered
into any End-User Licenses which contain terms materially different than as set
forth in the standard forms of such agreements made available to Acquiror.
(g) The Company and each of its subsidiaries has taken reasonable security
measures to safeguard and maintain the secrecy, confidentiality and value of,
and its property rights in, all Intellectual Property. All officers, employees
and consultants of the Company or any of its subsidiaries who have access to
proprietary information or Intellectual Property have executed and delivered to
the Company or any of its subsidiaries an agreement regarding the protection of
proprietary information and the assignment to the Company or any of its
subsidiaries of all Intellectual Property arising from the services performed
for the Company or any of its subsidiaries by such persons. No current or prior
officers, employees or consultants of the Company or any of its subsidiaries
claim any ownership interest in any material Intellectual Property as a result
of having been involved in the development of such property while employed by or
consulting to the Company or any of its subsidiaries, or otherwise. Except as
set forth in Section 2.12 of the Disclosure Schedule and except for the Embedded
Products, all of the Intellectual Property have been developed by employees of
the Company or any of its subsidiaries, within the scope of their employment.
(h) The Company and each of its subsidiaries has sufficient right, title
and interest in and to all material software development tools, not entirely
developed internally, used by the Company or any of its subsidiaries in the
development of any of the computer software included in the Intellectual
Property.
(i) To the knowledge of the Company's management, as of the date hereof,
there are no material defects in the Company's or any of its subsidiaries'
software products, and there are no errors in any documentation, specifications,
manuals, user guides, promotional material, internal notes and memos, technical
documentation, drawings, flow charts, diagrams, source language statements, demo
disks, benchmark test results, and other written materials related to,
associated with or used or produced in the development of the Company's or any
of its subsidiaries' software products (collectively, the "Design
Documentation"), which defects or errors would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company. The
occurrence in or use by the computer software products currently sold by the
Company or any of its subsidiaries, of dates on or after January 1, 2000 (the
"Millennial Dates") will not adversely affect the performance of the software
with respect to date dependent data, computations, output or other functions
(including without limitation, calculating, computing and sequencing) and the
software will create, sort and generate output data related to or including
Millennial Dates without errors or omissions.
(j) No government funding or university or college facilities were used in
the development of the Company's or any of its subsidiaries' software products
and the software was not developed pursuant to any contract or other agreement
with any person or entity except pursuant to contracts or agreements listed in
Section 2.12 of the Disclosure Schedule.
(k) To the knowledge of the Company's management, Section 2.12(k) of the
Disclosure Schedule list all material warranty claims (including any pending
claims) related to the Company's or any of its subsidiaries' products and the
nature of such claims, except for customary product support and maintenance. To
the knowledge of the Company's management, except as set forth in Section
2.12(k) of the Disclosure Schedule, neither the Company nor any of its
subsidiaries has made any material oral or written representations or warranties
with respect to its products or services.
(l) Except as set forth on Schedule 2.12(k), the Company and its
subsidiaries have been and are in compliance with the Export Administration Act
of 1979, as amended, and all regulations promulgated thereunder.
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. To the knowledge of the Company, no
investigation or review by any Governmental Entity is pending or 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 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 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") except
for any such failure which would not individually or in the aggregate be
material to the Company. Company and its subsidiaries are in compliance in all
material respects with the terms of the Company Permits, except where the
failure to be in compliance with the terms of the Company Permits would not be
material to Company.
2.11 Litigation. Except as disclosed in the Company Schedules, there are
no claims, suits, actions or proceedings pending or, to the knowledge of the
Company, threatened against, relating to or affecting Company or any of its
subsidiaries, before any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator that seeks to restrain or enjoin
the consummation of the transactions contemplated by this Agreement or which
could reasonable be expected, either singularly or in the aggregate with all
such claims, actions or proceedings, to have a material loss to the Company's
business. 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.
Except as disclosed in the Company Schedules, neither Company nor any
Subsidiary has ever been subject to an audit, compliance review, investigation
or like contract review by the GSA office of the Inspector General or other
Governmental Entity or agent thereof in connection with any government contract
(a "Government Audit"), to Company's knowledge no Government Audit is threatened
or reasonably anticipated, and in the event of such Government Audit, to the
knowledge of the Company no basis exists for a finding of noncompliance with any
material provision of any government contract or a refund of any amounts paid or
owed by any Governmental Entity pursuant to such government contract. For each
item disclosed in the Company Schedule pursuant to this Section 2.11 a true and
complete copy of all material correspondence and documentation with respect
thereto has been provided to Parent.
2.12 Brokers' and Finders' Fees. Except for fees payable to J.P. Morgan
Securities Inc. and Updata Capital, Inc. pursuant to engagement letters, each
dated January 21, 1998, copies of which have 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 Employee Benefit Plans.
(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 any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether
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written or unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of Section
3(3) of ERISA which is or has been maintained, contributed to, or required
to be contributed to, by Company or any Affiliate for the benefit of any
Employee;
(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;
(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 Employee or consultant;
(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 all documents embodying to each Company Employee Plan and each
Employee Agreement including all amendments thereto and written interpretations
thereof; (ii) 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; (iii) if the Company Employee Plan is funded, the most recent annual and
periodic accounting of Company Employee Plan assets; (iv) 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; (v) 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; (vi) 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; (vii)
all communications material to any Employee or Employees relating to any Company
Employee Plan and any proposed Company Employee Plans, in each case, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events which
would result in
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any material liability to Company; (viii) all standard 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 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 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 402(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) Except as set forth on Section 2.13(i) of the Company Schedules,
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.
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(j) Employment Matters. Company: (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees; (ii)
has withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees, which amounts are material
individually or in the aggregate; (iii) is not liable for any 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 against Company under any worker's
compensation policy or long-term disability policy. To Company's knowledge, no
employee of Company has violated any employment contract, nondisclosure
agreement or 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 would not 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 would not 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")
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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 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 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, 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. Except as otherwise set forth
in the Company Schedules, neither Company nor any of its 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 respect the right of Company or any of its subsidiaries to
engage in any line of business or to compete with any person or granting
any exclusive distribution rights;
(e) any 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 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; or
(g) 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 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
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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).
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 or agreed to take any
action which would preclude Parent's ability to account for the Merger as a
pooling of interests.
2.17 Change of Control 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 Statements; 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 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") (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement/Prospectus") shall not, on the date the Proxy
Statement/Prospectus is first mailed to Company's stockholders or at the time of
the Company 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 which has become false or misleading. The Proxy Statement/Prospectus
will comply as to form in all material respects with the provisions of the
Securities Act, the Exchange Act and the rules and regulations thereunder. 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 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) 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 a written
opinion from J. P. Morgan Securities Inc. 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 to
Parent a copy of such opinion.
2.21 Section 203 of the Delaware General Corporation Law Not
Applicable. The Board of Directors of Company has taken all actions so that 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.
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
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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 and Merger Sub.
(a) Each of Parent and Merger Sub (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 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 300,000,000 shares of Common Stock, of which there were
69,920,883 shares issued and outstanding as of December 31, 1997, and 5,000,000
shares of Preferred Stock, of which one share of Series A Preferred Stock is
issued and outstanding. 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 100 shares of
Common Stock, $0.01 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
February 19, 1998, for the purpose of consummating the Merger and has no
material assets or liabilities except as necessary for such purpose.
3.3 Authority.
(a) Each of Parent and Merger Sub has all requisite corporate power and
authority to enter into, as applicable, this Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Parent and Merger Sub, subject only to the filing of the Certificate of
Merger pursuant to Delaware Law. 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 impair Parent's
rights or alter the rights or
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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.
(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 or Merger Sub 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 (v) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not be material to Parent or Company or have a material
adverse effect on the ability of the parties hereto to consummate the Merger.
3.4 SEC Filings; Parent Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
by Parent with the SEC since January 1, 1997, 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) The Company's revenue recognition practices and policies have been and
will be consistent with SOP 97-2. 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 December 31, 1997 is hereinafter referred to as the
"Parent Balance Sheet."
3.5 Absence of Certain Changes or Events. Since the date of the Parent
Balance Sheet there has not been any Material Adverse Effect on Parent.
3.6 Statements; 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 Proxy Statement/Prospectus shall not, on the date the Proxy
Statement/Prospectus is first mailed to Company's stockholders or at the time of
the Company 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
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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 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 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.
3.7 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.
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 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
issued shared at fair market value in connection with employees exercised
of options pursuant to the Company's Stock Option Plan of unvested shares
at cost
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in connection with the termination of the employment relationship with any
employee pursuant to stock option or purchase agreements in effect on the
date hereof;
(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) shares of Company Common Stock pursuant to the exercise of
stock options therefor outstanding as of the date of this Agreement, and
(ii) 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 subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a 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 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 $250,000;
(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) materially revalue any of its 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;
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(q) Engage in any action with the intent to directly or indirectly
adversely impact any of the transactions contemplated by this Agreement; or
(r) Agree in writing or otherwise to take any of the actions described
in Article 4 (a) through (q) above.
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, except as permitted by the terms of
this Agreement and except as provided in Article 4 of the Parent Schedules,
without the prior written consent of Company (which consent shall not be
unreasonably withheld), 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 substantially all of the assets of any corporation or other
business entity (other than Company), whether by merger, consolidation, stock
tender or otherwise, provided, however, that nothing herein shall prevent Parent
from doing any of the foregoing until such time as the consideration paid by
Parent (as determined in good faith by the Board of Directors of Parent as of
the time such acquisition is approved by such Board or as of such other time as
such Board may determine) to acquire such voting securities or assets (in any
individual case or in the aggregate) shall exceed $300,000,000.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 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 Proxy
Statement/Prospectus and Parent will prepare and file with the SEC the
Registration Statement in which the 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 Company will cause the 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 or any other government officials for amendments or supplements to the
Registration Statement, the 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 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 Proxy Statement/Prospectus, the
Registration Statement or any Other
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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 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.
5.2 Meeting of Company Stockholders. Promptly after the date hereof,
Company will take all action necessary in accordance with the Delaware Law and
its Certificate of Incorporation and Bylaws to convene the Company Stockholders'
Meeting 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.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Company and Parent have previously
executed a Mutual Confidentiality Agreement, dated as of February 4, 1998 (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 their properties, books, records and personnel
and during the period prior to the Effective Time to obtain all information
concerning the business, including the status of product development efforts,
properties, results of their operations and personnel, as the other may
reasonably request. No information or knowledge obtained by Parent in any
investigation 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) From and after the date of this Agreement until 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 or
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 Acquisition 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 may reasonably be expected to lead to, any Acquisition 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 Acquisition Proposal. Without limiting the foregoing, it is
understood that any action taken 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 that if taken by the
Company would constitute a breach by the Company of the immediately preceding
two sentences shall be deemed to be a breach of this Section 5.4 by Company. For
purposes of this Agreement, "Acquisition 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 20% interest in the total 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 20% or more of the total 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.
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(b) Neither the Board of Directors of Company nor any committee thereof
shall (i) 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 (ii)
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 Acquisition Proposal. In addition, 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 Acquisition
Proposal.
(c) In addition to the obligations of Company set forth in paragraphs (a)
and (b) of this Section 5.4, 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 Acquisition Proposal or of any
Acquisition Proposal, or any inquiry with respect to or which Company reasonably
should believe would lead to any Acquisition Proposal, the material terms and
conditions of such request, Acquisition Proposal or inquiry, and the identity of
the person making any such request, Acquisition Proposal or inquiry. Company
will keep Parent informed in all material respects of the status and details
(including material amendments or proposed amendments) of any such request,
Acquisition Proposal or inquiry.
(d) Nothing contained in this Section 5.4 or elsewhere in this Agreement
shall prohibit Company 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 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 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 Acquisition Proposal.
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 Acquisition 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 all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including using reasonable efforts to accomplish the following: (i)
the taking of all reasonable acts 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 all 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
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or regulation is or becomes applicable to the Merger, this Agreement or any of
the transactions contemplated by this Agreement, use all 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 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 theirbusinesses 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 practicable following the date
hereof, Parent and Company will each use its commercially reasonable efforts to
obtain any 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) At the Effective Time, each outstanding purchase right (an "Assumed
Purchase Right") under the ESPP shall be deemed to constitute a purchase right
to acquire, on the same terms and conditions as were applicable under the ESPP
immediately prior to the Effective Time, a number of shares of Parent Common
Stock determined as provided in the ESPP except that the purchase price of such
shares of Parent Common
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Stock under each Assumed Purchase Right shall be the lower of (i) the quotient
determined by dividing eighty-five percent (85%) of the fair market value of the
Company Common Stock on the offering date of each assumed offering by the
Exchange Ratio or (ii) eighty-five percent (85%) of the fair market value of the
Parent Common Stock on each exercise date of the assumed offering occurring
after the Effective Time. As soon as practicable after the Effective Time,
Parent shall deliver to the participants in the ESPP appropriate notice setting
forth such participants' rights pursuant thereto and that the purchase rights
pursuant to the ESPP shall continue in effect on the same terms and conditions.
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 and Assumed Purchase Right within five days after the Effective
Time and intends to maintain the effectiveness of such registration statement
thereafter for so long as any of such options or other rights remain
outstanding.
5.10 Indemnification.
(a) From and after the Effective Time, Parent will 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. The foregoing parties are expressly made third party beneficiaries to
the provisions of this Section 5.10.
(b) For a period of six years after the Effective Time, Parent will cause
the Surviving Corporation to use its commercially reasonable efforts 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 annual premiums
in excess of $200,000 for such coverage (or such coverage as is available for
such annual premium of $200,000).
5.11 Nasdaq Listing. Parent agrees to authorize for listing on Nasdaq 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 Company Affiliate Agreement. 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 C (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. The Company will
also use reasonable effort to cause Steve Smaha to execute a Company Voting
Agreement.
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
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forms required by the merger notification or control laws and regulations of any
applicable jurisdiction, as 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.
ARTICLE VI
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) Registration Statement Effective; Proxy Statement; Nasdaq
Listing. 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 Proxy Statement/Prospectus,
shall have been initiated or threatened in writing by the SEC. The shares
to be issued in the Merger and under the Company Stock Plan shall be
approved for listing on the Nasdaq National Market.
(c) 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.
(d) Tax Opinions. Parent and Company shall each have received written
opinions from their respective tax counsel (Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Piper & Marbury, L.L.P.,
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 that each of Parent, Merger Sub
and Company shall be treated as a party to this Agreement 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 such reasonable representations as requested by
such counsel for the purpose of rendering such opinions.
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. Solely for the purpose of the application of clause (ii)
above, all representations and warranties of Parent set forth in this
Agreement that are qualified as to materiality (including without
limitation by the word
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"material" in the phrases "material adverse change" or "material adverse
effect") shall be deemed to be not so qualified. 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.
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 would not have a
Material Adverse Effect on Company. Solely for the purpose of the
application of clause (ii) above, all representations and warranties of
Company set forth in this Agreement that are qualified as to materiality
(including without limitation by the word "material" in the phrases
"material adverse change" or "material adverse effect") shall be deemed to
be not so qualified. 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.
(d) Noncompetition Agreements. Stephen T. Walker shall have entered
into a Noncompetition Agreement substantially in the form attached hereto
as Exhibit D and such agreement shall be in full force and effect.
(e) 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.
(f) Opinion of Accountants. Parent shall have received letters from
each of Coopers & Lybrand L.L.P. and Ernst & Young 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) 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 Schedule 6.3(g).
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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 July 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 approval 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 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 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 five business
days after a written request to do so, (iv) the Board of Directors of
Company or any committee thereof shall have recommended any Acquisition
Proposal, (v) the Board of Directors of Company or any committee thereof
shall have resolved to do any of the foregoing or (vi) the Company or any
of its officers or directors shall participate in any discussions or
negotiations in breach of Section 5.4;
(f) 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 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, then Company may not terminate this
Agreement under this Section 7.1(f) for thirty days after delivery of
written notice from Company to Parent of such breach, 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 (f) if it shall have materially breached this Agreement
or if such breach by Parent is cured during such thirty day period); or
(g) 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 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, then Parent may not terminate this Agreement under this Section
7.1(g) for thirty days after delivery of written notice from Parent to
Company of such breach, provided Company continues to exercise commercially
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reasonable efforts to cure such breach (it being understood that Parent may
not terminate this Agreement pursuant to this paragraph (g) if it shall
have materially breached this Agreement or if such breach by Company is
cured during such thirty day period).
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 (with the SEC) of the
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(d) or (e), Company shall promptly, but in no
event later than two days after the date of such termination, pay Parent a fee
equal to $9,000,000 in immediately available funds (the "Termination Fee");
provided, however, that such payment shall not be due if (i) in the case of
termination under Section 7.1(d), the failure to obtain the required stockholder
approval is primarily the result of a Material Adverse Effect on Parent or (ii)
in the case of termination under Section 7.1(e) if any of the specified actions
are taken primarily as a result of a Material Adverse Effect on Parent. 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), 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.
(c) Payment of the fees described in Section 7.3(b) above shall not be in
lieu of damages incurred in the event of breach of this Agreement.
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 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:
Trusted Information Systems, Inc.
3060 Washington Road
Glenwood, Maryland 21738
Attention: Stephen T. Walker
Telephone No.: (301) 854-6889
Telecopy No.: (301) 854-5755
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Kurt J. Berney, Esq.
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
(b) if to Company, to:
Networks Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Attention: Prabhat K. Goyal
Telephone No.: (408) 988-3932
Telecopy No.: (408) 988-6054
with a copy to:
Piper & Marbury, L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Attention: Edwin M. Martin, Jr., Esq.
Telephone No.: (202) 861-6315
Telecopy No.: (202) 223-2085
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 "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
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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 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 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
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;
provided that issues involving the corporate governance of any of the parties
hereto shall be governed by their respective jurisdictions of incorporation.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction of
any state or federal court within the Northern District of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, other than issues involving the corporate
governance of any of the parties hereto, agrees that process may be served upon
them in any manner authorized by the laws of the State of California for such
persons and waives
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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.
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.
NETWORKS ASSOCIATES, INC.
By: /s/ WILLIAM L. LARSON
--------------------------------------
Name: William L. Larson
--------------------------------------
Title: Chairman and Chief Executive
Officer
--------------------------------------
THOR ACQUISITION CORP.
By: /s/ PRABHAT K. GOYAL
--------------------------------------
Name: Prabhat K. Goyal
--------------------------------------
Title: President
--------------------------------------
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ STEPHEN T. WALKER
--------------------------------------
Name: Stephen T. Walker
--------------------------------------
Title: Chairman and Chief Executive
Officer
--------------------------------------
****REORGANIZATION AGREEMENT****
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ANNEX B
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of February 22, 1998 (the "Agreement")
is entered into by and between Trusted Information Systems, Inc., a Delaware
corporation ("Target"), and Networks Associates, Inc., a Delaware corporation
("Acquiror"). Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement (as defined
below).
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
Target, Acquiror and Thor Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Acquiror ("Sub"), are entering into an Agreement and Plan of
Reorganization (the "Merger Agreement"), which provides that, among other
things, upon the terms and subject to the conditions thereof, Target, Acquiror
and Sub will enter into a business combination transaction (the "Merger"); and
WHEREAS, as a condition to Acquiror's willingness to enter into the Merger
Agreement, Acquiror has requested that Target agree, and Target has so agreed,
to grant to Acquiror an option to acquire shares of Target's Common Stock, $0.01
par value, upon the terms and subject to the conditions set forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option
Target hereby grants to Acquiror an irrevocable option (the "Option") to
acquire up to a number of shares of the Common Stock, $0.01 par value, of Target
("Target Shares") equal to 19.9% of the issued and outstanding shares as of the
first date, if any, upon which an Exercise Event (as defined in Section 2(a)
below) shall occur (the "Option Shares"), in the manner set forth below (i) by
paying cash at a price of $20.00 per share (the "Exercise Price") and/or, at
Acquiror's election, (ii) by exchanging therefor shares of the Common Stock,
$0.01 par value, of Acquiror ("Acquiror Shares") at a rate (the "Exercise
Ratio"), for each Option Share, of a number of Acquiror Shares equal to the
Exercise Price divided by the average closing sale prices during the previous 30
trading days of Acquiror Shares on the Nasdaq National Market immediately
preceding the date of the Closing (as defined below) of the particular Option
exercise (the "Acquiror Share Price").
2. Exercise of Option; Maximum Proceeds
(a) For all purposes of this Agreement, an "Exercise Event" shall occur
immediately prior to the consummation of a Target Acquisition. A "Target
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
Target pursuant to which the stockholders of Target 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 Target 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 Target'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 Target), 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 Target. Consummation by Acquiror of the
Merger or any other Acquisition with Target will not constitute a Target
Acquisition. Notwithstanding any
<PAGE> 145
provision of this Agreement to the contrary, the economic benefit derived by
Acquiror under this Agreement shall not exceed $12,000,000, less any Termination
Fee paid to Acquiror under Section 7.3(b) of the Merger Agreement, and Acquiror
shall promptly account to Target for any such excess. In addition, in lieu of
delivery and receipt of the Target Shares issuable in connection with an
Exercise Event, either Acquiror or Target may elect to have the economic
benefit, if any, payable to Acquiror, pursuant to the immediately preceding
sentence, be paid in cash promptly to Acquiror.
(b) Acquiror may deliver to Target a written notice (and "Exercise Notice")
specifying that it wishes to exercise and close a purchase of Option Shares at
any time within 30 days following the occurrence of an Exercise Event,
specifying the total number of Option Shares it wishes to acquire. Each closing
of a purchase of Option Shares (a "Closing") shall occur on the date and at a
time designated by the Acquiror in an Exercise Notice delivered at least five
(5) business days prior to the date of such Closing, which Closing shall be held
at the offices of counsel to Acquiror upon the occurrence of an Exercise Event
prior to the termination of the Option as may be designated by Acquiror in
writing. In the event that no Exercise Event shall occur prior to termination of
the Option, such Exercise Notice shall be void and of no further force and
effect.
(c) The Option shall terminate upon the earlier of (i) the Effective Time;
(ii) 12 months following the termination of the Merger Agreement pursuant to
Section 7.1(b), (d), (e) or (g) thereof if a third person or group shall have
made and not withdrawn a proposal or entered into an agreement with Target with
respect to a Target Acquisition on or prior to the date of such termination; and
(iii) six months after the date on which the Merger Agreement is terminated
pursuant to Section 7.1(d), (e) or (g) if at the time of such termination there
shall be no outstanding third person or group offer or agreement with Target
with respect to any Target Acquisition (provided that, if during the pendency of
such six-month period any such proposal is made or agreement is entered into,
the Option shall not terminate until six months after the date such offer or
agreement is made or entered into); provided, however, that if the Option is
exercisable but cannot be exercised by reason of any applicable government order
or because the waiting period related to the issuance of the Option Shares under
the HSR Act shall not have expired or been terminated, then the Option shall not
terminate until the tenth business day after such impediment to exercise shall
have been removed or shall have become final and not subject to appeal.
Notwithstanding the foregoing, the Option may not be exercised if (i) Acquiror
shall have breached in any material respect any of its covenants or agreements
contained in the Merger Agreement or (ii) the representations and warranties of
Acquiror contained in the Merger Agreement shall not have been true and correct
in all material respects on and as of the date when made.
3. Conditions to Closing
The obligation of Target to issue Option Shares to Acquiror hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired or
been terminated; (b) all material consents, approvals, orders or authorizations
of, or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal state or local governmental
authority or instrumentality, if any, required in connection with the issuance
of the Option Shares hereunder shall have been obtained or made, as the case may
be; and (c) no preliminary or permanent injunction or other order by any court
of competent jurisdiction prohibiting or otherwise restraining such issuance
shall be in effect. It is understood and agreed that at any time during which
Acquiror shall be entitled to deliver to Target an Exercise Notice, the parties
will use their respective best efforts to satisfy all conditions to Closing, so
that a Closing may take place as promptly as practicable, and in any event, upon
the occurrence of an Exercise Event.
4. Closing
At any Closing, (a) Target shall deliver to Acquiror a single certificate
in definitive form representing the number of Target Shares designated by
Acquiror in its Exercise Notice, such certificate to be registered in the name
of Acquiror and to bear the legend set forth in Section 10 hereof, against
delivery of (b) payment by Acquiror to Target of the aggregate purchase price
for the Target Shares so designated and being purchased by delivery of (i) a
certified check or bank check and/or, at Acquiror's election, (ii) a single
certificate in definitive form representing the number of Acquiror Shares being
issued by Acquiror in consideration therefor
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(based on the Exercise Ratio), such certificate to be registered in the name of
Target and to bear the legend set forth in Section 10 hereof.
5. Representations and Warranties of Target
Target represents and warrants to Acquiror that (a) Target is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by Target and consummation by Target of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target and no other corporate proceedings on the
part of Target are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed and
delivered by Target and constitutes a legal, valid and binding obligation of
Target and, assuming this Agreement constitutes a legal, valid and binding
obligation of Acquiror, is enforceable against Target in accordance with its
terms, except as enforceability may be limited by bankruptcy and other laws
affecting the rights and remedies of creditors generally and general principles
of equity; (d) except for any filings required under the HSR Act, Target has
taken all necessary corporate and other action to authorize and reserve for
issuance and to permit it to issue upon exercise of the Option, and at all times
from the date hereof until the termination of the Option will have reserved for
issuance, a sufficient number of unissued Target Shares for Acquiror to exercise
the Option in full and will take all necessary corporate or other action to
authorize and reserve for issuance all additional Target Shares or other
securities which may be issuable pursuant to Section 9(a) upon exercise of the
Option, all of which, upon their issuance and delivery in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable;
(e) upon delivery of the Target Shares and any other securities to Acquiror upon
exercise of the Option, Acquiror will acquire such Target Shares or other
securities free and clear of all material claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever, excluding those imposed
by Acquiror; (f) the execution and delivery of this Agreement by Target do not,
and the performance of this Agreement by Target will not, (i) violate the
Certificate of Incorporation or Bylaws of Target, (ii) conflict with or violate
any order applicable to Target or any of its subsidiaries or by which they or
any of their property is bound or affected or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give rise to any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance on any property or assets of Target or any of its subsidiaries
pursuant to, any contract or agreement to which Target or any of its
subsidiaries is a party or by which Target or any of its subsidiaries or any of
their property is bound or affected, except, in the case of clauses (ii) and
(iii) above, for violations, conflicts, breaches, defaults, rights of
termination, amendment, acceleration or cancellation, liens or encumbrances
which would not, individually or in the aggregate, have a Material Adverse
Effect on Target; and (g) the execution and delivery of this Agreement by Target
does not, and the performance of this Agreement by Target will not, require any
consent, approval, authorization or permit of, or filing with, or notification
to, any Governmental Entity except pursuant to the HSR Act.
6. Representations and Warranties of Acquiror
Acquiror represents and warrants to Target that (a) Acquiror is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by Acquiror and the consummation by
Acquiror of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Acquiror and no other corporate
proceedings on the part of Acquiror are necessary to authorize this Agreement or
any of the transactions contemplated hereby; (c) this Agreement has been duly
executed and delivered by Acquiror and constitutes a legal, valid and binding
obligation of Acquiror and, assuming this Agreement constitutes a legal, valid
and binding obligation of Target, is enforceable against Acquiror in accordance
with its terms, except as enforceability may be limited by bankruptcy and other
laws affecting the rights and remedies of creditors generally and general
principles of equity; and (d) except for any filings required under the HSR Act,
Acquiror has taken (or will in a timely manner take) all necessary corporate and
other action in connection
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with any exercise of the Option; (e) upon delivery of Acquiror Shares to Target
in consideration of any acquisition of Target Shares pursuant hereto, Target
will acquire such Acquiror Shares free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by Target; (f) the execution and delivery of this
Agreement by Acquiror do not, and the performance of this Agreement by Acquiror
will not, (i) violate the Articles of Association of Acquiror, (ii) conflict
with or violate any order applicable to Acquiror or any of its subsidiaries or
by which they or any of their property is bound or affected or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Acquiror
or any of its subsidiaries pursuant to, any contract or agreement to which
Acquiror or any of its subsidiaries is a party or by which Acquiror or any of
its subsidiaries or any of their property is bound or affected, except, in the
case of clauses (ii) and (iii) above, for violations, conflicts, breaches,
defaults, rights of termination, amendment, acceleration or cancellation, liens
or encumbrances which would not, individually or in the aggregate, have a
Material Adverse Effect on Acquiror; (g) the execution and delivery of this
Agreement by Acquiror does not, and the performance of this Agreement by
Acquiror will not, require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity except pursuant to the
HSR Act; and (h) any Target Shares acquired upon exercise of the Option will not
be acquired by Acquiror with a view to the public distribution thereof and
Acquiror will not sell or otherwise dispose of such shares in violation of
applicable law or this Agreement.
7. Certain Rights
(a) Acquiror Put. If Acquiror shall have exercised the Option, Acquiror may
thereafter deliver to Target a written notice (a "Put Notice"), at any time
during which Acquiror may exercise the Option, specifying that it wishes to sell
(as specified in such Put Notice) all or a portion of the Option Shares acquired
as a result of such exercise at the price, and in the form, set forth in
paragraph (b) below. At any time after delivery of a Put Notice, unless such Put
Notice is withdrawn by Acquiror, the closing of the Put (the "Put Closing")
shall take place at the principal offices of Target on the date specified in the
Put Notice (which shall be at least 5 days after the date of such Put Notice).
(b) Payment and Redelivery of Cash or Acquiror Shares. At the Put Closing,
(i) Acquiror shall surrender to Target the certificates evidencing the Option
Shares to be purchased by Target at such Put Closing and (ii) Target shall
deliver to Acquiror a proportionate amount of the aggregate consideration paid
by Acquiror in connection with any exercise of the Option, together with
interest on such amounts at a per annum rate of 10% (which, in the case of
Acquiror Shares, shall be based upon each applicable Acquiror Share Price). In
addition, the consideration to be paid by Target to Acquiror at any Put Closing
shall be in the form that is proportionate to the form previously paid by
Acquiror to Target. By way of example only, if (x) one third of the aggregate
Option Shares shall have been acquired for cash and two-thirds shall have been
acquired for Acquiror Shares, then (y) the consideration to be paid by Target to
Acquiror at such Put Closing shall consist of one-third cash and two-thirds
Acquiror Shares. Any cash payment required to be made by Target to Acquiror
shall be paid a certified check or bank check. In connection with any Acquiror
Shares returned to Acquiror at a Put Closing, Target shall represent and warrant
that such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, other than
those imposed by Acquiror.
(c) Effect of Certain Actions. The amount of Option Shares and Acquiror
Shares delivered or required to be delivered hereunder shall reflect
appropriately the effect of any stock split, reverse stock split, stock dividend
(including any dividend or distribution of securities convertible into Acquiror
Common Shares or Target Common Stock), reorganization, recapitalization or other
like change with respect to Acquiror Common Shares or Target Common Stock
occurring after the date of Closing and prior to the date of the Put Closing.
(d) Restrictions on Transfer. Until the termination of the Option, Target
shall not sell, transfer or otherwise dispose of any Acquiror Shares acquired by
it pursuant to this Agreement.
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8. Registration Rights
(a) Following the termination of the Merger Agreement, each party hereto (a
"Holder") may by written notice (a "Registration Notice") to the other party
(the "Registrant") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this Agreement
(the "Registrable Securities") in order to permit the sale or other disposition
of such shares pursuant to a bona fide firm commitment underwritten public
offering in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable and
shall use reasonable efforts to prevent any person or group from purchasing
through such offering shares representing more than 1% of the outstanding shares
of Common Stock of the Registrant on a fully diluted basis (a "Permitted
Offering"); provided, however, that any such Registration Notice must relate to
a number of shares equal to at least 2% of the outstanding shares of Common
Stock of the Registrant on a fully diluted basis and that any rights to require
registration hereunder shall terminate with respect to any shares that may be
sold pursuant to Rule 144(k) under the Securities Act. The Registration Notice
shall include a certificate executed by the Holder and its proposed managing
underwriter, which underwriter shall be an investment banking firm of nationally
recognized standing (the "Manager"), stating that (i) the Holder and the Manager
have a good faith intention to commence a Permitted Offering and (ii) the
Manager in good faith believes that, based on the then prevailing market
conditions, it will be able to sell the Registrable Securities at a per share
price equal to at least 80% of the per share average of the closing sale prices
of the Registrant's Common Stock on the Nasdaq National Market for the twenty
trading days immediately preceding the date of the Registration Notice. The
Registrant shall thereupon have the option exercisable by written notice
delivered to the Holder within ten business days after the receipt of the
Registration Notice, irrevocably to agree to purchase all or any part of the
Registrable Securities for cash at a price (the "Option Price" equal to the
product of (i) the number of Registrable Securities so purchased and (ii) the
per share average of the closing sale prices of the Registrant's Common Stock on
the Nasdaq National Market for the twenty trading days immediately preceding the
date of the Registration Notice. Any such purchase of Registrable Securities by
the Registrant hereunder shall take place at a closing to be held at the
principal executive offices of the Registrant or its counsel at any reasonable
date and time designated by the Registrant in such notice within 10 business
days after delivery of such notice. The payment for the shares to be purchased
shall be made by delivery at the time of such closing of the Option Price in
immediately available funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion of counsel to such
Registrant, such information would have to be disclosed if a registration
statement were filed at that time; (B) such Registrant is required under the
Securities Act to include audited financial statements for any period in such
registration statement and such financial statements are not yet available for
inclusion in such registration statement; or (C) such Registrant determines, in
its reasonable judgment, that such registration would interfere with any
financing, acquisition or other material transaction involving the Registrant.
If consummation of the sale of any Registrable Securities pursuant to a
registration hereunder does not occur within 180 days after the filing with the
SEC of the initial registration statement therefor, the provisions of this
Section 8 shall again be applicable to any proposed registration, it being
understood that neither party shall be entitled to more than an aggregate of two
effective registration statements hereunder. The Registrant shall use all
reasonable efforts to cause any Registrable Securities registered pursuant to
this Section 8 to be qualified for sale under the securities or blue sky laws of
such jurisdictions as the Holder may reasonably request and shall continue such
registration or qualification in effect in such jurisdictions; provided,
however, that the Registrant shall not be required to qualify to do business in,
or consent to general service of process in, any jurisdiction by reason of this
provision.
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(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to such Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required to
be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant shall provide to
the underwriters such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings and as such underwriters may reasonably require.
In connection with any registration, the Holder and the Registrant agree to
enter into an underwriting agreement reasonably acceptable to each such party,
in form and substance customary for transactions of this type with the
underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Registrant of any
rule or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Registrant will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or controlling
person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Holder of any rule or regulation
promulgated under the Securities Act applicable to the Holder in connection with
any such registration, qualification or compliance, and will reimburse the
Registrant, such directors, officers or control persons or underwriters for any
legal or any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Registrant by the Holder for use therein, provided that in no event shall
any indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder..
(iii) Each party entitled to indemnification under this Section 8(e) (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such
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Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall pay such expense if representation of the Indemnified Party by counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding, and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 8(e) unless
the failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnifying Party shall be required to
indemnify any Indemnified Party with respect to any settlement entered into
without such Indemnifying Party's prior consent (which shall not be unreasonably
withheld).
9. Adjustment Upon Changes in Capitalization; Rights Plans
(a) In the event of any change in the Target Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Ratio and the
Exercise Price shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that Acquiror shall
receive, upon exercise of the Option, the number and class of shares or other
securities or property that Acquiror would have received in respect of the
Target Shares if the Option had been exercised immediately prior to such event
or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), Target shall not
adopt a stockholders rights plan (a so-called "poison pill") that contains
provisions for the distribution of rights thereunder as a result of Acquiror
being the beneficial owner of shares of the first party by virtue of the Option
being exercisable or having been exercised (or as a result of such other party
beneficially owning shares issuable in respect of any Option Shares). It is
understood, however, that following termination (if any) of the Merger
Agreement, a party may adopt a stockholders rights plan, that contains
provisions for the distribution of rights thereunder as a result of the other
party being the beneficial owner of shares of the first party in addition to
those that may be beneficially owned by virtue of the Option being exercisable
or having been exercised (or as a result of such other party beneficially owning
shares issuable in respect of any Option Shares).
10. Restrictive Legends
Each certificate representing Option Shares issued to Acquiror hereunder,
and each certificate representing Acquiror Shares delivered to Target at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH
SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH
IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY 22, A COPY OF WHICH MAY BE
OBTAINED FROM ACQUIROR.
11. Listing and HSR Filing
Target, upon the request of Acquiror, shall promptly file an application to
list the Target Shares to be acquired upon exercise of the Option for quotation
on the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each of
the
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parties hereto shall promptly file with the Federal Trade Commission and the
Antitrust Division of the United States Department of Justice all required
premerger notification and report forms and other documents and exhibits
required to be filed under the HSR Act to permit the acquisition of the Target
Shares subject to the Option at the earliest possible date.
12. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon any
person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions of
Section 8 shall, upon consummation of such sale, be free of the restrictions
imposed with respect to such shares by this Agreement and any transferee of such
shares shall not be entitled to the rights of such party. Certificates
representing shares sold in a registered public offering pursuant to Section 8
shall not be required to bear the legend set forth in Section 10.
13. Specific Performance
The parties recognize and agree that if for any reason any of the
provisions of this Agreement are not performed in accordance with their specific
terms or are otherwise breached, immediate and irreparable harm or injury would
be caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be brought
in equity to enforce the provisions of the Agreement, neither party will allege,
and each party hereby waives the defense, that there is an adequate remedy at
law.
14. Entire Agreement
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof.
15. Further Assurances
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
16. Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith and shall execute and deliver an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision.
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17. 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 Target, to:
Trusted Information Systems, Inc.
3060 Washington Road
Glenwood, MD 21738
Telephone No.: (301) 854-6889
Facsimile No.: (301) 854-5755
Attention: President and
Chief Executive Officer
with a copy to:
Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, DC 20036
Telephone No.: (202) 861-3900
Facsimile No.: (202) 223-2085
Attention: Edwin M. Martin, Jr., Esq.
(b) if to Acquiror, to:
Networks Associates, Inc.
2805 Bowers Avenue
Santa Clara, CA 95051
Attention: President and
Chief Executive Officer
Telephone No.: (408) 988-3932
Facsimile No.: (408) 988-6054
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Kurt J. Berney, Esq.
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
18. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be performed
entirely within such State.
19. Counterparts
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
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20. Expenses
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses.
21. Amendments; Waiver
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. Assignment
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure to
the benefit of and be binding upon any successor of a party hereto.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
ACQUIROR:
NETWORKS ASSOCIATES, INC.
By: /s/ WILLIAM L. LARSON
--------------------------------------
Name: William L. Larson
--------------------------------------
Title: Chairman and Chief Executive
Officer
--------------------------------------
TARGET:
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ STEPHEN T. WALKER
--------------------------------------
Name: Stephen T. Walker
--------------------------------------
Title: President and Chief Executive
Officer
--------------------------------------
***STOCK OPTION AGREEMENT***
(Target option to Acquiror)
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
ACQUIROR:
NETWORKS ASSOCIATES, INC.
By: /s/ WILLIAM L. LARSON
--------------------------------------
Name: William L. Larson
--------------------------------------
Title: Chairman and Chief Executive
Officer
--------------------------------------
TARGET:
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ STEPHEN T. WALKER
--------------------------------------
Name: Stephen T. Walker
--------------------------------------
Title: President and Chief Executive
Officer
--------------------------------------
***STOCK OPTION AGREEMENT***
(Target option to Acquiror)
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ANNEX C
February 22, 1998
The Board of Directors
Trusted Information Systems, Inc.
3060 Washington Road (Rt. 97)
Glenwood, MD 21738
Attention: Stephen T. Walker
Chairman, President and CEO
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of Trusted Information Systems, Inc. (the
"Company") of the consideration proposed to be paid to them in connection with
the proposed merger (the "Merger") of the Company with and into Thor Acquisition
Corp. ("Merger Sub"), a wholly-owned subsidiary of Networks Associates, Inc.
(the "Buyer"). Pursuant to the Agreement and Plan of Reorganization, dated as of
February 22, 1998, (the "Agreement"), among the Company, the Buyer and Merger
Sub, Merger Sub will merge with and into the Company, the Company will become a
wholly-owned subsidiary of the Buyer, and each share of Common Stock, $0.01 par
value per share, of the Company (other than shares canceled pursuant to the
terms of the Agreement) will be converted into the right to receive 0.3230
shares of common stock of the Buyer, as may be adjusted pursuant to the terms of
the Agreement.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii)
certain publicly available information concerning the business of the Company
and of certain other companies engaged in businesses comparable to those of the
Company, and the reported market prices for certain other companies' securities
deemed comparable; (iii) publicly available terms of certain transactions
involving companies comparable to the Company and the consideration received for
such companies; (iv) current and historical market prices of the common stock of
the Company and the Buyer; (v) the audited financial statements of the Company
for the fiscal year ended December 27, 1996 and the quarter ended September 26,
1997, the audited financial statements of the Buyer for the fiscal year ended
December 31, 1997, and the unaudited financial statements of the Company for the
fiscal year ended December 26, 1997; (vi) certain agreements with respect to
outstanding indebtedness or obligations of the Company; (vii) certain internal
financial analyses and forecasts prepared by the Company and its management; and
(viii) the terms of other business combinations that we deemed relevant.
In addition, we have held discussions with certain members of the
management of the Company and the Buyer with respect to certain aspects of the
Merger, the past and current business operations of the Company and the Buyer,
the financial condition and future prospects and operations of the Company and
the Buyer, the effects of the Merger on the financial condition and future
prospects of the Company and the Buyer, and certain other matters we believed
necessary or appropriate to our inquiry. We have visited certain representative
facilities of the Company, and reviewed such other financial studies and
analyses and considered such other information as we deemed appropriate for the
purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and the Buyer or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. We have not conducted any valuation or appraisal of any assets or
liabilities, nor have any such valuations or appraisals been provided to us. In
relying on financial analyses and forecasts provided to us, we have assumed that
they have been reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by management as to the expected
future results of operations and financial condition of the Company to which
such analyses or forecasts relate. We have also assumed that the Merger will
have the tax consequences described in discussions with, and materials furnished
to us by, representatives of the Company, and that the other transactions
contemplated by the Agreement will be consummated as described in the Agreement.
We have relied as to all legal matters relevant to rendering our opinion upon
the advice of counsel.
<PAGE> 156
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. It should be understood that subsequent developments may affect this
opinion and that we do not have any obligation to update, revise, or reaffirm
this opinion. We are expressing no opinion herein as to the price at which the
Buyer's stock will trade at any future time.
We have acted as financial advisor to the Company with respect to the
proposed Merger and will receive a fee if the proposed Merger is consummated.
Please be advised that we acted as lead underwriter in the Company's initial
public offering in October 1996. In the ordinary course of their businesses, our
affiliates may actively trade the debt and equity securities of the Company or
the Buyer for their own account or for the accounts of customers and,
accordingly, they may at any time hold long or short positions in such
securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid to the Company's stockholders in
the proposed Merger is fair, from a financial point of view, to such
stockholders.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote with respect to the Merger. This opinion
may be reproduced in full in any proxy or information statement mailed to
stockholders of the Company.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ TODD R. MARIN
--------------------------------------
Name: Todd R. Marin
Title: Managing Director
C-2
<PAGE> 157
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 TIS 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 February
22, 1998, among Networks Associates, Inc., Thor Acquisition
Corp. and Trusted Information Systems, Inc.
2.2*** Stock Option Agreement, dated as of February 22, 1998, among
Networks Associates, Inc. and Trusted Information Systems,
Inc.
3.1 Second Restated Certificate of Incorporation of Networks
Associates, Inc., as amended on December 1, 1997.
3.2 Bylaws of Networks Associates, Inc.
3.3 Certificate of Designation of Series A Preferred Stock of
Networks Associates, Inc., incorporated by reference to
Exhibit 3.3 of the Registrant's Form 10-Q for the Quarter
ended September 30, 1996.
4.1 Registration Rights Agreement, dated as of August 30, 1996,
by and among Networks Associates, Inc., FSA Combination
Corp. and FSA Corporation, incorporated by reference to the
Registrant's Report on Form 8-K as filed with the Securities
and Exchange Commission on September 24, 1996.
4.2 Registration Rights Agreement, dated January 13, 1997 by and
between Networks Associates, Inc. and the shareholders of
Jade, incorporated by reference to the Registrant's Report
on Form 8-K, as filed with the Securities and Exchange
Commission on March 14, 1997.
4.3 Registration Rights Agreement, dated as of February 28,
1997, by and between Networks Associates, Inc. and
shareholders of Schuijers, incorporated by reference to
Exhibit 10.50 to the Registrant's Report on Form 10-K, for
the year ended December 31, 1996.
4.4 Registration Rights Agreement, dated as of December 1, 1997,
by and between Networks Associates, Inc. and shareholders of
Helix Software Company, incorporated by reference to the
Registrant's Registration Statement of Form S-3, filed with
the Commission on February 12, 1998.
</TABLE>
II-1
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
4.5 Registration Rights Agreement, dated December 9, 1997
between the Registrant and certain of the shareholders of
PGP, incorporated by reference to the Registrant's
Registration Statement of Form S-3, filed with the
Commission on February 12, 1998.
4.6 Indenture dated as of February 13, 1998 between Networks
Associates, Inc. and State Street Bank and Trust Company of
California, N.A., as Trustee.
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 Piper & Marbury L.L.P.
21.1 Subsidiaries of Networks Associates, Inc., incorporated by
reference to the Registrant's Registration Statement of Form
S-3, filed with the Commission on February 12, 1998
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 Piper & Marbury LLP (included in opinion filed as
Exhibit 8.2).
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Ernst & Young LLP, Independent Auditors
23.5 Consent of J.P. Morgan Securities Inc.
24.1 Power of Attorney (see Page II-4).
</TABLE>
- ---------------
* On December 1, 1997, the Registrant changed its legal name from McAfee
Associates, Inc. to Networks Associates Inc. Items filed by the Registrant
prior to December 1, 1997 were filed under the name McAfee Associates, Inc.
** Incorporated by reference to Annex A to the Proxy Statement/Prospectus.
*** Incorporated by reference to Annex C to the Proxy Statement/Prospectus.
(B) FINANCIAL STATEMENTS SCHEDULES
The information required to be set forth herein is incorporated by
reference to Networks Associates' Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and TIS's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, as amended on Form 10-K/A.
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.
II-2
<PAGE> 159
(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.
(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-3
<PAGE> 160
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 24th day of March 1998.
NETWORKS ASSOCIATES, INC.
By: /s/ WILLIAM L. LARSON
------------------------------------
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, March 24, 1998
- ----------------------------------------------------- President and Chief Executive
William L. Larson Officer (Principal executive
officer)
/s/ PRABHAT K. GOYAL Chief Financial Officer March 24, 1998
- ----------------------------------------------------- (Principal financial and
Prabhat K. Goyal accounting officer)
/s/ JOHN BOLGER Board Member March 24, 1998
- -----------------------------------------------------
John Bolger
/s/ LESLIE G. DENEND Board Member March 24, 1998
- -----------------------------------------------------
Leslie G. Denend
/s/ VIRGINIA GEMMELL Board Member March 24, 1998
- -----------------------------------------------------
Virginia Gemmell
/s/ EDWIN HARPER Board Member March 24, 1998
- -----------------------------------------------------
Edwin Harper
/s/ HARRY SAAL Board Member March 24, 1998
- -----------------------------------------------------
Harry Saal
</TABLE>
II-4
<PAGE> 161
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
2.1** Agreement and Plan of Reorganization, dated as of February
22, 1998, among Networks Associates, Inc., Thor Acquisition
Corp. and Trusted Information Systems, Inc.
2.2*** Stock Option Agreement, dated as of February 22, 1998, among
Networks Associates, Inc. and Trusted Information Systems,
Inc.
3.1 Second Restated Certificate of Incorporation of Networks
Associates, Inc., as amended on December 1, 1997.
3.2 Bylaws of Networks Associates, Inc.
3.3 Certificate of Designation of Series A Preferred Stock of
Networks Associates, Inc., incorporated by reference to
Exhibit 3.3 of the Registrant's Form 10-Q for the Quarter
ended September 30, 1996.
4.1 Registration Rights Agreement, dated as of August 30, 1996,
by and among Networks Associates, Inc., FSA Combination
Corp. and FSA Corporation, incorporated by reference to the
Registrant's Report on Form 8-K as filed with the Securities
and Exchange Commission on September 24, 1996.
4.2 Registration Rights Agreement, dated January 13, 1997 by and
between Networks Associates, Inc. and the shareholders of
Jade, incorporated by reference to the Registrant's Report
on Form 8-K, as filed with the Securities and Exchange
Commission on March 14, 1997.
4.3 Registration Rights Agreement, dated as of February 28,
1997, by and between Networks Associates, Inc. and
shareholders of Schuijers, incorporated by reference to
Exhibit 10.50 to the Registrant's Report on Form 10-K, for
the year ended December 31, 1996.
4.4 Registration Rights Agreement, dated as of December 1, 1997,
by and between Networks Associates, Inc. and shareholders of
Helix Software Company, incorporated by reference to the
Registrant's Registration Statement of Form S-3, filed with
the Commission on February 12, 1998.
4.5 Registration Rights Agreement, dated December 9, 1997
between the Registrant and certain of the shareholders of
PGP, incorporated by reference to the Registrant's
Registration Statement of Form S-3, filed with the
Commission on February 12, 1998.
4.6 Indenture dated as of February 13, 1998 between Networks
Associates, Inc. and State Street Bank and Trust Company of
California, N.A., as Trustee.
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 Piper & Marbury L.L.P.
21.1 Subsidiaries of Networks Associates, Inc., incorporated by
reference to the Registrant's Registration Statement of Form
S-3, filed with the Commission on February 12, 1998
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 Piper & Marbury LLP (included in opinion filed as
Exhibit 8.2).
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT NO.* DESCRIPTION
------------ -----------
<C> <S>
23.5 Consent of J.P. Morgan Securities Inc.
24.1 Power of Attorney (see Page II-4).
</TABLE>
- ---------------
* On December 1, 1997, the Registrant changed its legal name from McAfee
Associates, Inc. to Networks Associates Inc. Items filed by the Registrant
prior to December 1, 1997 were filed under the name McAfee Associates, Inc.
** Incorporated by reference to Annex A to the Proxy Statement/Prospectus.
*** Incorporated by reference to Annex C to the Proxy Statement/Prospectus.
<PAGE> 1
EXHIBIT 3.1
SECOND RESTATED
CERTIFICATE OF INCORPORATION
OF
MCAFEE ASSOCIATES, INC.
The undersigned, William L. Larson and R. Terry Duryea, hereby certify that:
A. They are the duly elected and acting President and Secretary,
respectively, of McAfee Associates, Inc., a Delaware corporation (the
"Corporation").
B. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State on August 14, 1992 and restated on October 15,
1992.
C. The Certificate of Incorporation is amended and restated to read in
full as follows:
FIRST: The name of Corporation is McAfee Associates, Inc. (hereinafter
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 15 E. North Street, in the City of Dover, County of Kent.
The name of the registered agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH: The Corporation is authorized to issue a total of one hundred
and five million (105,000,000) 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 ($.01) per share, and the total number of shares
of Common Stock the Corporation shall have authority to issue is one hundred
million (100,000,000), par value one cent ($.01) per share.
The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of the
state of Delaware, 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 any qualifications, limitations
or restrictions thereof. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the voting
stock of the corporation, without the approval of the holders of the Preferred
Stock, or of any series thereof, unless the approval of any such holders is
required pursuant to the certificate or certificates establishing the series of
Preferred Stock.
<PAGE> 2
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called
only by the Board of Directors pursuant to a resolution adopted by a majority of
the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time of any such
resolution is presented to the Board for adoption) or by the holders of shares
entitled to cast not less than 10% of the votes at the meeting.
SIXTH: A director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
If the Delaware General Corporation law is hereafter amended to
authorize corporate action further eliminating or limiting the personal
liability of a director, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this Article
SIXTH by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
SEVENTH: The number of directors shall initially be six (6) and,
thereafter, shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption). The directors shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the 1993 annual meeting of stockholders, the term of
office of the second class to expire at the 1994 annual meeting of stockholders
and the term of office of the third class to expire at the 1995 annual meeting
of
-2-
<PAGE> 3
stockholders. At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election. All directors
shall hold office until the expiration of the term for which elected, and until
their respective successors are elected, except in the case of the death,
resignation or removal of any director.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, removal from office,
disqualification or other cause (other than removal from office by a vote of
stockholders) may be filled only by a majority vote of the directors then in
office, though less than a quorum, and directors so chosen shall hold office for
a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent directors.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class. Vacancies in the Board of Directors resulting from such removal may be
filled by a majority of the directors then in office, though less than a quorum,
or the stockholders at a special meeting of the stockholders properly called for
that purpose, by the vote of the holders of a majority of the shares entitled to
vote at such special meeting. Directors so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires.
EIGHTH: The Board of Directors is expressly empowered to adopt, amend or
repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of
the Corporation by the Board of Directors shall require the approval of a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or repeal the Bylaws of the
Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by
the stockholders shall require, in addition to any vote of the holders of any
class or series of stock of this Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
NINTH: In addition to any vote of the holders of any class or series of
the stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of a majority of the vesting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeat the provisions of ARTICLE
FIRST, ARTICLE SECOND,
-3-
<PAGE> 4
ARTICLE THIRD and ARTICLE FOURTH of this Certificate of Incorporation.
Notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the voting power of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally int he election of
directors, voting together as a single class, shall be required to amend or
repeal any provision of this Certificate of Incorporation not specified in the
preceding sentence.
D. The foregoing Second Restated Certificate of Incorporation has been
approved by the Board of Directors of the Corporation.
E. The foregoing Second Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
Delaware General Corporation Law and the Corporation's Restated Certificate of
Incorporation by obtaining at least sixty-six and two-third percent (66-2/3%) of
the voting power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote, voting together as a single class.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by R. Terry Duryea, its Secretary, on August 1, 1996.
/s/ R. Terry Duryea
----------------------------------
R. Terry Duryea, Secretary
-4-
<PAGE> 5
CERTIFICATE OF AMENDMENT
OF
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
MCAFEE ASSOCIATES, INC.
McAFEE ASSOCIATES, INC., a Delaware corporation (the"Corporation"),
hereby certifies as follows:
1. The current name of the Corporation is "McAfee Associates, Inc." The
Corporation's original Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware on August 14, 1992 and the Corporation's
Second Restated Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on August 6, 1996.
2. The Second Restated Certificate of Incorporation of the Corporation
is hereby amended by deleting, in its entirety, the current ARTICLE ONE thereof
and inserting in place thereof a new ARTICLE ONE to read as follows:
FIRST: The name of the corporation is Networks Associates, Inc. (herein
sometimes referred to as the "Corporation").
3. The Second Restated Certificate of Incorporation of the Corporation
is hereby amended by deleting the first paragraph of ARTICLE FOUR thereof and
inserting in place thereof a new first paragraph of ARTICLE FOUR to read as
follows:
FOURTH: The Corporation is authorized to issue a total of three hundred
and 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 ($.01) per share, and the total number of shares
of Common Stock of the Corporation shall have authority to issue is three
hundred million (300,000,000), par value one cent ($.01) per share.
4. The Certificate of Amendment of the Second Restated Certificate of
Incorporation was duly adopted in accordance with Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS THEREOF, the Corporation has caused this Certificate of
Amendment of the Second Restated Certificate of Incorporation to be signed as of
the 1st day of December 1997, by
<PAGE> 6
William L. Larson, its President and Chief Executive Officer, and attested by
Prabhat K. Goyal, its Chief Financial Officer and Secretary, who hereby affirm
and acknowledge, under penalties of perjury, that this Certificate is the act
and deed of the Corporation and that the facts stated herein are true.
McAFEE ASSOCIATES, INC.
By /s/ William L. Larson
------------------------------------------
Name: William L. Larson
Title: President and Chief Executive Officer
ATTESTED:
By /s/ Prabhat K. Goyal
--------------------------
Name: Prabhat K. Goyal
Title: Chief Financial Officer and Secretary
<PAGE> 1
EXHIBIT 3.2
RESTATED BY-LAWS
OF
NETWORKS ASSOCIATES, INC.
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
the election of directors and for the transaction of such other business as may
properly come before the meeting, shall be held at such place, on such date, and
at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings. Special meetings of stockholders of the
Corporation, for any purpose or purposes prescribed in the notice of the
meeting, may be called only by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board for adoption) or by the holders of
shares entitled to cast not less than 10% of the votes at the meeting, and shall
be held at such place, on such date, and at such time as the notice shall fix.
Business transacted at special meetings shall be limited to the purpose or
purposes stated in the notice.
Section 3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
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If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
Section 5. Conduct of Stockholders' Meeting. At every meeting of the
stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his or her absence the Vice President
designated by the President, or in the absence of such designation any Vice
President, or in the absence of the President or any Vice President, a chairman
chosen by the majority of the voting shares represented in person or by proxy,
shall act as Chairman. The Secretary of the Corporation or a person designated
by the Chairman shall act as Secretary of the meeting. Unless otherwise approved
by the Chairman, attendance at the Stockholders' Meeting is restricted to
stockholders of record, persons authorized in accordance with Section 8 of this
Article I to act by proxy, and officers of the Corporation.
Section 6. Conduct of Business. The Chairman shall call the meeting to
order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of, and procedure on, motions and other procedural matters,
and exercise discretion with respect to such procedural matters with fairness
and good faith toward all those entitled to take part. The chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the By-Laws to the contrary, no business shall be conducted at an annual or
special meeting except in accordance with the procedures set forth in this
Section 6 and Section 7, below. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of this Section
6 and Section 7, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
Section 7. Notice of Stockholder Business. At an annual or special
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) properly brought before an annual meeting by a stockholder, or
(d) properly brought before a special meeting by a stockholder, but if, and only
if, the notice of a special meeting provides for business to be brought before
the meeting by stockholders and such business is properly brought before the
meeting by a stockholder. For business to be properly brought before a meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To
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be timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation (i) with respect to an annual
meeting of stockholders, not less than one hundred twenty (120) days prior to
the day and month of the prior year's proxy statement for that annual meeting,
and (ii) with respect to a special meeting where the notice of such special
meeting provides for such business to be brought before the meeting by
stockholders, the close of business on the seventh (7th) day following the date
on which notice of such meeting is first given to stockholders. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual or special meeting (a) a brief description
of the business desired to be brought before the annual or special meeting and
the reasons for conducting such business at the annual or special meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business.
Section 8. Proxies and Voting. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
transmission or other reproduction shall be complete reproduction for the entire
original writing or transmission. A validly executed proxy which does not state
that it is irrevocable and is not coupled with an interest shall continue in
full force and effect unless (i) revoked by the person executing it, before the
vote pursuant to that proxy, by a writing delivered to the Corporation stating
that the proxy is revoked, or by a subsequent proxy executed by, or attendance
at the meeting and voting in person by, the person executing the proxy, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the Corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of three years from
the date of the proxy, unless otherwise provided in the proxy.
Except as otherwise required by the Certificate of Incorporation or the
General Corporation Law of Delaware, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote of
stockholders. All voting, including on the election of directors but excepting
where otherwise required by law, may be by a voice vote; provided, however, that
upon demand therefor by a stockholder entitled to vote or his or her proxy, a
stock vote shall be taken. Every stock vote shall be taken by ballots, each of
which shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting. The Corporation may, and to the extent
required by law, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the person presiding at the meeting may, and to the
extent required by law, shall, appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the
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discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his or
her ability. Each inspector shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the results; and
(g) Do any other acts that may be proper to conduct the elections
or votes with fairness to all stockholders.
Any holder of shares entitled to vote on any matter may vote part of the
shares in favor or the proposal and refrain from voting the remaining shares or
vote them against the proposal but if the stockholder fails to specify the
number of shares such stockholder is voting affirmatively, it shall be
conclusively presumed that the stockholder's approving vote is with respect to
all shares said stockholder is entitled to vote.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast affirmatively or negatively.
Section 9. Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
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ARTICLE II
BOARD OF DIRECTORS
Section 1. Number and Term of Office. The board of directors shall
consist of six (6) members. The number of directors may be changed by an
amendment to this bylaw pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such resolution is
presented to the Board for adoption). The directors shall be divided into three
classes, as nearly equal in number as reasonably possible, with the term of
office of the first class to expire at the 1993 annual meeting of stockholders,
the term of office of the second class to expire at the 1994 annual meeting of
stockholders and the term of office of the third class to expire at the 1995
annual meeting of stockholders. At each annual meeting of stockholders
following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election. All directors shall hold office until the expiration of the term
for which elected, and until their respective successors are elected, except in
the case of the death, resignation or removal of any director.
Until the Corporation's initial public offering of its capital stock,
the holders of the Corporation's Common Stock, voting as a single class, shall
be entitled to elect one director for each class of directors and the holders of
the Corporation's Preferred Stock, voting as a single class, shall be entitled
to elect one director to each class of directors.
Section 2. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any series of Preferred Stock then-outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
(other than removal from office by a vote of stockholders) may be filled only by
a majority vote of the directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have been
elected expires; provided, however, that if, prior to the Corporation's initial
public offering of its capital stock, a vacancy results from a director elected
by a single class of stock no longer serving as director, then such vacancy may
only be filled by the holders of a majority of the voting power of all of the
then-outstanding shares of such class. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 3. Removal. Subject to the rights of the holders of any series
of Preferred Stock then-outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a majority of the voting
power of all of the then-outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class; provided, however, that prior to the Corporation's initial public
offering of its capital stock a director that is elected by a single class of
stock may only be removed by the affirmative vote of the holders of at least a
majority of the voting power of all of the then-outstanding shares of such
class. Vacancies in the Board of
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Directors resulting from such removal may be fined by (i) a majority of the
directors then in office, though less than a quorum, or (ii) the stockholders at
a special meeting of the stockholders properly called for that purpose, by the
vote of the holders of a majority of the shares entitled to vote at such special
meeting; provided, however, that if, prior to the Corporation's initial public
offering of its capital stock, a vacancy results from a director elected by a
single class of stock no longer serving as director, then such vacancy may only
be filled by the holders of a majority of the voting power of all of the
then-outstanding shares of such class. Directors so chosen shall hold office for
a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by one-third of the directors then in office (rounded up the
nearest whole number) or by the chief executive officer and shall be held at
such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not less than
five (5) days before the meeting, by telegraphing the same not less than
twenty-four (24) hours before the meeting or by personal delivery, telephone or
facsimile notice to each director's home or principal place of business not less
than forty-eight (48) hours before the meeting. Unless otherwise indicated in
the notice thereof, any and all business may be transacted at a special meeting.
Section 6. Quorum. At any meeting of the Board of Directors, a majority
of the total number of authorized directors shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 7. Participation in Meetings by Conference Telephone. Members of
the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 8. Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
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Section 9. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with
these by-laws, for the management of the Corporation's business and affairs.
Section 10. Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 11. Nomination of Director Candidates. Subject to the rights of
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, nominations for the election of
Directors may be made by the Board of Directors or a proxy committee appointed
by the Board of Directors or by any stockholder entitled to vote in the election
of Directors generally. However, any stockholder entitled to vote in the
election of Directors generally may nominate one or more persons for election as
Directors at a meeting only if timely notice of such stockholder's intent to
make such nomination or nominations has been given in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation (i)
with respect to an
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election to be held at an annual meeting of stockholders, not less than one
hundred twenty (120) days prior to the day and month of the prior year's proxy
statement for that annual meeting as set forth in Section 7 of Article I of
these By-laws, and (ii) with respect to an election to be held at a special
meeting of stockholders for the election of Directors where the notice of such
special meeting provides for such business to be brought before the meeting by
stockholders, the close of business on the seventh (7th) day following the date
on which notice of such meeting is first given to stockholders. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to make
the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote for the election of Directors on the date of such
notice and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Corporation if so elected.
In the event that a person is validly designated as a nominee in
accordance with this Section 11 and shall thereafter become unable or unwilling
to stand for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee of a written notice to the
Secretary setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a Director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 11,
such nomination shall be void; provided, however, that nothing in this Section
11 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors. The Board of Directors,
by a vote of a majority of the whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall, for those
committees and any others provided for herein, elect a director or directors to
serve as
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the member or members, designating, if it desires, other directors as alternate
members who may replace any absent or disqualified member at any meeting of the
committee. Any committee so designated may exercise the power and authority of
the Board of Directors to declare a dividend, to authorize the issuance of stock
or to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law if the resolution which designates the
committee or a supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of any committee and
any alternate member in his place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may by unanimous vote appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member.
Section 2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third of the authorized members shall constitute a quorum unless the
committee shall consist of one or two members, in which event one member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
Section 1. Generally. The officers of the Corporation shall consist of a
Chairman of the Board, a Chief Executive Officer, a President, one or more Vice
Presidents, a Secretary, a Treasurer and such other offices as may from time to
time be appointed by the Board of Directors. Officers shall be elected by the
Board of Directors, which shall consider that subject at its first meeting after
every annual meeting of stockholders. Each officer shall hold office until his
or her successor is elected and qualified or until his or her earlier
resignation or removal. The Chairman of the Board and the President shall each
be members of the Board of Directors. Any number of offices may be held by the
same person.
Section 2. Chairman of the Board. The Chairman of the Board shall
perform all duties and have all powers which are commonly incident to the office
of the Chairman of the Board or which are delegated to him or her by the Board
of Directors or the President of the Corporation, including the power to sign
all stock certificates of the Corporation.
Section 3. Chief Executive Officer. Subject to the provisions of these
by-laws and to the direction of the Board of Directors, he or she shall have the
responsibility for the general management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the office of chief executive or which are
delegated to him or her by the Board of Directors. He or she shall have power to
sign all contracts
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and other instruments of the Corporation which are authorized and shall have
general supervision and direction of all of the other officers, employees and
agents of the Corporation.
Section 4. President. The President shall be the chief operating officer
of the Corporation. Subject to the provisions of these by-laws and to the
direction of the Board of Directors, he or she shall have the responsibility for
the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief operating officer or which are delegated to him
or her by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation except for the Chief Executive
Officer.
Section 5. Vice President. Each Vice President shall have such powers
and duties as may be delegated to him or her by the Board of Directors. One Vice
President shall be designated by the Board to perform the duties and exercise
the powers of the President in the event of the President's absence or
disability.
Section 6. Treasurer. The Treasurer shall have the responsibility for
maintaining the financial records of the Corporation and shall have custody of
all monies and securities of the Corporation. He or she shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all such transactions and of the financial
condition of the Corporation. The Treasurer shall also have the power to sign
all stock certificates of the Corporation, and shall perform such other duties
as the Board of Directors may from time to time prescribe.
Section 7. Secretary. The Secretary shall issue all authorized notices
for, and shall keep minutes of all meetings of the stockholders and the Board of
Directors. He or she shall have charge of the corporate books, shall have the
power to sign all stock certificates of the Corporation and shall perform such
other duties as the Board of Directors may from time to time prescribe.
Section 8. Delegation of Authority. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 9. Removal. Any officer of the Corporation may be removed at any
time, with or without cause, by the Board of Directors.
Section 10. Action With Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
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ARTICLE V
STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate signed by, or in the name of the Corporation by, the Chairman or
Vice-Chairman of the Board of Directors, or the President or a Vice President,
and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant
Treasurer, certifying the number of shares owned by him or her. Any of or all
the signatures on the certificate may be facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of this Article V of these by-laws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 3. Record Date. The Board of Directors may fix a record date,
which shall not be more than sixty (60) nor fewer than ten (10) days before the
date of any meeting of stockholders, nor more than sixty (60) days prior to the
time for the other action hereinafter described, as of which there shall be
determined the stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to express consent to
corporate action in writing without a meeting; to receive payment of any
dividend or other distribution or allotment of any rights; or to exercise any
rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and registration
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
ARTICLE VI
NOTICES
Section 1. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid telegram
or mailgram. Any such notice shall be addressed to such stockholder, director,
officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received by such
stockholder, director, officer, employee or agent, or by any
11
<PAGE> 12
person accepting such notice on behalf of such person, if hand delivered, or
dispatched, if delivered through the mails or by telegram or mailgram, shall be
the time of the giving of the notice.
Section 2. Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these by-laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a suitable
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or Assistant Treasurer.
Section 3. Reliance Phone Books, Reports and Records. Each director,
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these by-laws
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a
12
<PAGE> 13
person of whom he or she is the legal representative, is or was a director,
officer or employee of the Corporation or is or was serving at the request of
the Corporation as a director, officer or employee of another corporation, or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer or employee or in
any other capacity while serving as a director, officer or employee, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by Delaware Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said Law
permitted the Corporation to provide prior to such amendment) against all
expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties, amounts paid or to be paid in settlement and amounts
expended in seeking indemnification granted to such person under applicable law,
this bylaw or any agreement with the Corporation) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer or employee and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in Section 2 of this Article VIII,
the Corporation shall indemnify any such person seeking indemnity in connection
with an action, suit or proceeding (or part thereof) initiated by such person
only if such action, suit or proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. Such right shall be a contract right and
shall include the right to be paid by the Corporation expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law then so requires, the
payment of such expenses incurred by a director or officer of the Corporation in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of such proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this Section or
otherwise.
Any indemnification as provided herein (unless ordered by a court) shall
be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of a director, officer, employee or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of Delaware. Such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
Section 2. Right of Claimant to Bring Suit. If a claim under Section 1
is not paid in full by the Corporation within twenty (20) days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if such suit is not frivolous or brought in bad faith, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any
13
<PAGE> 14
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to this Corporation) that the claimant has not met the
standards of conduct which make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not met the applicable standard of
conduct.
Section 3. Non-Exclusivity of Rights. The rights conferred on any person
in Sections 1 and 2 shall not be exclusive of any other right which such persons
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
Section 4. Indemnification Contracts. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VIII.
Section 5. Insurance. The Corporation shall maintain insurance to the
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
Section 6. Effect of Amendment. Any amendment, repeal or modification of
any provision of this Article VIII by the stockholders and the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification.
ARTICLE IX
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, the Board of
Directors is expressly empowered to adopt, amend or repeal By-Laws of the
Corporation. Any adoption, amendment or repeal of By-Laws of the Corporation by
the Board of Directors shall require the approval of a majority of the total
number of authorized directors (whether or not there exist any vacancies in
14
<PAGE> 15
previously authorized directorships at the time any resolution providing for
adoption, amendment or repeal is presented to the Board). The stockholders shall
also have power to adopt, amend or repeal the By-Laws of the Corporation. In
addition to any vote of the holders of any class or series of stock of this
Corporation required by law or by these By-Laws, the affirmative vote of the
holders of at least 66 2/3 percent of the voting power of all of the
then-outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to adopt, amend or repeal any provisions of the By-Laws of the
Corporation.
15
<PAGE> 16
CERTIFICATE OF SECRETARY
I, Prabhat K. Goyal, hereby certify that:
1. That I am the duly elected and acting Secretary of Networks
Associates, Inc., a Delaware corporation (the "Corporation"); and
2. That the foregoing Bylaws comprising fifteen (15) pages constitute
the Restated Bylaws of the Corporation.
IN WITNESS WHEREOF, I have hereunder subscribed my name this March 18,
1998.
/s/ Prabhat K. Goyal
-----------------------------
Prabhat K. Goyal
Secretary
<PAGE> 1
================================================================================
EXHIBIT 4.6
Zero Coupon Convertible Subordinated Debentures due 2018
Networks Associates, Inc.
Issuer
------------
INDENTURE
------------
Dated as of February 13, 1998
State Street Bank and Trust Company of California, N.A.,
Trustee
================================================================================
<PAGE> 2
CROSS REFERENCE TABLE*
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- ------- -------
<S> <C>
310(a)(1)........................................................ 7.10
(a)(2)..................................................... 7.10
(a)(3)..................................................... N.A.**
(a)(4)..................................................... N.A.
(b)...................................................7.08; 7.10
(c)........................................................ N.A.
3.11(a)........................................................ 7.11
(b)....................................................... 7.11
(c)....................................................... N.A.
3.12(a)....................................................... 2.05
(b).......................................................12.03
(c).......................................................12.03
(d)....................................................... 7.06
3.13(a)....................................................... 7.06
(b)(1).................................................... N.A.
(b)(2).................................................... 7.06
(c).......................................................12.02
(d)....................................................... 7.06
3.14(a)..................................................4.02;12.02
(b)....................................................... N.A.
(c)(1)....................................................12.04
(c)(2)....................................................12.04
(c)(3).................................................... N.A.
(d)....................................................... N.A.
(e).......................................................12.05
(f)....................................................... 4.03
3.15(a)....................................................... 7.01
(b)..................................................7.05;12.02
(c)....................................................... 7.01
(d)....................................................... 7.01
(e)....................................................... 6.11
3.16(a) (last sentence)....................................... 2.08
(a)(1)(A)................................................. 6.05
(a)(1)(B)................................................. 6.04
(a)(2).................................................... N.A.
(b)....................................................... 6.07
3.17(a)(1).................................................... 6.08
(a)(2).................................................... 6.09
(b)....................................................... 2.04
3.18(a). .....................................................12.01
</TABLE>
* Note: This Cross Reference Table shall not, for any purpose, be
deemed to be part of the Indenture
** Note: N.A. means Not Applicable
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<PAGE> 3
TABLE OF CONTENTS(1)
PAGE
----
ARTICLE 1 - DEFINITIONS AND INCORPORATION BY REFERENCE.........................1
Section 1.01. Definitions...................................................1
Section 1.02. Other Definitions.............................................8
Section 1.03. Incorporation by Reference of Trust Indenture Act.............9
Section 1.04. Rules of Construction.........................................9
ARTICLE 2 - THE SECURITIES.....................................................9
Section 2.01. Form and Dating...............................................9
Section 2.02. Execution and Authentication.................................10
Section 2.03. Registrar, Paying Agent and Conversion Agent.................10
Section 2.04. Paying Agent to Hold Money and Securities in Trust...........11
Section 2.05. Securityholder Lists.........................................11
Section 2.06. Exchange and Registration of Transfer of Securities;
Restrictions on Transfers; Depositary......................11
Section 2.07. Replacement Securities.......................................18
Section 2.08. Outstanding Securities; Determinations of Holders' Action....18
Section 2.09. Temporary Securities.........................................19
Section 2.10. Cancellation.................................................19
Section 2.11. Persons Deemed Owners........................................20
ARTICLE 3 - REDEMPTION AND PURCHASES..........................................20
Section 3.01. Right to Redeem; Notices to Trustee..........................20
Section 3.02. Selection of Securities to be Redeemed.......................20
Section 3.03. Notice of Redemption.........................................21
Section 3.04. Effect of Notice of Redemption...............................22
Section 3.05. Deposit of Redemption Price..................................22
Section 3.06. Securities Redeemed in Part..................................22
Section 3.07. Conversion Arrangement on Call for Redemption................22
Section 3.08. Purchase of Securities at Option of the Holder...............23
Section 3.09. Redemption at Option of the Holder upon a
Fundamental Change.........................................29
Section 3.10. Effect of Purchase Notice or Fundamental Change
Redemption Notice..........................................30
Section 3.11. Deposit of Purchase Price or Fundamental Change
Redemption Price...........................................31
Section 3.12. Securities Purchased in Part.................................31
Section 3.13. Covenant to Comply with Securities Laws upon
Purchase of Securities.....................................31
Section 3.14. Repayment to the Company.....................................31
- --------
(1) This Table of Contents shall not, for any purpose, be deemed to
be part of the Indenture.
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<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 4 - COVENANTS...............................................32
Section 4.01. Payment of Securities...............................32
Section 4.02. Financial Information; SEC Reports..................32
Section 4.03. Compliance Certificate..............................33
Section 4.04. Further Instruments and Acts........................33
Section 4.05. Maintenance of Office or Agency.....................33
Section 4.06. Existence...........................................34
Section 4.07. Maintenance of Properties...........................34
Section 4.08. Payment of Taxes and Other Claims...................34
ARTICLE 5 - SUCCESSOR CORPORATION...................................34
Section 5.01. When the Company May Merge or Transfer Assets.......34
ARTICLE 6 - DEFAULTS AND REMEDIES...................................36
Section 6.01. Events of Default...................................36
Section 6.02. Acceleration........................................37
Section 6.03. Other Remedies......................................37
Section 6.04. Waiver of Past Defaults.............................37
Section 6.05. Control by Majority.................................37
Section 6.06. Limitation on Suits.................................38
Section 6.07. Rights of Holders to Receive Payment................38
Section 6.08. Collection Suit by Trustee..........................38
Section 6.09. Trustee May File Proofs of Claim....................38
Section 6.10. Priorities..........................................39
Section 6.11. Undertaking for Costs...............................40
Section 6.12. Waiver of Stay, Extension or Usury Laws.............40
ARTICLE 7 - TRUSTEE.................................................40
Section 7.01. Duties of Trustee...................................40
Section 7.02. Rights of Trustee...................................42
Section 7.03. Individual Rights of Trustee........................42
Section 7.04. Trustee's Disclaimer................................42
Section 7.05. Notice of Defaults..................................42
Section 7.06. Reports.............................................43
Section 7.07. Compensation and Indemnity..........................43
Section 7.08. Replacement of Trustee..............................44
</TABLE>
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<PAGE> 5
TABLE OF CONTENTS
PAGE
----
Section 7.09. Successor Trustee by Merger.... .............................44
Section 7.10. Eligibility; Disqualification.......... .....................44
Section 7.11. Preferential Collection of Claims Against Company............45
ARTICLE 8 - DISCHARGE OF INDENTURE............................................45
Section 8.01. Discharge of Liability on Securities.........................45
Section 8.02. Repayment to the Company.....................................45
ARTICLE 9 - AMENDMENTS........................................................45
Section 9.01. Without Consent of Holders...................................45
Section 9.02. With Consent of Holders......................................46
Section 9.03. Compliance with Trust Indenture Act..........................47
Section 9.04. Revocation and Effect of Consents, Waivers and Actions.......47
Section 9.05. Notation on or Exchange of Securities........................47
Section 9.06. Trustee to Sign Supplemental Indentures......................48
Section 9.07. Effect of Supplemental Indentures............................48
ARTICLE 10 - SUBORDINATION....................................................48
Section 10.01. Agreement of Subordination...................................48
Section 10.02. Payments to Holders..........................................48
Section 10.03. Subrogation of Securities....................................51
Section 10.04. Authorization by Holders.....................................52
Section 10.05. Notice to Trustee............................................52
Section 10.06. Trustee's Relation to Senior Indebtedness....................53
Section 10.07. No Impairment of Subordination...............................54
Section 10.08. Reliance by Holders of Senior Indebtedness on
Subordination Provisions...................................54
Section 10.09. Reinstatement of Subordination...............................54
Section 10.10. Permitted Payments...........................................54
Section 10.11. Article Applicable to Paying Agents..........................55
Section 10.12. Treatment of Conversion Payments.............................55
Section 10.13. Reliance on Judicial Order or Certificate of
Liquidating Agent..........................................55
Section 10.14. Holders of Senior Indebtedness May File Proofs of Claim......55
ARTICLE 11 - CONVERSION.......................................................56
Section 11.01. Conversion Privilege.........................................56
Section 11.02. Conversion Procedure.........................................56
Section 11.03. Fractional Shares............................................57
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<PAGE> 6
TABLE OF CONTENTS
PAGE
----
Section 11.04. Taxes on Conversion..........................................57
Section 11.05. Company to Provide Stock.....................................57
Section 11.06. Adjustment for Change in Capital Stock.......................58
Section 11.07. Adjustment for Rights Issue..................................58
Section 11.08. Adjustment for Other Distributions...........................59
Section 11.09. When Adjustment May be Deferred..............................62
Section 11.10. When No Adjustment Required..................................62
Section 11.11. Notice of Adjustment.........................................62
Section 11.12. Voluntary Increase...........................................62
Section 11.13. Notice of Certain Transactions...............................63
Section 11.14. Effect of Reclassification, Consolidation, Merger or Sale....63
Section 11.15. Company Determination Final..................................64
Section 11.16. Trustee's Adjustment Disclaimer..............................64
Section 11.17. Simultaneous Adjustments.....................................64
Section 11.18. Successive Adjustments.......................................64
Section 11.19. Rights Issued in Respect of Common Stock Issued
Upon Conversion............................................64
Section 11.20. General Considerations.......................................65
ARTICLE 12 - MISCELLANEOUS....................................................65
Section 12.01. Trust Indenture Act..........................................65
Section 12.02. Notices......................................................65
Section 12.03. Communication by Holders with other Holders..................66
Section 12.04. Certificate and Opinion as to Conditions Precedent...........66
Section 12.05. Statements Required in Certificate or Opinion................67
Section 12.06. Separability Clause..........................................67
Section 12.07. Rules by Trustee, Paying Agent, Conversion Agent
and Registrar..............................................67
Section 12.08. Governing Law................................................67
Section 12.09. No Recourse Against Others...................................67
Section 12.10. Successors...................................................68
Section 12.11. Multiple Originals...........................................68
EXHIBIT A--Form of Security
-iv-
<PAGE> 7
INDENTURE, dated as of February 13, 1998, between Networks
Associates, Inc., a Delaware corporation (the "Company"), and State Street Bank
and Trust Company of California, N.A., a national banking association organized
and existing under the laws of the United States of America (the "Trustee").
Each party agrees as follows for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Company's Zero Coupon
Convertible Subordinated Debentures due 2018:
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Applicable Price" means (i) in the event of a Fundamental Change in
which the holders of the Common Stock receive only Cash, the amount of Cash
received by the holder of one share of Common Stock and (ii) in the event of any
other Fundamental Change, the average of the last reported sales price for the
Common Stock (determined as set forth in the definition of Current Market Price)
during the ten Trading Days prior to the record date for the determination of
the holders of Common Stock entitled to receive Cash, securities, property or
other assets in connection with such Fundamental Change, or, if there is no such
record date, the date upon which the holders of Common Stock shall have the
right to receive such Cash, securities, property or other assets in connection
with a Fundamental Change.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of such board.
"Business Day" means each day of the year on which banking
institutions are not required or authorized to close in The City of New York or
the city in which the Corporate Trust Office is located.
"Common Stock" means any stock of any class of the Company which has
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company
and which is not subject to redemption by the Company. Subject to the provisions
of Section 11.14, however, shares issuable upon conversion of the
<PAGE> 8
Securities shall include only shares of Common Stock, par value of $.01 per
share, of the Company as it exists on the date of this Indenture or shares of
any class or classes resulting from any reclassification or reclassifications
thereof and which have no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company and which are not subject to redemption by the
Company; provided that if at any time there shall be more than one such
resulting class, the shares of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of shares of
all such classes resulting from all such reclassifications.
"Company" means the party named as the "Company" in the first
paragraph of this Indenture until a successor replaces it pursuant to the
applicable provisions of this Indenture and, thereafter, shall mean such
successor. The foregoing sentence shall likewise apply to any subsequent such
successor or successors.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, a Vice Chairman,
its President or a Vice President, and by its Treasurer, an Assistant Treasurer,
its Secretary or an Assistant Secretary, and delivered to the Trustee.
"Conversion Rate" shall have the meaning specified in Section 11.01.
"Corporate Trust Office" or other similar term, shall mean the
principal office of the Trustee at which at any particular time its corporate
trust business shall be principally administered, which office is, at the date
as of which this Indenture is dated, located at 633 West 5th Street, 12th Floor,
Los Angeles, California 90071, Attention: Corporate Trust Department (Networks
Associates, Inc., Zero Coupon Convertible Subordinated Debentures due 2018).
"Current Market Price" per share of the Common Stock on any date of
determination means the average of the daily closing prices of the Common Stock
on the Nasdaq National Market for the 5 consecutive trading days ending on and
including such date of determination. The last reported sale price for each day
shall be (i) if the Common Stock is listed on the Nasdaq National Market, the
last reported sale price of Common Stock on the Nasdaq National Market, or any
similar system of automated dissemination of quotations of securities prices
then in common use, if so quoted, (ii) if the Common Stock is not listed or
admitted for trading as described in clause (i), the last reported sale price of
the Common Stock on the NYSE or if the Common Stock is listed or admitted for
trading on any other national securities exchange, the last sale price, or the
closing bid price if no sale occurred, of the Common Stock on the principal
securities exchange on which the Common Stock is listed, or (iii) if not quoted
or listed as described in clauses (i) or (ii), the mean between the high bid and
low asked quotations for Common Stock as reported by the National Quotation
Bureau Incorporated if at least two securities dealers have inserted both bid
and asked quotations for the Common Stock on at least 5 of the 10 preceding
Trading Days. If none of the conditions set forth above is met, the last
reported sale price of Common Stock on any day or the average of such last
-2-
<PAGE> 9
reported sale prices for any period shall be the fair market value of the Common
Stock as determined by a member firm of the NYSE selected by the Company.
"Custodian" shall mean State Street Bank and Trust Company of
California, N.A., as custodian with respect to the Securities in global form, or
any successor entity thereto.
"Default" means any event which is, or after notice or passage of
time or both would be, an Event of Default.
"Depositary" means, with respect to the Securities issuable or issued
in whole or in part in global form, the Person specified in Section 2.06 as the
Depositary with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provisions of this
Indenture, and thereafter, "Depositary" shall mean or include such successor.
"Designated Senior Indebtedness" means any particular Senior
Indebtedness in which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such Senior Indebtedness shall be
"Designated Senior Indebtedness" for purposes of this Indenture; provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness. If any payment made to any holder of any
Designated Senior Indebtedness or its Representative with respect to such
Designated Senior Indebtedness is rescinded or must otherwise be returned by
such holder or Representative upon the insolvency, bankruptcy or reorganization
of the Company or otherwise, the reinstated Indebtedness of the Company arising
as a result of such rescission or return shall constitute Designated Senior
Indebtedness effective as of the date of such rescission or return.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
"Fundamental Change" means the occurrence of any transaction or event
in connection with which all or substantially all the Common Stock shall be
exchanged for, converted into, acquired for or constitute solely the right to
receive (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) consideration which is not all or substantially all common stock
listed (or, upon consummation of such transaction or event, will be listed) on a
United States national securities exchange or approved for quotation in the
Nasdaq National Market or any similar system of automated dissemination of
quotations of securities prices.
"Holder" or "Securityholder" means a Person in whose name a Security
is registered on the Registrar's books.
"Indebtedness" means, with respect to any Person, and without
duplication, (a) all indebtedness, obligations and other liabilities (contingent
or otherwise) of such Person for borrowed money (including obligations of the
Company in respect of overdrafts, foreign exchange contracts, currency
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<PAGE> 10
exchange agreements, interest rate protection agreements, and any loans or
advances from banks, whether or not evidenced by notes or similar instruments)
or evidenced by bonds, debentures, notes or similar instruments (whether or not
the recourse of the lender is to the whole of the assets of such Person or to
only a portion thereof), (b) all reimbursement obligations and other liabilities
(contingent or otherwise) of such Person with respect to letters of credit, bank
guarantees or bankers' acceptances, (c) all obligations and liabilities
(contingent or otherwise) in respect of leases of such Person (i) required, in
conformity with generally accepted accounting principles, to be accounted for as
capitalized lease obligations on the balance sheet of such Person, or (ii)
required, in conformity with generally accepted accounting principles, to be
accounted for as an operating lease, provided either (A) such operating lease
requires, at the end of the term thereof, that such Person make any payment
other than accrued periodic rent in the event that such Person does not acquire
the leased real property and related fixtures subject to such lease, or (B) such
Person has an option to acquire the leased real property and related fixtures,
whether such option is exercisable at any time or under specific circumstances,
(d) all obligations of such Person (contingent or otherwise) with respect to an
interest rate swap, cap or collar agreement or other similar instrument or
agreement, (e) all direct or indirect guaranties or similar agreements by such
Person in respect of, and obligations or liabilities (contingent or otherwise)
of such Person to purchase or otherwise acquire or otherwise assure a creditor
against loss in respect of indebtedness, obligations or liabilities of another
Person of the kind described in clauses (a) through (d), (f) any indebtedness or
other obligations described in clauses (a) through (d) secured by any mortgage,
pledge, lien or other encumbrance existing on property which is owned or held by
such Person, regardless of whether the indebtedness or other obligation secured
thereby shall have been assumed by such Person and (g) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to, any indebtedness, obligation or liability of the kind described
in clauses (a) through (f).
"Indenture" means this Indenture, as amended or supplemented from
time to time in accordance with the terms hereof.
"Initial Purchaser" means Morgan Stanley & Co. Incorporated.
"Issue Date" of any Security means the date on which the Security was
originally issued or deemed issued as set forth on the face of the Security.
"Issue Price" of any Security means, in connection with the original
issuance of such Security, the initial issue price at which the Security is
issued as set forth on the face of the Security.
"Legal Holiday" is any day other than a Business Day. If any
specified date (including a date for giving notice) is a Legal Holiday, the
action shall be taken on the next succeeding date that is not a Legal Holiday,
and to the extent applicable no Original Issue Discount or interest, if any,
shall accrue for the intervening period.
"Liquidated Damages" shall have the meaning specified in the
Registration Rights Agreement.
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<PAGE> 11
"Nasdaq National Market" means the electronic inter-dealer quotation
system operated by NASDAQ Stock Market, Inc., a subsidiary of the National
Association of Securities Dealers, Inc.
"NYSE" means The New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, any Vice Chairman, the
President, any Vice President, the Treasurer or the Secretary or any Assistant
Treasurer or Assistant Secretary of the Company.
"Officers' Certificate" means a written certificate containing the
information specified in Sections 12.04 and 12.05, signed in the name of the
Company by its Chairman of the Board, a Vice Chairman, its President or a Vice
President, and by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion containing the
information specified in Sections 12.04 and 12.05, from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of, or counsel to, the
Company or the Trustee.
"Original Issue Discount" of any Security means the difference
between the Issue Price and the Principal Amount of the Security as set forth on
the face of the Security. For purposes of this Indenture and the Securities,
accrual of Original Issue Discount shall be calculated on the basis of a 360 day
year of twelve 30 day months.
"Payment Blockage Notice" has the meaning specified in Section 10.02.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
"Portal Market" means The Portal Market operated by the National
Association of Securities Dealers, Inc. or any successor thereto.
"Principal" or "Principal Amount" of a Security means the Principal
Amount as set forth on the face of the Security.
"QIB" means a "qualified institutional buyer" as defined in Rule
144A.
"Redemption Date" shall mean a date specified for redemption of the
Securities (other than redemption upon a Fundamental Change at the option of the
Securityholder) in accordance with the terms of the Securities and Section 3.01
of this Indenture.
"Redemption Price" shall have the meaning set forth in paragraph 5 of
the Securities.
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<PAGE> 12
"Reference Market Price" shall initially mean $38.17 and in the event
of any adjustment to the Conversion Rate pursuant to Article 11, the Reference
Market Price shall be adjusted to equal the initial Reference Market Price
multiplied by a fraction the numerator of which is the Conversion Rate specified
in the form of Security attached hereto as Exhibit A (without regard to any
adjustment thereto), and the denominator of which is the Conversion Rate
following such adjustment.
"Registration Rights Agreement" means that certain Registration
Rights Agreement, dated as of the date hereof, between the Company and the
Initial Purchaser.
"Regulation S" means Regulation S as promulgated under the Securities
Act, or any successor rule.
"Representative" means (a) the indenture trustee or other trustee,
agent or representative for any Senior Indebtedness or (b) with respect to any
Senior Indebtedness that does not have any such trustee, agent or other
representative, (i) in the case of such Senior Indebtedness issued pursuant to
an agreement providing for voting arrangements as among the holders or owners of
such Senior Indebtedness, any holder or owner of such Senior Indebtedness acting
with the consent of the required Persons necessary to bind such holders or
owners of such Senior Indebtedness and (ii) in the case of all other such Senior
Indebtedness, the holder or owner of such Senior Indebtedness.
"Rule 144A" means Rule 144A as promulgated under the Securities Act,
or any successor rule.
"Rule 144(k)" means Rule 144(k) as promulgated under the Securities
Act, or any successor rule.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Zero Coupon Convertible Subordinated
Debentures due 2018.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"Securityholder" or "Holder" means a Person in whose name a Security
is registered on the Registrar's books.
"Senior Indebtedness" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding), original issue
discount, rent and end of term payments payable on or in connection with, and,
to the extent not included in the foregoing, all amounts payable as fees, costs,
expenses, liquidated damages, indemnities, repurchase and other put obligations
and other amounts to the extent accrued or due on or in connection with,
Indebtedness of the Company, whether outstanding on the date of this Indenture
or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by
the Company (including all deferrals, renewals, extensions or refundings of, or
amendments,
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<PAGE> 13
modifications or supplements to, the foregoing). Notwithstanding the foregoing,
the term Senior Indebtedness shall not include (i) any Indebtedness of the
Company that is not secured, (ii) Indebtedness evidenced by the Securities,
(iii) Indebtedness of the Company to any subsidiary of the Company, a majority
of the voting stock of which is owned, directly or indirectly, by the Company,
(iv) accounts payable or other indebtedness to trade creditors created or
assumed by the Company in the ordinary course of business and (v) any particular
Indebtedness in which the instrument creating or evidencing the same or the
assumption or guarantee thereof expressly provides that such Indebtedness shall
not be senior in right of payment to, or is pari passu with, or is subordinated
or junior to, the Securities. If any payment made to any holder of any Senior
Indebtedness or its Representative with respect to such Senior Indebtedness is
rescinded or must otherwise be returned by such holder or Representative upon
the insolvency, bankruptcy or reorganization of the Company or otherwise, the
reinstated Indebtedness of the Company arising as a result of such rescission or
return shall constitute Senior Indebtedness effective as of the date of such
rescission or return.
"Stated Maturity", when used with respect to any Security, means the
date specified in such Security as the fixed date on which an amount equal to
the Principal of such Security is due and payable.
"Significant Subsidiary" means, with respect to any Person, a
Subsidiary of such Person organized under the laws of the United States of
America, any state thereof, or the District of Columbia that would constitute a
"significant subsidiary" as such term is defined under Rule 1-02 of Regulation
S-X of the Securities and Exchange Commission.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of capital stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or managing
general partner of which is such Person or a subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
subsidiaries of such Person (or any combination thereof).
"TIA" means the Trust Indenture Act of 1939, as amended, as in effect
on the date of this Indenture, except as provided in Section 9.03.
"Trading Day" means a day during which trading in securities
generally occurs on the Nasdaq National Market or, if the applicable security is
not quoted on the Nasdaq National Market, on the NYSE, or if the applicable
security is not listed on the NYSE, on the principal other national or regional
securities exchange on which the applicable security is then listed or, if the
applicable security is not listed on a national or regional securities exchange,
on the principal other market on which the applicable security is then traded.
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<PAGE> 14
"Trust Officer" means any officer of the Trustee assigned by the
Trustee to administer its corporate trust matters.
"Trustee" means the party named as the "Trustee" in the first
paragraph of this Indenture until a successor replaces it pursuant to the
applicable provisions of this Indenture and, thereafter, shall mean such
successor. The foregoing sentence shall likewise apply to any subsequent such
successor or successors.
"U.S. Person" shall have the meaning set forth in Regulation S.
"Voting Stock" shall mean stock of any class or classes, however
designated, having ordinary voting power for the election of a majority of the
board of directors of a corporation, other than stock having such power only by
reason of the happening of a contingency.
SECTION 1.02. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
------------------------------------------- -----------
<S> <C>
"Bankruptcy Law"........................... 6.01
"Cash"..................................... 3.08(b)
"Company Notice"........................... 3.08(e)
"Company Notice Date"...................... 3.08(c)
"Conversion Agent"......................... 2.03
"Expiration Time".......................... 11.08(c)
"Event of Default"......................... 6.01
"Fundamental Change Redemption Date"....... 3.09(a)
"Fundamental Change Redemption Notice"..... 3.09(a)
"Fundamental Change Redemption Price"...... 3.09(a)
"Market Price"............................. 3.08(d)
"Notice of Default"........................ 6.01
"Over-allotment Option".................... 2.02
"Paying Agent"............................. 2.03
"Purchase Date"............................ 3.08(a)
"Purchase Notice".......................... 3.08(a)
"Purchase Price"........................... 3.08(a)
"Purchased Shares"......................... 11.08(c)
"Registrar"................................ 2.03
"Sale Price"............................... 3.08(d)
"Tender Expiration Time"................... 11.08(d)
"Tender Purchased Shares".................. 11.08(d)
</TABLE>
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<PAGE> 15
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"Indenture Securities" means the Securities.
"Indenture Security Holder" means a Securityholder.
"Indenture to be Qualified" means this Indenture.
"Indenture Trustee" or "Institutional Trustee" means the Trustee.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rules have
the meanings assigned to them by such definitions.
SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with generally accepted accounting
principles as in effect from time to time;
(3) "or" is not exclusive;
(4) "including" means including, without limitation; and
(5) words in the singular include the plural, and words in
the plural include the singular.
ARTICLE 2
THE SECURITIES
SECTION 2.01. FORM AND DATING. The Securities and the Trustee's
certificate of authentication for the Securities shall be substantially in the
form of Exhibit A, which is a part of this Indenture. The Securities may have
notations, legends or endorsements required by law, stock exchange rule or usage
(provided that any such notation, legend or endorsement required by usage is in
a form acceptable to the Company). The Company shall provide any such notations,
legends or endorsements to the Trustee in writing. Each Security shall be dated
the date of its authentication.
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<PAGE> 16
Any Security in global form shall represent such of the outstanding
Securities as shall be specified therein and shall provide that it shall
represent the aggregate amount of outstanding Securities from time to time
endorsed thereon and that the aggregate amount of outstanding Securities
represented thereby may from time to time be increased or reduced to reflect
transfers or exchanges permitted hereby. Any endorsement of a Security in global
form to reflect the amount of any increase or decrease in the amount of
outstanding Security represented thereby shall be made by the Trustee or the
Custodian, at the direction of the Trustee, in such manner and upon instructions
given by the Holder of such Security in accordance with this Indenture. Payment
of Principal Amount, Issue Price, accrued Original Issue Discount, accrued
Liquidated Damages, if any, Redemption Price, Purchase Price, Fundamental Change
Redemption Price or interest, if any, on any Security in global form shall be
made to the Holder of such Security.
SECTION 2.02. EXECUTION AND AUTHENTICATION. The Securities shall be
executed on behalf of the Company by its Chairman of the Board, one of its Vice
Chairmen, its President or one of its Vice Presidents, under its corporate seal
reproduced thereon and attested by its Treasurer or Secretary or one of its
Assistant Treasurers or one of its Assistant Secretaries. The signature of any
of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper Officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of authentication of such Securities.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature of an authorized officer, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder.
The Trustee shall authenticate and deliver Securities for original
issue in an aggregate Principal Amount of up to $885,500,000 upon a Company
Order without any further action by the Company. The aggregate Principal Amount
of Securities outstanding at any time may not exceed the amount set forth in the
foregoing sentence, subject to the proviso set forth therein, except as provided
in Section 2.07.
SECTION 2.03. REGISTRAR, PAYING AGENT AND CONVERSION AGENT. The
Company shall maintain an office or agency where Securities may be presented for
registration of transfer or for exchange ("Registrar"), an office or agency
where Securities may be presented for purchase or payment ("Paying Agent") and
an office or agency where Securities may be presented for conversion into Common
Stock ("Conversion Agent"). The Registrar shall keep a register of the
Securities and of their transfer and exchange. The Company may have one or more
co-registrars, one or more additional paying agents and one or more additional
conversion agents. The term Paying Agent includes any additional paying agent.
The term Conversion Agent includes any additional conversion agent, including
any named pursuant to Section 4.05.
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<PAGE> 17
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent, Conversion Agent or co-registrar (if not the Trustee or
an Affiliate of the Trustee). The agreement shall implement the provisions of
this Indenture that relate to such agent and the Security. The Company shall
notify the Trustee of the name and address of any such agent. If the Company
fails to maintain a Registrar, Paying Agent or Conversion Agent, the Trustee
shall act as such and shall be entitled to appropriate compensation therefor
pursuant to Section 7.07. The Company or an Affiliate of the Company may act as
Paying Agent, Registrar, Conversion Agent or co-registrar.
The Company initially appoints the Trustee as Registrar, Conversion
Agent and Paying Agent in connection with the Securities.
SECTION 2.04. PAYING AGENT TO HOLD MONEY AND SECURITIES IN TRUST.
Except as otherwise provided herein, prior to or on each due date of payments in
respect of any Security, the Company shall deposit with the Paying Agent a sum
of money or securities sufficient to make such payments when such payments are
due. The Company shall require the Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all money and securities held by the Paying Agent for the
making of payments in respect of the Securities and shall notify the Trustee of
any default by the Company in making any such payment. At any time during the
continuance of any such default, the Paying Agent shall, upon the written
request of the Trustee, forthwith pay to the Trustee all money and securities so
held in trust. If the Company or an Affiliate of the Company acts as Paying
Agent, it shall segregate the money and securities held by it as Paying Agent
and hold it as a separate trust fund. The Company at any time may require the
Paying Agent to pay all money and securities held by it to the Trustee and to
account for any funds and securities disbursed by it. Upon doing so, the Paying
Agent shall have no further liability for the money or securities.
SECTION 2.05. SECURITYHOLDER LISTS. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Holders. If the Trustee is not the Registrar, the
Company shall cause to be furnished to the Trustee at least semiannually on
February 13 and August 13 a listing of Holders dated within 15 days of the date
on which the list is furnished and at such other times as the Trustee may
request in writing a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of Holders.
SECTION 2.06. EXCHANGE AND REGISTRATION OF TRANSFER OF SECURITIES;
RESTRICTIONS ON TRANSFERS; DEPOSITARY.
(a) Upon surrender for registration of transfer of any Security at
any office or agency of the Company designated as Registrar or co-registrar
pursuant to Section 2.03 and satisfaction of the requirements for such transfer
set forth in this Section 2.06, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Securities of any authorized denominations and of a
like aggregate principal amount and bearing such restrictive legends as may be
required by this Indenture.
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<PAGE> 18
Securities may be exchanged for a like aggregate principal amount of
Securities of other authorized denominations. Securities to be exchanged shall
be surrendered at any office or agency to be maintained by the Company
designated as Registrar or co-registrar pursuant to Section 2.03 and the Company
shall execute and register and the Trustee shall authenticate and deliver in
exchange therefor the Security or Securities which the Securityholder making the
exchange shall be entitled to receive, bearing registration numbers not
contemporaneously outstanding.
All Securities presented for registration of transfer or for exchange
into like Securities, purchase, redemption or conversion into Common Stock or
payment shall (if so required by the Company, the Trustee, the Registrar or any
co-registrar) be duly endorsed by, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company and the Trustee,
duly executed by the Holder or such Holder's attorney duly authorized in
writing.
No service charge shall be charged to the Securityholder for any
exchange for like Securities or registration of transfer of Securities, but the
Company may require payment of a sum sufficient to cover any tax, assessments or
other governmental charges that may be imposed in connection therewith.
None of the Company, the Trustee, the Registrar or any co-registrar
shall be required to exchange for like Securities or register a transfer of (a)
any Securities for a period of 15 days next preceding any selection of
Securities to be redeemed, or (b) any Securities or portions thereof selected or
called for redemption, or (c) any Securities or portion thereof surrendered for
conversion into Common Stock, or (d) any Securities or portion thereof
surrendered for purchase or redemption (and not withdrawn) pursuant to Sections
3.08 or 3.09, respectively.
All Securities issued upon any transfer or exchange for like
Securities shall be valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture as the Securities
surrendered upon such exchange or transfer.
(b) So long as the Securities are eligible for book-entry settlement
with the Depositary (as defined below), or unless otherwise required by law, all
Securities that are so eligible may be represented by a Security in global form
registered in the name of the Depositary or the nominee of the Depositary,
except as otherwise specified below. The transfer and exchange of beneficial
interests in such Security in global form shall be effected through the
Depositary in accordance with this Indenture and the procedures of the
Depositary therefor.
Securities that upon initial issuance are beneficially owned by QIBs
or Persons that are not U.S. Persons will be represented by one or more
Securities in global form. Transfers of interests in a Security in global form
will be made in accordance with the standing instructions and procedures of the
Depository and its participants. The Trustee shall make appropriate endorsements
to reflect increases or decreases in the Principal Amounts of such Securities in
global form as set forth on the face of the Security to reflect any such
transfers.
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<PAGE> 19
Except as provided below, beneficial owners of a Security in global
form shall not be entitled to have certificates registered in their names, will
not receive or be entitled to receive physical delivery of certificates in
definitive form and will not be considered Holders of such Securities in global
form.
(c) So long as the Securities are eligible for book-entry settlement,
or unless otherwise required by law, upon any transfer of a definitive Security
to a QIB in accordance with Rule 144A or to a Person who is not a U.S. Person in
accordance with Regulation S, and upon receipt of the definitive Security or
Securities being so transferred, together with a certification, substantially in
the form of the reverse of the Security, from the transferor that the transfer
is being made in compliance with Rule 144A or Regulation S, as the case may be
(or other evidence satisfactory to the Trustee), the Trustee shall make an
endorsement on the Security in global form to reflect an increase in the
aggregate Principal Amount of the Securities represented by the Security in
global form, the Trustee shall cancel such Security or Securities in
certificated form in accordance with the standing instructions and procedures of
the Depositary and the aggregate principal amount of Securities represented by
the Security in global form to be increased accordingly; provided that no
definitive Security, or portion thereof, in respect of which the Company or an
Affiliate of the Company held any beneficial interest shall be included in such
Security in global form until such definitive Security is freely tradable in
accordance with Rule 144(k); provided further that the Trustee shall issue
Securities in definitive form upon any transfer of a beneficial interest in the
Security in global form to the Company or any Affiliate of the Company.
Any Security in global form may be endorsed with or have incorporated
in the text thereof such legends or recitals or changes not inconsistent with
the provisions of this Indenture as may be required by the Custodian, the
Depositary, by the NYSE or by the National Association of Securities Dealers,
Inc. in order for the Securities to be tradeable on The Portal Market or as may
be required for the Securities to be tradeable on any other market developed for
trading of securities pursuant to Rule 144A or required to comply with any
applicable law or any regulation thereunder or with the rules and regulations of
any securities exchange upon which the Securities may be listed or traded or to
conform with any usage with respect thereto, or to indicate any special
limitations or restrictions to which any particular Securities are subject.
(d) Every Security that bears or is required under this Section
2.06(d) to bear the legend set forth in this Section 2.06(d) (together with any
Common Stock issued upon conversion of the Securities and required to bear the
legend set forth in Section 2.06(e), collectively, the "Restricted Securities")
shall be subject to the restrictions on transfer set forth in this Section
2.06(d) (including those set forth in the legend set forth below) unless such
restrictions on transfer shall be waived by written consent of the Company, and
the holder of each such Restricted Security, by such Securityholder's acceptance
thereof, agrees to be bound by all such restrictions on transfer. As used in
Sections 2.06(d) and 2.06(e), the term "transfer" encompasses any sale, pledge,
transfer or other disposition whatsoever of any Restricted Security.
Until the expiration of the holding period applicable to sales
thereof under Rule 144(k) under the Securities Act (or any successor provision),
any certificate evidencing such Security (and all
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<PAGE> 20
securities issued in exchange therefor or substitution thereof, other than
Common Stock, if any, issued upon conversion therefor, which shall bear the
legend set forth in Section 2.06(e), if applicable) shall bear a legend in
substantially the following form, unless such Security has been sold pursuant to
a registration statement that has been declared effective under the Securities
Act (and which continues to be effective at the time of such transfer), or
unless otherwise agreed by the Company in writing, with written notice thereof
to the Trustee:
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT
(A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THE SECURITY EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION;
(2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF THE HOLDING
PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER
RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION),
RESELL OR OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY OR THE
COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH SECURITY WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT (A) TO NETWORKS ASSOCIATES, INC. OR ANY SUBSIDIARY THEREOF,
(B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO
BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3) PRIOR TO SUCH
TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(D) ABOVE), IT
WILL FURNISH TO STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA,
N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE TRUSTEE
MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (4) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED
HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. IN CONNECTION WITH ANY
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<PAGE> 21
TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED
HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION), THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON
THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT
THIS CERTIFICATE TO STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE).
IF THE PROPOSED TRANSFEREE IS A PURCHASER WHO IS NOT A U.S. PERSON,
THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO STATE STREET BANK
AND TRUST COMPANY OF CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR
TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE
TRANSFER OF THE SECURITY EVIDENCED HEREBY PURSUANT TO CLAUSE 2(D)
ABOVE OR UPON ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY UNDER
RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION).
Any Security (or security issued in exchange or substitution
therefor) as to which such restrictions on transfer shall have expired in
accordance with their terms or as to the conditions for removal of the foregoing
legend set forth therein have been satisfied may, upon surrender of such
Securities for exchange to the Registrar in accordance with the provisions of
this Section 2.06, be exchanged for a new Security or Securities, of like tenor
and aggregate principal amount, which shall not bear the restrictive legend
required by this Section 2.06(d).
Notwithstanding any other provisions of this Indenture (other than
the provisions set forth in this Section 2.06(d)), a Security in global form may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee to a successor Depositary or a nominee of such successor Depositary.
The Depositary shall be a clearing agency registered under the
Exchange Act. The Company initially appoints The Depository Trust Company to act
as Depositary with respect to the Securities in global form. Initially, a
Security in global form shall be issued to the Depositary, registered in the
name of Cede & Co., as the nominee of the Depositary, and deposited with the
Custodian for Cede & Co.
If at any time the Depositary for the Security in global form
notifies the Company that it is unwilling or unable to continue as Depositary
for such Security, the Company may appoint a successor Depositary with respect
to such Security. If a successor Depositary for the Security is
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not appointed by the Company within 90 days after the Company receives such
notice, the Company will execute, and the Trustee, upon receipt of an Officers'
Certificate for authentication and delivery of Securities, will authenticate and
deliver, Securities in certificated form, in an aggregate principal amount equal
to the principal amount of the Security in global form, in exchange for such
Security in global form.
Securities in certificated form issued in exchange for all or a part
of a Security in global form pursuant to this Section 2.06 shall be registered
in such names and in such authorized denominations as the Depositary, pursuant
to instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. Upon execution and authentication, the Trustee shall
deliver such Securities in certificated form to the Persons in whose names such
Securities in certificated form are so registered.
At such time as all interests in a Security in global form have been
redeemed, converted, exchanged, repurchased or canceled for Securities in
certificated form, or transferred to a transferee who receives Securities in
certificated form, such Security in global form shall be, upon receipt thereof,
canceled by the Trustee in accordance with standing procedures and instructions
existing between the Custodian and Depositary. At any time prior to such
cancellation, if any interest in a Security in global form is exchanged for
Securities in certificated form, redeemed, converted, exchanged, repurchased by
the Company pursuant to Article 3 or canceled, or transferred for part of a
Security in global form, the principal amount of such Security in global form
shall, in accordance with the standing procedures and instructions existing
between the Custodian and the Depositary, be reduced or increased, as the case
may be, and an endorsement shall be made on such Security in global form, by the
Trustee or the Custodian, at the direction of the Trustee, to reflect such
reduction or increase.
(e) Until the expiration of the holding period applicable to sales
thereof under Rule 144(k) under the Securities Act (or any successor provision),
any stock certificate representing Common Stock issued upon conversion of a
Security shall bear a legend in substantially the following form, unless such
Common Stock has been sold pursuant to a registration statement that has been
declared effective under the Securities Act (and which continues to be effective
at the time of such transfer) or such Common Stock has been issued upon
conversion of Securities that have been transferred pursuant to a registration
statement that has been declared effective under the Securities Act, or unless
otherwise agreed by the Company in writing with written notice thereof to the
transfer agent for the Common Stock:
THE COMMON STOCK EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY
STATE SECURITIES LAWS, AND, ACCOR DINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR ACCOUNT OR BENEFIT OF, U.S.
PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. THE HOLDER
HEREOF AGREES THAT UNTIL THE EXPIRATION OF THE HOLDING PERIOD
APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER RULE
144(K)
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<PAGE> 23
UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), (1) IT WILL
NOT RESELL OR OTHERWISE TRANSFER THE COMMON STOCK EVIDENCED HEREBY
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF,
U.S. PERSONS EXCEPT (A) TO NETWORKS ASSOCIATES, INC. OR ANY
SUBSIDIARY THEREOF, (B) TO A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN COMPLIANCE WITH
RULE 144A, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED
BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (D) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER
THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME
OF SUCH TRANSFER); (2) PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER
PURSUANT TO CLAUSE 1(D) ABOVE), IT WILL FURNISH TO BOSTON EQUISERVE,
AS TRANSFER AGENT (OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE),
SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE
TRANSFER AGENT MAY REASONABLE REQUIRE TO CONFIRM THAT SUCH TRANSFER
IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
(3) IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED
HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(D)
ABOVE) A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS
LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF THE COMMON
STOCK EVIDENCED HEREBY PURSUANT TO CLAUSE 1(D) ABOVE OR UPON ANY
TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY AFTER THE EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED
HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION).
Any such Common Stock as to which such restrictions on transfer shall
have expired in accordance with their terms or as to which the conditions for
removal of the foregoing legend set forth therein have been satisfied may, upon
surrender of the certificates representing such shares of Common Stock for
exchange in accordance with the procedures of the transfer agent for the Common
Stock, be exchanged for a new certificate or certificates for a like number of
shares of Common Stock, which shall not bear the restrictive legend required by
this Section 2.06(e).
(f) Any Security or Common Stock issued upon the conversion or
exchange of a Security that, prior to the expiration of the holding period
applicable to sales thereof under Rule 144(k) under the Securities Act (or any
successor provision), is purchased or owned by the Company or any Affiliate
thereof may not be resold by the Company or such Affiliate unless registered
under the Securities Act or resold pursuant to an exemption from the
registration requirements of the Securities Act in a transaction which results
in such Securities or Common Stock, as the case may be, no longer being
"restricted securities" (as defined under Rule 144).
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<PAGE> 24
SECTION 2.07. REPLACEMENT SECURITIES. If (a) any mutilated Security
is surrendered to the Trustee, or (b) the Company and the Trustee receive
evidence to their satisfaction of the destruction, loss or theft of any
Security, and there is delivered to the Company and the Trustee such security or
indemnity as may be required by them to save each of them harmless, then, in the
absence of notice to the Company or the Trustee that such Security has been
acquired by a bona fide purchaser, the Company shall execute and, upon its
written request, the Trustee shall authenticate and deliver, in exchange for any
such mutilated Security or in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and Principal Amount, bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, or is about to be purchased or
redeemed by the Company pursuant to Article 3 hereof, the Company in its
discretion may, instead of issuing a new Security, pay, purchase or redeem such
Security, as the case may be.
Upon the issuance of any new Securities under this Section 2.07, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section 2.07 in lieu of
any mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section 2.07 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.08. OUTSTANDING SECURITIES; DETERMINATIONS OF HOLDERS'
ACTION. Securities outstanding at any time are all the Securities authenticated
by the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.08 as not outstanding. A
Security does not cease to be outstanding because the Company or an Affiliate
thereof holds the Security; provided, however, that in determining whether the
Holders of the requisite Principal Amount of Securities have given or concurred
in any request, demand, authorization, direction, notice, consent or waiver
hereunder, Securities owned by the Company or any Affiliate of the Company shall
be disregarded and deemed not to be outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Securities which the
Trustee knows to be so owned shall be so disregarded. Subject to the foregoing,
only Securities outstanding at the time of such determination shall be
considered in any such determination (including, without limitation,
determinations pursuant to Articles 6 and 9).
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<PAGE> 25
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent holds, in accordance with this Indenture, on a
Redemption Date, or on the Business Day following a Purchase Date or a
Fundamental Change Redemption Date, or on Stated Maturity, money or securities,
if permitted hereunder, sufficient to pay Securities payable on that date, then
on and after that date such Securities shall cease to be outstanding and
Original Issue Discount and interest, if any, on such Securities shall cease to
accrue; provided, that if such Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made.
If a Security is converted in accordance with Article 11, then from
and after such conversion such Security shall cease to be outstanding and
Original Issue Discount and interest, if any, shall cease to accrue on such
Security.
SECTION 2.09. TEMPORARY SECURITIES. Pending the preparation of
definitive Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which are printed,
lithographed, typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially of the tenor of the definitive Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Securities may
determine, as conclusively evidenced by their execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for such purpose pursuant to Section 2.03,
without charge to the Holder. Upon surrender for cancellation of any one or more
temporary Securities the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like Principal Amount of
definitive Securities of authorized denominations. Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
SECTION 2.10. CANCELLATION. All Securities surrendered for payment,
purchase by the Company pursuant to Article 3, conversion, redemption or
registration of transfer or exchange for the Securities shall, if surrendered to
any Person other than the Trustee, be delivered to the Trustee and shall be
promptly canceled by it. The Company may at any time deliver to the Trustee for
cancellation any Securities previously authenticated and delivered hereunder
which the Company may have acquired in any manner whatsoever, and all Securities
so delivered shall be promptly canceled by the Trustee. The Company may not
issue new Securities to replace Securities it has paid for or delivered to the
Trustee for cancellation or that any Holder has converted pursuant to Article
11. No Securities shall be authenticated in lieu of or in exchange for any
Securities canceled as provided in this Section 2.10, except as expressly
permitted by this Indenture. All canceled Securities held by the Trustee shall
be destroyed by the Trustee and, following such
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<PAGE> 26
destruction, the Trustee shall deliver a certificate of destruction to the
Company, unless the Company directs by the Company Order that the Trustee
deliver canceled Securities to the Company.
SECTION 2.11. PERSONS DEEMED OWNERS. Prior to due presentment of a
Security for registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the Person in whose name such Security is
registered as the owner of such Security for the purpose of receiving payment of
Principal Amount, Issue Price, accrued Original Issue Discount, accrued
Liquidated Damages, if any, Redemption Price, Purchase Price, Fundamental Change
Redemption Price and interest, if any, in respect thereof, for the purpose of
conversion and for all other purposes whatsoever, whether or not such Security
be overdue, and none of the Company, the Trustee or any agent of the Company or
the Trustee shall be affected by notice to the contrary.
ARTICLE 3
REDEMPTION AND PURCHASES
SECTION 3.01. RIGHT TO REDEEM; NOTICES TO TRUSTEE. The Company, at
its option, may redeem the Securities in accordance with the provisions of
paragraphs 5 and 7 of the Securities. If the Company elects to redeem Securities
pursuant to paragraph 5 of the Securities, it shall notify the Trustee in
writing of the Redemption Date, the Principal Amount of Securities to be
redeemed and the Redemption Price.
The Company shall give the notice to the Trustee provided for in this
Section 3.01 (i) in the case of any redemption of fewer than all of the
Securities, at least 45 days before the Redemption Date and (ii) in the case of
a redemption of all of the Securities, no later than the date that the Company
is required to give notice to the Holders pursuant to Section 3.03, in each case
unless a shorter notice shall be satisfactory to the Trustee.
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If less than
all the Securities held in definitive form are to be redeemed, the Trustee shall
select the definitive Securities to be redeemed pro rata or by lot or by a
method the Trustee considers fair and appropriate (as long as such method is not
prohibited by the rules of any stock exchange on which the Securities are then
listed). The Trustee shall make the selection at least 35 days, but not more
than 60 days, before the Redemption Date from outstanding definitive Securities
not previously called for redemption. The Trustee may select for redemption
portions of the Principal of Securities that have denominations larger than
$1,000. Securities and portions of them the Trustee selects shall be in
Principal Amounts of $1,000 or a multiple of $1,000. Provisions of this
Indenture that apply to definitive Securities called for redemption also apply
to portions of definitive Securities called for redemption. The Trustee shall
notify the Company promptly of the definitive Securities or portions of
definitive Securities to be redeemed.
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Any interest in a Security held in global form by and registered in
the name of the Depositary or its nominee to be redeemed in whole or in part
will be redeemed in accordance with the procedures of the Depositary.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. Securities which have
been converted during a selection of Securities to be redeemed may be treated by
the Trustee as outstanding for the purpose of such selection.
SECTION 3.03. NOTICE OF REDEMPTION. At least 30 days but not more
than 60 days before a Redemption Date, the Company shall mail a notice of
redemption by first-class mail, postage prepaid, to each Holder of Securities to
be redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) the Conversion Rate;
(4) the name and address of the Paying Agent and Conversion Agent;
(5) that Securities called for redemption may be converted at any
time before the close of business on the last Trading Day prior to the
Redemption Date;
(6) that Holders who want to convert Securities must satisfy the
requirements set forth in paragraph 9 of the Securities;
(7) that Securities called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(8) if fewer than all the outstanding Securities are to be redeemed,
the certificate number and Principal Amounts of the particular Securities to be
redeemed;
(9) that Original Issue Discount on Securities called for redemption
will cease to accrue on and after the Redemption Date; and
(10) the CUSIP number or numbers for the Securities.
The notice if mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives such notice. In any case, failure to give such notice by mail or any
defect in the notice to the Holder of any Security designated for redemption
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<PAGE> 28
as a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of
redemption is given, Securities called for redemption become due and payable on
the Redemption Date and at the Redemption Price stated in the notice except for
Securities which are converted in accordance with the terms of this Indenture.
Upon the later of the Redemption Date or the date such Securities are
surrendered to the Paying Agent, such Securities shall be paid at the Redemption
Price stated in the notice.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. Prior to or on the
Redemption Date, the Company shall deposit with the Paying Agent (or if the
Company or an Affiliate of the Company is the Paying Agent, shall segregate and
hold in trust) money sufficient to pay the Redemption Price of all Securities to
be redeemed on that date other than Securities or portions of Securities called
for redemption which prior thereto have been delivered by the Company to the
Trustee for cancellation or have been converted for Common Stock, and on or
after the Redemption Date (unless the Company shall default in the payment of
the Securities at the Redemption Price, together with Original Issue Discount
accrued to, but excluding, the Redemption Date), Original Issue Discount on the
Securities or portion of Securities called for redemption shall cease to accrue
and such Securities shall cease after the close of business on the Business Day
immediately preceding the Redemption Date to be convertible into Common Stock
and, except as provided in Section 8.02, to be entitled to any benefit or
security under this Indenture, and the Holders thereof shall have no right in
respect of such Securities except the right to receive the Redemption Price
thereof and unpaid interest to, but excluding, the Redemption Date. The Paying
Agent shall as promptly as practicable return to the Company any money, with
interest, if any, thereon not required for that purpose because of conversion of
Securities. If such money is then held by the Company in trust and is not
required for such purpose it shall be discharged from such trust.
SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder a new Security in an authorized
denomination equal in Principal Amount to the unredeemed portion of the Security
surrendered.
SECTION 3.07. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In
connection with any redemption of Securities, the Company may arrange for the
purchase and conversion for Common Stock of any Securities called for redemption
by an agreement with one or more investment bankers or other purchasers to
purchase such Securities by paying to the Paying Agent in trust for the Holders,
on or before the close of business on the Redemption Date, an amount that,
together with any amounts deposited with the Paying Agent by the Company for the
redemption of the Securities, is not less than the Redemption Price, including
interest, if any, to the Redemption
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<PAGE> 29
Date, of such Securities. Notwithstanding anything to the contrary contained in
this Article 3, the obligation of the Company to pay the Redemption Price of
such Securities, including all accrued Original Issue Discount, shall be deemed
to be satisfied and discharged to the extent such amount is so paid by such
purchasers. If such an agreement is entered into, any Securities not duly
surrendered for conversion by the Holders thereof may, at the option of the
Company, be deemed, to the fullest extent permitted by law, acquired by such
purchasers from such Holders and (notwithstanding anything to the contrary
contained in Article 11) surrendered by such purchasers for conversion, all
immediately prior to the close of business on the Redemption Date, subject to
payment of the above amount as aforesaid. The Paying Agent shall hold and pay to
the Holders whose Securities are selected for redemption any such amount paid to
it in the same manner as it would money deposited with it by the Company for the
redemption of Securities. Without the Paying Agent's prior written consent, no
arrangement between the Company and such purchasers for the purchase and
conversion of any Securities shall increase or otherwise affect any of the
powers, duties, responsibilities or obligations of the Paying Agent as set forth
in this Indenture, and the Company agrees to indemnify the Paying Agent from,
and hold it harmless against, any loss, liability or expense arising out of or
in connection with any such arrangement for the purchase and conversion of any
Securities between the Company and such purchasers, including the costs and
expenses incurred by the Paying Agent in the defense of any claim or liability
arising out of or in connection with the exercise or performance of any of its
powers, duties, responsibilities or obligations under this Indenture.
SECTION 3.08. PURCHASE OF SECURITIES AT OPTION OF THE HOLDER.
(a) General. Securities shall be purchased by the Company pursuant to
paragraph 6 of the Securities as of February 13, 2003, February 13, 2008 and
February 13, 2013 (each, a "Purchase Date"), at the purchase price specified
therein (each, a "Purchase Price") at the option of the Holder thereof, upon:
(1) delivery to the Paying Agent by the Holder of a written notice of
purchase (a "Purchase Notice") at any time from the opening of business on the
date that is 20 Business Days prior to a Purchase Date until the close of
business on such Purchase Date, stating:
(A) the certificate number of the Security which the Holder will
deliver to be purchased;
(B) the portion of the Principal Amount of the Security which
the Holder will deliver to be purchased, which portion must be $1,000 in
Principal Amount or a multiple thereof;
(C) that such Security shall be purchased as of the Purchase
Date pursuant to the terms and conditions specified in paragraph 6 of the
Securities and in this Indenture; and
(D) if the Company elects, pursuant to a Company Notice, to pay
the Purchase Price to be paid as of such Purchase Date, in whole or in part, in
Common Stock but such portion of the Purchase Price shall ultimately be payable
to such Holder in Cash because any of the conditions to the payment of the
Purchase Price in Common Stock are not satisfied prior to or on the Purchase
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Date, as set forth in Section 3.08(d), whether such Holder elects (x) to
withdraw such Purchase Notice as to some or all of the Securities to which such
Purchase Notice relates (stating the Principal Amount and certificate numbers of
the Securities as to which such withdrawal shall relate), or (y) to receive Cash
in respect of the entire Purchase Price for all Securities (or portions thereof)
to which such Purchase Notice relates; and
(2) delivery of such Security to the Paying Agent prior to, on or
after the Purchase Date (together with all necessary endorsements) at the
offices of the Paying Agent, such delivery being a condition to receipt by the
Holder of the Purchase Price therefor; provided, however, that such Purchase
Price shall be so paid pursuant to this Section 3.08 only if the Security so
delivered to the Paying Agent shall conform in all respects to the description
thereof in the related Purchase Notice.
If a Holder, in such Holder's Purchase Notice (and in any written
notice of withdrawal of a portion of such Holder's Securities previously
submitted for purchase pursuant to a Purchase Notice, the portion that remains
subject to the Purchase Notice), fails to indicate such Holder's choice with
respect to the election set forth in clause (D) of Section 3.08(a)(1), such
Holder shall be deemed to have elected to receive Cash in respect of the entire
Purchase Price for all Securities subject to such Purchase Notice in the
circumstances set forth in such clause (D).
The Company shall purchase from the Holder thereof, pursuant to this
Section 3.08, a portion of a Security if the Principal Amount of such portion is
$1,000 or a multiple of $1,000. Provisions of this Indenture that apply to the
purchase of all of a Security also apply to the purchase of such portion of such
Security.
Any purchase by the Company contemplated pursuant to the provisions
of this Section 3.08 shall be consummated by the delivery of the consideration
to be received by the Holder promptly following the later of the Purchase Date
and the time of delivery of the Security.
Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Purchase Notice contemplated by this Section
3.08(a) shall have the right at any time prior to the close of business on the
Purchase Date to withdraw such Purchase Notice by delivery of a written notice
of withdrawal to the Paying Agent in accordance with Section 3.10.
The Paying Agent shall promptly notify the Company of the receipt by
it of any Purchase Notice or written notice of withdrawal thereof.
(b) Company's Right to Elect Manner of Payment of Purchase Price. The
Company may elect with respect to any Purchase Date to pay the Purchase Price in
respect of the Securities to be purchased pursuant to Section 3.08(a) as of such
Purchase Date, in U.S. legal tender ("Cash") or Common Stock, or in any
combination of Cash and Common Stock, subject to the conditions set forth in
Sections 3.08(c) and (d). The Company shall designate, in the Company Notice
delivered pursuant to Section 3.08(e), whether the Company will purchase the
Securities for Cash or Common Stock, or, if a combination thereof, the
percentages of the Purchase Price of Securities in respect of which it will pay
in Cash and/or Common Stock; provided that the Company will pay
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Cash for fractional interests in Common Stock. For purposes of determining the
existence of potential fractional interests, all Securities subject to purchase
by the Company held by a Holder shall be considered together (no matter how many
separate certificates are to be presented). Each Holder whose Securities are
purchased pursuant to this Section 3.08 shall receive the same percentage of
Cash and/or Common Stock in payment of the Purchase Price for such Securities,
except (i) as provided in Section 3.08(d) with regard to the payment of Cash in
lieu of fractional interests in Common Stock and (ii) in the event that the
Company is unable to purchase the Securities of a Holder or Holders for Common
Stock because any necessary qualifications or registrations of the Common Stock
under applicable federal or state securities laws cannot be obtained, the
Company may purchase the Securities of such Holder or Holders for Cash. The
Company may not change its election with respect to the consideration (or
components or percentages of components thereof) to be paid once the Company has
given its Company Notice to Holders except pursuant to this Section 3.08(b) or
Section 3.08(d).
At least two Business Days before the Company Notice Date (as defined
in Section 3.08(c)), the Company shall deliver an Officers' Certificate to the
Trustee specifying:
(i) the manner of payment selected by the Company,
(ii) the information required by Section 3.08(e),
(iii) if the Company elects to pay the Purchase Price, or a
specified percentage thereof, in Common Stock, that the conditions to such
manner of payment set forth in Section 3.08(d) have been or will be complied
with, and
(iv) whether the Company desires the Trustee to give the Company
Notice required by Section 3.08(e).
(c) Purchase with Cash. At the option of the Company, the Purchase
Price of Securities in respect of which a Purchase Notice pursuant to Section
3.08(a) has been given, or a specified percentage thereof, may be paid by the
Company with Cash equal to the aggregate Purchase Price, or such specified
percentage thereof, as the case may be, of such Securities. If the Company
elects to purchase Securities with Cash, a Company Notice as provided in Section
3.08(e) shall be sent to Holders (and to beneficial owners as required by
applicable law) not less than 20 Business Days prior to the Purchase Date (the
"Company Notice Date").
(d) Payment by Issuance of Common Stock. At the option of the
Company, the Purchase Price of Securities in respect of which a Purchase Notice
pursuant to Section 3.08(a) has been given, or a specified percentage thereof,
may be paid by the Company by the issuance of a number of shares of Common Stock
equal to the quotient obtained by dividing (i) the amount of Cash to which the
Holders would have been entitled had the Company elected to pay all or such
specified percentage, as the case may be, of the Purchase Price of such
Securities in Cash by (ii) the Market Price of a share of Common Stock, subject
to the next succeeding paragraph.
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The Company will not issue a fractional share of Common Stock in
payment of the Purchase Price. Instead the Company will pay Cash for the current
market value of the fractional share. The current market value of a fraction of
a share shall be determined by multiplying the Market Price by such fraction and
rounding the product to the nearest whole cent. It is understood that if a
Holder elects to have more than one Security purchased, the number of shares of
Common Stock shall be based on the aggregate amount of Securities to be
purchased.
If the Company elects to purchase the Securities by the issuance of
shares of Common Stock, a Company Notice as provided in Section 3.08(e) shall be
sent to the Holders (and to beneficial owners as required by applicable law) not
later than the Company Notice Date.
The Company's right to exercise its election to purchase the
Securities pursuant to Section 3.08 through the issuance of shares of Common
Stock shall be conditioned upon:
(i) the Company having given timely Company Notice of election
to purchase all or a specified percentage of the Securities with Common Stock as
provided herein;
(ii) the registration of the shares of Common Stock to be issued
in respect of the payment of the specified percentage of the Purchase Price
under the Securities Act; unless the shares of Common Stock so issued can be
freely resold by the Securityholder (unless such Securityholder is the Company
or an Affiliate of the Company) receiving such shares without registration under
the Securities Act;
(iii) any necessary qualification or registration under
applicable state securities laws or the availability of an exemption from such
qualification and registration; and
(iv) the receipt by the Trustee of an Officers' Certificate and
an Opinion of Counsel each stating that (A) the terms of the issuance of the
Common Stock are in conformity with this Indenture and (B) the shares of Common
Stock to be issued by the Company in payment of the specified percentage of the
Purchase Price in respect of Securities have been duly authorized and, when
issued and delivered pursuant to the terms of this Indenture in payment of the
specified percentage of the Purchase Price in respect of Securities, will be
validly issued, fully paid and nonassessable, and, in the case of such Officers'
Certificate, stating that conditions (i), (ii) and (iii) above have been
satisfied and, in the case of such Opinion of Counsel, stating that conditions
(ii) and (iii) above have been satisfied.
Such Officers' Certificate shall also set forth the number of shares of Common
Stock to be issued for each $1,000 Principal Amount of Securities and the Sale
Price of a share of Common Stock on each Trading Day during the period during
which the Market Price is calculated and ending on the Purchase Date. The
Company may elect to pay the Purchase Price (or any portion thereof) in Common
Stock only if the information necessary to calculate the Market Price is
reported in a daily newspaper of national circulation. If such conditions are
not satisfied with respect to a Holder or Holders prior to or on the Purchase
Date and the Company elected to purchase the Securities to be purchased as of
such Purchase Date pursuant to this Section 3.08 through the
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issuance of shares of Common Stock, the Company shall pay the entire Purchase
Price in respect of such Securities of such Holder or Holders in Cash.
The "Market Price" means the average of the Sale Prices of the Common
Stock for the five Trading Day period ending on (if the third Business Day prior
to the applicable Purchase Date is a Trading Day or, if not, then on the last
Trading Day prior to) the third Business Day prior to the applicable Purchase
Date, appropriately adjusted to take into account the occurrence, during the
period commencing on the first of such Trading Days during such five Trading Day
period and ending on such Purchase Date, of any event described in Section
11.06, 11.07 or 11.08; subject, however, to the conditions set forth in Sections
11.09 and 11.10. The "Sale Price" of the Common Stock on any date means the
closing per share sale price (or if no closing sale price is reported the
average of the bid and ask prices or, if more than one, in either case, the
average of the average bid and average ask prices) on such date as reported in
the composite transactions for the principal United States securities exchange
on which the Common Stock is traded or, if the Common Stock is not listed on a
United States national or regional stock exchange, as reported by the Nasdaq
National Market.
(e) Notice of Election. Company's notices of election to purchase
with Cash or Common Stock, or any combination thereof, shall be sent to the
Holders (and to beneficial owners as required by applicable law) in the manner
provided in Section 12.02 at the time specified in Section 3.08(c) or (d), as
applicable (each, a "Company Notice"). Such Company Notices shall state the
manner of payment elected and shall contain the following information:
In the event the Company has elected to pay a Purchase Price (or a
specified percentage thereof) with Common Stock, the Company Notice shall:
(1) state that each Holder will receive Common Stock with a
Market Price determined as of a specified date prior to the Purchase Date equal
to such specified percentage of the Purchase Price of the Securities held by
such Holder (except any Cash amount to be paid in lieu of fractional share); and
(2) set forth the method of calculating the Market Price and
state that because the Market Price of Common Stock will be determined prior to
the Purchase Date, the Holders will bear the market risk with respect to the
value of the Common Stock to be received from the date such Market Price is
determined to the Purchase Date.
In any case, each Company Notice shall include a form of Purchase
Notice to be completed by a Securityholder and shall state:
(i) the Purchase Price and Conversion Rate;
(ii) the name and address of the Paying Agent and the Conversion
Agent;
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(iii) that Securities as to which a Purchase Notice has been
given may be converted only if the applicable Purchase Notice has been withdrawn
in accordance with the terms of this Indenture;
(iv) that Securities must be surrendered to the Paying Agent to
collect payment;
(v) that the Purchase Price for any Security as to which a
Purchase Notice has been given and not withdrawn will be paid promptly following
the later of the Purchase Date and the time of surrender of such Security as
described in (iv);
(vi) the procedures the Holder must follow to exercise rights
under Section 3.08 and a brief description of those rights;
(vii) briefly, the conversion rights of the Securities; and
(viii) the procedures for withdrawing a Purchase Notice
(including, without limitation, for a conditional withdrawal pursuant to the
terms of Section 3.08 (a) (1) (D) or Section 3.10).
At the Company's request, the Trustee shall give the Company Notice
in the Company's name and at the Company's expense; provided, however, that, in
all cases, the text of the Company Notice shall be prepared by the Company.
(f) Covenants of the Company. All shares of Common Stock delivered
upon conversion or purchase of the Securities shall be newly issued shares or
treasury shares, shall be fully paid and nonassessable and shall be free from
preemptive rights and free of any lien or adverse claim.
The Company shall use its best efforts to list or cause to have
quoted all such shares of Common Stock on each United States national securities
exchange or over-the-counter or other domestic market on which the Common Stock
is then listed or quoted.
(g) Procedure upon Purchase. On the Business Day following the
Purchase Date, the Company shall deposit with the Paying Agent Cash (in respect
of a Cash purchase under Section 3.08(c) or for fractional interests, as
applicable), or shares of Common Stock, or a combination thereof, as applicable,
sufficient to pay the aggregate Purchase Price of the Securities to be purchased
pursuant to this Section 3.08. As soon as practicable after the Purchase Date,
the Company shall deliver to each Holder entitled to receive Common Stock,
through the Paying Agent, a certificate for the number of full shares of Common
Stock, as applicable, issuable in payment of such Purchase Price and Cash in
lieu of any fractional interests. The Person in whose name the certificate for
Common Stock is registered shall be treated as a holder of record following the
Purchase Date. Subject to Section 3.08(d), no payment or adjustment will be made
for dividends on the Common Stock the record date for which occurred on or prior
to the Purchase Date.
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(h) Taxes. If a Holder is paid in Common Stock, the Company shall pay
any documentary, stamp or similar issue or transfer tax due on such issue of
shares of Common Stock. However, the Holder shall pay any such tax which is due
because the Holder requests the shares of Common Stock to be issued in a name
other than the Holder's name. The Paying Agent may refuse to deliver the
certificates representing the Common Stock being issued in a name other than the
Holder's name until the Paying Agent receives a sum sufficient to pay any tax
which will be due because the shares of Common Stock are to be issued in a name
other than the Holder's name. Nothing herein shall preclude any income tax
withholding required by law or regulations.
SECTION 3.09. REDEMPTION AT OPTION OF THE HOLDER UPON A FUNDAMENTAL
CHANGE.
(a) If a Fundamental Change shall occur at any time prior to February
13, 2018, each Holder of Securities shall have the right, at such Holder's
option, to require the Company to redeem such Holder's Securities on the date
(the "Fundamental Change Repurchase Date") (or if such date is not a Business
Day, the next succeeding Business Day) that is 45 days after the date of the
Company's notice of such Fundamental Change. The Securities will be redeemable
in part in multiples of $1,000 of Principal Amount. The Company shall redeem
such Securities at a price (the "Fundamental Change Redemption Price") equal to
the Issue Price plus accrued Original Issue Discount to the date of redemption;
provided that, with respect to a Fundamental Change, if the Applicable Price is
less than the Reference Market Price, the Company shall redeem such Securities
at a price equal to the foregoing Redemption Price multiplied by the fraction
obtained by dividing the Applicable Price by the Reference Market Price. No
Securities may be redeemed at the option of the Holders as a result of a
Fundamental Change if there has occurred and is continuing an Event of Default
(other than a default in the payment of the Fundamental Change Redemption Price
with respect to such Securities).
(b) The Company, or at its request (which must be received by the
Trustee at least three Business Days prior to the date the Trustee is requested
to give such notice as described below) the Trustee in the name of and at the
expense of the Company, shall mail to all Holders of record of the Securities a
notice (a "Fundamental Change Redemption Notice") of the occurrence of a
Fundamental Change and of the redemption right arising as a result thereof on or
before the tenth day after the occurrence of such Fundamental Change. The
Company shall promptly furnish the Trustee a copy of such notice.
(c) For a Security to be so redeemed at the option of the Holder, the
Paying Agent must receive such Security with the form entitled "Option to Elect
Redemption Upon a Fundamental Change" on the reverse thereof duly completed,
together with such Security duly endorsed for transfer, on or before the 30th
day after the date of such notice (or if such 30th day is not a Business Day,
the immediately preceding Business Day). All questions as to the validity,
eligibility (including time of receipt) and acceptance of any Security for
redemption shall be determined by the Company, whose determination shall be
final and binding.
SECTION 3.10. EFFECT OF PURCHASE NOTICE OR FUNDAMENTAL CHANGE
REDEMPTION NOTICE. Upon receipt by the Company of the Purchase Notice or
Fundamental Change Redemption Notice
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specified in Section 3.08(a) or Section 3.09(b), as applicable, the Holder of
the Security in respect of which such Purchase Notice or Fundamental Change
Redemption Notice, as the case may be, was given shall (unless such Purchase
Notice or Fundamental Change Redemption Notice is withdrawn as specified in the
following two paragraphs) thereafter be entitled to receive solely the Purchase
Price or Fundamental Change Redemption Price, as the case may be, with respect
to such Security. Such Purchase Price or Fundamental Change Redemption Price
shall be paid to such Holder promptly following the later of (x) the Purchase
Date or the Fundamental Change Redemption Date, as the case may be, with respect
to such Security (provided the conditions in Section 3.08(a) or Section 3.09(c),
as applicable, have been satisfied) and (y) the time of delivery of such
Security to the Paying Agent by the Holder thereof in the manner required by
Section 3.08(a) or Section 3.09(c), as applicable. Securities in respect of
which a Purchase Notice or Fundamental Change Redemption Notice, as the case may
be, has been given by the Holder thereof may not be converted for shares of
Common Stock on or after the date of the delivery of such Purchase Notice (or
Fundamental Change Redemption Notice, as the case may be), unless such Purchase
Notice (or Fundamental Change Redemption Notice, as the case may be) has first
been validly withdrawn as specified in the following two paragraphs.
A Purchase Notice or Fundamental Change Redemption Notice, as the
case may be, may be withdrawn by means of a written notice of withdrawal
delivered to the office of the Paying Agent at any time prior to the close of
business on the Purchase Date or the Fundamental Change Redemption Date, as the
case may be, to which it relates specifying:
(1) the certificate number of the Security in respect of which such
notice of withdrawal is being submitted,
(2) the Principal Amount of the Security with respect to which such
notice of withdrawal is being submitted, and
(3) the Principal Amount, if any, of such Security which remains
subject to the original Purchase Notice or Fundamental Change Redemption Notice,
as the case may be, and which has been or will be delivered for purchase by the
Company.
A written notice of withdrawal of a Purchase Notice may be in the
form of (i) a conditional withdrawal contained in a Purchase Notice pursuant to
the terms of Section 3.08(a)(1)(D) or (ii) a conditional withdrawal containing
the information set forth in Section 3.08(a)(1)(D) and the preceding paragraph
and contained in a written notice of withdrawal delivered to the Paying Agent as
set forth in the preceding paragraph.
There shall be no purchase of any Securities pursuant to Section 3.08
(other than through the issuance of Common Stock in payment of the Purchase
Price, including Cash in lieu of any fractional shares) or redemption pursuant
to Section 3.09 if there has occurred (prior to, on or after, as the case may
be, the giving, by the Holders of such Securities, of the required Purchase
Notice or Fundamental Change Redemption Notice, as the case may be) and is
continuing an Event of
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Default (other than a default in the payment of the Purchase Price or
Fundamental Change Redemption Price, as the case may be, with respect to such
Securities).
SECTION 3.11. DEPOSIT OF PURCHASE PRICE OR FUNDAMENTAL CHANGE
REDEMPTION PRICE. On or before the Business Day following a Purchase Date or a
Fundamental Change Redemption Date, as the case may be, the Company shall
deposit with the Trustee or with the Paying Agent (or, if the Company or an
Affiliate of the Company is acting as the Paying Agent, shall segregate and hold
in trust as provided in Section 2.04) an amount of money and/or securities, if
permitted hereunder, sufficient to pay the aggregate Purchase Price or
Fundamental Change Redemption Price, as the case may be, of all the Securities
or portions thereof which are to be purchased as of such Purchase Date or
Fundamental Change Redemption Date, as the case may be.
SECTION 3.12. SECURITIES PURCHASED IN PART. Any Security that is to
be purchased, or redeemed upon a Fundamental Change, only in part shall be
surrendered at the office of the Paying Agent (with, if the Company or the
Trustee so requires, due endorsement by, or a written instrument of transfer in
form satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or such Holder's attorney duly authorized in writing) and the Company
shall execute and the Trustee shall authenticate and deliver to the Holder of
such Security, without service charge, a new Security or Securities, of any
authorized denomination as requested by such Holder in aggregate Principal
Amount equal to, and in exchange for, the portion of the Principal Amount of the
Security so surrendered which is not purchased or redeemed.
SECTION 3.13. COVENANT TO COMPLY WITH SECURITIES LAWS UPON PURCHASE
OF SECURITIES. In connection with any purchase or redemption of Securities under
Section 3.08 or 3.09 hereof, the Company shall (i) comply with Rule 13e-4 (which
term, as used herein, includes any successor provision thereto) under the
Exchange Act, if applicable, (ii) file the related Schedule 13E-4 (or any
successor schedule, form or report) under the Exchange Act, if applicable, and
(iii) otherwise comply with all Federal and state securities laws so as to
permit the rights and obligations under Section 3.08 and 3.09 to be exercised in
the time and in the manner specified in Section 3.08 and 3.09.
SECTION 3.14. REPAYMENT TO THE COMPANY. The Trustee and the Paying
Agent shall return to the Company any cash or shares of Common Stock that remain
unclaimed as provided in para graph 14 of the Securities, together with interest
or dividends, if any, thereon, held by them for the payment of a Purchase Price
or Fundamental Change Redemption Price, as the case may be; provided, however,
that to the extent that the aggregate amount of cash or shares of Common Stock
deposited by the Company pursuant to Section 3.11 exceeds the aggregate Purchase
Price or Fundamental Change Redemption Price, as the case may be, of the
Securities or portions thereof which the Company is obligated to purchase as of
the Purchase Date or Fundamental Change Redemption Date, as the case may be,
then promptly after the Business Day following the Purchase Date or Fundamental
Change Redemption Date, as the case may be, the Trustee and the Paying Agent
shall return any such excess to the Company together with interest or dividends,
if any, thereon.
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ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF SECURITIES. The Company shall promptly make
all payments in respect of the Securities on the dates and in the manner
provided in the Securities or pursuant to this Indenture. Principal Amount,
Issue Price, accrued Original Issue Discount, accrued Liquidated Damages, if
any, Redemption Price, Purchase Price, Fundamental Change Redemption Price and
interest, if any, shall be considered paid on the applicable date due or, in the
case of a Purchase Price or Fundamental Change Redemption Price, on the Business
Day following the applicable Purchase Date or Fundamental Change Redemption
Date, as the case may be, if on such date the Trustee or the Paying Agent holds,
in accordance with this Indenture, money or securities, if permitted hereunder,
sufficient to pay all such amount then due.
The Company shall pay interest on overdue amounts at the rate set
forth in paragraph 1 of the Securities and it shall pay interest on overdue
interest at the same rate compounded semiannually (to the extent that the
payment of such interest shall be legally enforceable), which interest on
overdue interest shall accrue from the date such amounts became overdue and
shall be in lieu of, and not in addition to, the continued accrual of Original
Issue Discount.
SECTION 4.02. FINANCIAL INFORMATION; SEC REPORTS. The Company will
deliver to the Trustee (a) as soon as available and in any event within 90 days
after the end of each fiscal year of the Company (i) a consolidated balance
sheet of the Company and its Subsidiaries as of the end of such fiscal year and
the related consolidated statements of operations, stockholders' equity and cash
flows for such fiscal year, all reported on by an independent public accountant
of nationally recognized standing and (ii) a report containing a management's
discussion and analysis of the financial condition and results of operations and
a description of the business and properties of the Company and (b) as soon as
available and in any event within 45 days after the end of each of the first
three quarters of each fiscal year of the Company (i) an unaudited consolidated
financial report for such quarter and (ii) a report containing a management's
discussion and analysis of the financial condition and results of operations of
the Company; provided that the foregoing shall not be required for any fiscal
year or quarter, as the case may be, with respect to which the Company files or
expects to file with the Trustee an annual report or quarterly report, as the
case may be, pursuant to the third paragraph of this Section 4.02.
So long as the Securities or the Common Stock issued upon conversion
of the Securities are Restricted Securities, if the Company is not subject to
either Section 13 or 15(d) of the Exchange Act, the Company shall at the request
of any Holder (or holders of Common Stock issued upon conversion of the
Securities) provide to such Holder (or holders of such Common Stock) and any
prospective purchaser designated by such Holders (or holders of such Common
Stock), as the case may be, such information, if any, required by Rule
144A(d)(4) under the Securities Act.
The Company shall file with the Trustee, within 15 days after it
files such annual and quarterly reports, information, documents and other
reports with the SEC, copies of its annual report and of
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the information, documents and other reports (or copies of such portions of any
of the foregoing as the SEC may by rules and regulations prescribe) which the
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act.
SECTION 4.03. COMPLIANCE CERTIFICATE. The Company shall deliver to
the Trustee, within 120 days after the end of each fiscal year of the Company,
an Officers' Certificate in which one of the two Officers signing such
certificate is either the principal executive officer, principal financial
officer or principal accounting officer of the Company, stating whether or not
to the best knowledge of the signers thereof a Default exists (without regard to
any period of grace or requirement of notice provided hereunder) and, if a
Default exists, specifying all such Defaults and the nature and status thereof
of which the signers may have knowledge.
The Company will deliver to the Trustee, forthwith upon becoming
aware of any Default or any Event of Default, an Officers' Certificate
specifying with particularity such Default or Event of Default and further
stating what action the Company has taken, is taking or proposes to take with
respect thereto.
Any notice required to be given under this Section 4.03 shall be
delivered to the Trustee at its Corporate Trust Office.
SECTION 4.04. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
SECTION 4.05. MAINTENANCE OF OFFICE OR AGENCY. The Company will
maintain in the Borough of Manhattan, The City of New York, an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer, exchange, purchase, redemption
or conversion and where notices and demands to or upon the Company in respect of
the Securities and this Indenture may be served. The office or agency of State
Street Bank and Trust Company, N.A., an Affiliate of the Trustee located at 61
Broadway, Concourse Level, Corporate Trust Window, New York, New York 10006
(Attention: Networks Associates, Inc., Zero Coupon Convertible Subordinated
Debentures due 2018) shall be such office or agency for all of the aforesaid
purposes unless the Company shall maintain some other office or agency for such
purposes and shall give prompt written notice to the Trustee of the location,
and any change in the location, of such other office or agency. If at any time
the Company shall fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York, for such purposes.
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SECTION 4.06. EXISTENCE. Subject to Article 5, the Company will do or
cause to be done all things necessary to preserve and keep in full force and
effect its existence and rights (charter and statutory); provided, however, that
the Company shall not be required to preserve any such right if the Company
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and that the loss thereof is not
disadvantageous in any material respect to the Holders.
SECTION 4.07. MAINTENANCE OF PROPERTIES. The Company will cause all
properties used or useful in the conduct of its business or the business of any
Significant Subsidiary to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section 4.07
shall prevent the Company from discontinuing the operation or maintenance of any
of such properties if such discontinuance is, in the judgment of the Company,
desirable in the conduct of its business or the business of any Significant
Subsidiary and not disadvantageous in any material respect to the Holders.
SECTION 4.08. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay
or discharge, or cause to be paid or discharged, before the same may become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon the Company or any Significant Subsidiary or upon the income,
profits or property, of the Company or any Significant Subsidiary, (ii) all
claims for labor, materials and supplies which, if unpaid, might by law become a
lien or charge upon the property of the Company or any Significant Subsidiary,
and (iii) all stamps and other duties, if any, which may be imposed by the
United States or any political subdivision thereof or therein in connection with
the issuance, transfer, exchange or conversion of any Securities or with respect
to this Indenture; provided however, that, in the case of clauses (i) and (ii),
the Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim (A) if the failure to do so
will not, in the aggregate, have a material adverse impact on the Company, or
(B) if the amount applicability or validity is being contested in good faith by
appropriate proceedings.
ARTICLE 5
SUCCESSOR CORPORATION
SECTION 5.01. WHEN THE COMPANY MAY MERGE OR TRANSFER ASSETS.
The Company shall not consolidate with or merge with or into any
other Person (other than in a merger or consolidation in which the Company is
the surviving Person) or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless:
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(i) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by conveyance, transfer or lease the properties and assets of the Company
substantially as an entirety shall be a corporation, limited liability company,
partnership or trust organized and validly existing under the laws of the United
States or any State thereof or the District of Columbia, and shall expressly
assume by an indenture supplemental hereto, executed and delivered to the
Trustee in form satisfactory to the Trustee, the due and punctual payment of the
Principal Amount, Issue Price, accrued Original Issue Discount, accrued
Liquidated Damages, if any, Redemption Price, Purchase Price, Fundamental Change
Redemption Price or interest, if any, on the Securities, according to their
tenor, and the due and punctual performance of all of the covenants and
obligations of the Company under the Securities and this Indenture, and shall
have provided for conversion rights in accordance with the Indenture;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; and
(iii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture, comply with this Article 5 and that all conditions precedent herein
provided for relating to such transaction have been satisfied.
The successor Person formed by such consolidation or into which the
Company is merged or the successor Person to which such conveyance, transfer or
lease is made shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture with the same effect as if
such successor had been named as the Company herein; and thereafter, except in
the case of a lease, the Company shall be discharged from all obligations and
covenants under this Indenture and the Securities.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" occurs if:
(1) the Company defaults in the payment of the Principal Amount,
Issue Price, accrued Original Issue Discount, accrued Liquidated Damages, if
any, Redemption Price, Purchase Price or Fundamental Change Redemption Price on
any Security when the same becomes due and payable at its Stated Maturity, upon
redemption, upon declaration, when due for purchase by the Company or otherwise
(provided that in the case of a default in the payment of Liquidated Damages,
such default in payment of Liquidated Damages continues for a period of 30
days), whether or not such payment shall be prohibited by Article 10;
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(2) the Company fails to comply with any of its agreements or
covenants in the Securities or this Indenture (other than those referred to in
clause (1) above) and such failure continues for 60 days after receipt by the
Company of a Notice of Default;
(3) a decree or order by a court having jurisdiction in the premises
shall have been entered adjudging the Company a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization of the Company
under any Bankruptcy Law, and such decree or order shall have continued
undischarged and unstayed for a period of 60 consecutive days; or a decree or
order of a court having jurisdiction in the premises of the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the
Company or of its property, or for the winding-up or liquidation of its affairs,
shall have been entered, and such decree or order shall have remained in force
undischarged and unstayed of a period of 60 consecutive days; or
(4) the Company shall institute proceedings to be adjudicated a
voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking reorganization
under any Bankruptcy Law, or shall consent to the filing of any such petition,
or shall consent to the appointment of a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency of it or of its property or shall make an
assignment for the benefit of creditors, or shall admit in writing its inability
to pay its debts generally as they become due.
"Bankruptcy Law" means Title 11, United States Code, or any similar
Federal or state law for the relief of debtors.
A Default under clause (2) above is not an Event of Default until the
Trustee notifies the Company, or the Holders of at least 25% in aggregate
Principal Amount of the Securities at the time outstanding notify the Company
and the Trustee, of the Default and the Company does not cure such Default (and
such Default is not waived) within the time specified in clause (2) above after
actual receipt of such notice (a "Notice of Default"). Any such notice must
specify the Default, demand that it be remedied and state that such notice is a
Notice of Default.
SECTION 6.02. ACCELERATION. If an Event of Default (other than an
Event of Default specified in Section 6.01(3) or (4)) occurs and is continuing,
the Trustee by notice to the Company, or the Holders of at least 25% in
aggregate Principal Amount of the Securities at the time outstanding by notice
to the Company and the Trustee, may declare the Issue Price and accrued Original
Issue Discount to the date of declaration on all the Securities to be
immediately due and payable. Upon such a declaration, such Issue Price and
accrued Original Issue Discount shall be due and payable immediately. If an
Event of Default specified in Section 6.01(3) or (4) occurs and is continuing,
the Issue Price and accrued Original Issue Discount on all the Securities shall
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holders. The Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding, by notice
to the Company and the Trustee (and without notice to any other Securityholder),
may rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default have
been cured or waived except nonpayment of the Issue Price and accrued Original
Issue Discount that have
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become due solely as a result of acceleration and if all amounts due to the
Trustee under Section 7.07 have been paid. No such rescission shall affect any
subsequent Default or Event of Default or impair any right consequent thereto.
SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of the Issue Price and accrued Original Issue Discount on the Securities or to
enforce the performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if the Trustee does not
possess any of the Securities or does not produce any of the Securities in the
proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of, or acquiescence in, the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.
SECTION 6.04. WAIVER OF PAST DEFAULTS. The Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding, by notice
to the Company and the Trustee (and without notice to any other Securityholder),
may waive an existing Default or Event of Default and its consequences except
(1) an Event of Default described in Section 6.01(l), (2) a Default in respect
of a provision that under Section 9.02 cannot be amended without the consent of
each Securityholder affected or (3) a Default that constitutes a failure to
convert any Security in accordance with the terms of Article 11. When a Default
or Event of Default is waived, it is deemed cured, but no such waiver shall
extend to any subsequent or other Default or Event of Default or impair any
consequent right.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or of exercising any trust or power conferred on the Trustee.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture or that the Trustee determines in good faith is unduly
prejudicial to the rights of other Holders or would involve the Trustee in
personal liability unless the Trustee is offered indemnity satisfactory to it.
SECTION 6.06. LIMITATION ON SUITS. A Securityholder may not pursue
any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Company and the Trustee written
notice stating that an Event of Default is continuing;
(2) the Holders of at least 25% in aggregate Principal Amount of
the Securities at the time outstanding make a written request to the Trustee to
pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense satisfactory to the
Trustee;
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(4) the Trustee does not comply with the request within 60 days
after receipt of the notice, the request and the offer of security or indemnity;
and
(5) the Holders of a majority in aggregate Principal Amount of
the Securities at the time outstanding do not give the Trustee a direction
inconsistent with the request during such 60 day period.
A Securityholder may not use this Indenture to prejudice the rights
of any other Securityholder or to obtain a preference or priority over any other
Securityholder.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding
any other provision of this Indenture, but subject to Article 10, the right of
any Holder to receive payment of the Principal Amount, Issue Price, accrued
Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change
Redemption Price or interest, if any, in respect of the Securities held by such
Holder, on or after the respective due dates expressed in the Securities or any
Redemption Date and to convert the Securities in accordance with Article 11, or
to bring suit for the enforcement of any such payment on or after such
respective dates or the right to convert, shall not be impaired or affected
adversely without the consent of each such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default
described in Section 6.01(1) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
for the whole amount owing with respect to the Securities and the amounts
provided for in Section 7.07.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Company or any other obligor upon the Securities or
the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the Principal Amount, Issue Price, accrued
Original Issue Discount, accrued Liquidated Damages, if any, Redemption Price,
Purchase Price, Fundamental Change Redemption Price or interest, if any, in
respect of the Securities shall then be due and payable as therein expressed or
by declaration or otherwise and irrespective of whether the Trustee shall have
made any demand on the Company for the payment of any such amount) shall be
entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of the Principal
Amount, Issue Price, accrued Original Issue Discount, accrued Liquidated
Damages, if any, Redemption Price, Purchase Price, Fundamental Change Redemption
Price or interest, if any, and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel) and of the Holders allowed in such judicial
proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
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and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claims of any Holder in any such proceeding.
SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant
to this Article 6, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: to holders of Senior Indebtedness to the extent required by
Article 10;
Third: to Holders for amounts due and unpaid on the Securities for
the Principal Amount, Issue Price, accrued Original Issue Discount, accrued
Liquidated Damages, if any, Redemption Price, Purchase Price, Fundamental Change
Redemption Price or interest, if any, as the case may be, ratably, without
preference or priority of any kind, according to such amounts due and payable on
the Securities; and
Fourth: the balance, if any, to the Company.
The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.10. At least 15 days before such record date,
the Company shall mail to each Securityholder and the Trustee a notice that
states the record date, the payment date and amount to be paid.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant (other than the Trustee) in the suit of
an undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section 6.11 does not apply
to a suit by the Trustee, any suit by a Holder for the enforcement of the
payment of the Principal Amount, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price, Fundamental Change Redemption Price or
interest, if any, on or after the due date expressed in such Security or to any
suit for the enforcement of the right to convert the security pursuant to
Article 11, or a suit by Holders of more than 10% in aggregate Principal Amount
of the Securities at the time outstanding.
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SECTION 6.12. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury or other law
wherever enacted, now or at any time hereafter in force, which would prohibit or
forgive the Company from paying all or any portion of the Principal Amount,
Issue Price, accrued Original Issue Discount, accrued Liquidated Damages, if
any, Redemption Price, Purchase Price or Fundamental Change Redemption Price in
respect of Securities, or any interest on any such amounts, as contemplated
herein, or which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such laws and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise the rights and powers vested in it by this Indenture and
use the same degree of care and skill in its exercise as a prudent person would
exercise or use under the circumstances in the conduct of his or her own
affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture. However, the
Trustee shall examine the certificates and opinions to determine whether or not
they conform to the requirements of this Indenture.
This Section 7.01(b) shall be in lieu of Section 315(a) of the TIA and such
Section 315(a) is hereby expressly excluded from this Indenture, as permitted by
the TIA.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) this paragraph (c) does not limit the effect of
paragraph (b) of this Section 7.01;
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(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
Subparagraphs (c)(1),(2) and (3) shall be in lieu of Sections 315(d)(1),
315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and
315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the
TIA.
(d) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section 7.01.
(e) The Trustee may refuse to perform any duty or exercise any
right or power or extend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law.
SECTION 7.02. RIGHTS OF TRUSTEE.
(a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper Person. The Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require a Company Order, an Officers' Certificate or an Opinion of Counsel. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on a Company Order, Officers' Certificate or Opinion of
Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) Subject to the provisions of Section 7.01(c), the Trustee
shall not be liable for any action it takes or omits to take in good faith which
it believes to be authorized or within its rights or powers.
(e) The Trustee may consult with counsel selected by it and any
advice or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered or omitted by it hereunder
in good faith and in accordance with such advice or Opinion of Counsel.
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(f) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture, unless the Holders shall
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, Conversion
Agent or co-registrar may do the same with the like rights. However, the Trustee
must comply with Section 7.10 and 7.11.
SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee makes no
representation as to the validity or adequacy of this Indenture or the
Securities, it shall not be accountable for the Company's use of the proceeds
from the Securities, it shall not be responsible for any statement in the
offering memorandum for the Securities or in this Indenture or the Securities
(other than its certificate of authentication), the acts of a prior Trustee
hereunder, or the determination as to which beneficial owners are entitled to
receive any notices hereunder.
SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall give to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default described in Section 6.01(1), the Trustee may withhold the
notice if and so long as a committee of its Trust Officers in good faith
determines that withholding the notice is in the interests of Holders. The
second sentence of this Section 7.05 shall be in lieu of the proviso to Section
315(b) of the TIA and such provision is hereby expressly excluded from this
Indenture, as permitted by the TIA. The Trustee shall not give notice of a
Default pursuant to Section 6.01(2) until at least sixty days have passed since
its occurrence.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after
each May 1, beginning with the May 1 following the date of this Indenture, the
Trustee shall mail to each Holder a brief report dated as of such May 1 that
complies with TIA Section 313(a), if required by such Section 313(a). The
Trustee also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and each securities exchange on which the Securities are
listed. The Company agrees to notify the Trustee whenever the Securities become
listed on any securities exchange and of any delisting thereof.
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company agrees:
(a) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which compensation shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(b) to reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture
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(including the reasonable compensation and the expense, advances and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
(c) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or bad faith
on its part, arising out of or in connection with the acceptance or
administration of this trust, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay the Principal
Amount, Issue Price, accrued Original Issue Discount, accrued Liquidated
Damages, if any, Redemption Price, Purchase Price, Fundamental Change Redemption
Price or interest, if any, as the case may be, on particular Securities.
The Company's payment obligations pursuant to this Section 7.07 shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(3) or (4), the expenses
are intended to constitute expenses of administration under any Bankruptcy Law.
SECTION 7.08. REPLACEMENT OF TRUSTEE. The Trustee may resign by so
notifying the Company; provided, however, that no such resignation shall be
effective until a successor Trustee has accepted its appointment pursuant to
this Section 7.08. The Holders of a majority in aggregate Principal Amount of
the Securities at the time outstanding may remove the Trustee by so notifying
the Trustee and may appoint a successor Trustee. The Company shall remove the
Trustee if:
(1) the Trustee fails to comply with, or ceases to be eligible
under, Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or public officer takes charge of the Trustee or
its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint, by
resolution of its Board of Directors, a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to
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Holders. The retiring Trustee shall promptly transfer all property held by it as
Trustee to the successor Trustee, subject to the lien provided for in Section
7.07.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of a majority in aggregate Principal Amount of the Securities at the
time outstanding may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trustee business (including the trust created by this
Indenture) or assets to, another corporation, the resulting, surviving or
transferee corporation without any further act shall be the successor Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all
times satisfy the requirements of TIA Sections 310(a)(1) and 310(b). The Trustee
shall have a combined capital and surplus of at least $50,000,000 (or if the
Trustee is a member of a bank holding company system, its bank holding company
shall have a combined capital and surplus of $50,000,000) as set forth in its
most recent published annual report of conditions. Nothing herein contained
shall prevent the Trustee from filing with the SEC the application referred to
in the penultimate paragraph of TIA Section 310(b). If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section
7.10, it shall resign immediately in the manner and with the effect hereinafter
specified in this Article 7.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES. When (i) the
Company delivers to the Trustee all outstanding Securities (other than
Securities replaced pursuant to Section 2.07) for cancellation or (ii) all
outstanding Securities have become due and payable and the Company deposits with
the Trustee Cash and/or securities, as permitted by the terms hereof, sufficient
to pay at Stated Maturity the Principal Amount of all outstanding Securities
(other than Securities replaced pursuant to Section 2.07), and if in either case
the Company pays all other sums payable hereunder by the Company, then this
Indenture shall, subject to Section 7.07, cease to be of further effect. The
Trustee shall join in the execution of a document prepared by the Company
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acknowledging satisfaction and discharge of this Indenture on demand of the
Company accompanied by an Officers' Certificate and Opinion of Counsel and at
the cost and expense of the Company.
SECTION 8.02. REPAYMENT TO THE COMPANY. The Trustee and the Paying
Agent shall return to the Company upon written request any money or securities
held by them for the payment of any amount with respect to the Securities that
remains unclaimed for two years, provided, however, that the Trustee or such
Paying Agent, before being required to make any such return, shall, in the event
that the Securities are no longer held in global form, at the expense of the
Company cause to be published once in a newspaper of general circulation in The
City of New York or mail to each such Holder notice that such money or
securities remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication or mailing, any
unclaimed money or securities then remaining will be returned to the Company.
After return to the Company, Holders entitled to the money or securities must
look to the Company for payment as general creditors unless an applicable
abandoned property law designates another Person.
ARTICLE 9
AMENDMENTS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee
may amend this Indenture and the Securities without the consent of any
Securityholder:
(1) to cure any ambiguity or to correct or supplement any
provision contained herein or in any supplemental indenture which may be
defective or inconsistent with any other provision contained herein or in any
supplemental indenture, or to make such other provisions in regard to matters or
questions arising under this Indenture which shall not materially adversely
affect the interests of the Holders of the Securities;
(2) to comply with Article 5 or Section 11.14;
(3) to provide for uncertificated Securities in addition to
certificated Securities so long as such uncertificated Securities are in
registered form for purposes of the Internal Revenue Code of 1986, as amended;
(4) to make any change that does not adversely affect the right
of any Securityholder; or
(5) to make any change to comply with the TIA, or any amendment
thereto, or to comply with any requirement of the SEC in connection with the
qualification, if any, of the Indenture under the TIA.
SECTION 9.02. WITH CONSENT OF HOLDERS. The Company and the Trustee,
with the written consent of the Holders of at least a majority in aggregate
Principal Amount of the Securities at the
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time outstanding, may amend this Indenture or the Securities. However, without
the consent of each Securityholder affected, an amendment or supplement to this
Indenture or the Securities may not:
(1) make any change to the Principal Amount of Securities whose
Holders must consent to an amendment;
(2) make any change to the manner or rate of accrual in
connection with Original Issue Discount or interest, if any, reduce the rate of
interest referred to in paragraph 1 of the Securities or extend the time for
payment of Original Issue Discount or interest, if any, on any Security;
(3) reduce the Principal Amount or the Issue Price of or extend
the Stated Maturity of any Security;
(4) reduce the Redemption Price, Purchase Price or Fundamental
Change Redemption Price of any Security;
(5) make any Security payable in money or securities other than
that stated in the Security;
(6) make any change in Article 10 that adversely affects the
rights of any Securityholder in any material respect;
(7) make any change in Section 6.04, Section 6.07 or this
Section 9.02, except to increase any such percentage;
(8) make any change that adversely affects the right to convert
any Security; or
(9) make any change that adversely affects the right to require
the Company to purchase the Securities, or the right to require the Company to
redeem the Securities upon a Fundamental Change, in accordance with the terms
thereof and this Indenture.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.
An amendment under this Section 9.02 or Section 9.01 may not make any
change that adversely affects the rights under Article 10 of any holder of
Senior Indebtedness then outstanding unless the requisite holders of such Senior
Indebtedness consent to such change pursuant to the terms of such Senior
Indebtedness.
After an amendment under this Section 9.02 becomes effective, the
Company shall mail to each Holder a notice briefly describing the amendment.
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SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every supplemental
indenture executed pursuant to this Article 9 shall comply with the TIA as then
in effect, if then required to so comply.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS, WAIVERS AND ACTIONS.
Until an amendment, waiver or other action becomes effective, a consent to it or
any other action by a Holder of a Security is a continuing consent by the Holder
and every subsequent Holder of that Security or portion of the Security that
evidences the same obligation as the consenting Holder's Security, even if
notation of the consent, waiver or action is not made on the Security. However,
any such Holder or subsequent Holder may revoke the consent, waiver or action as
to such Holder's Security or portion of the Security if the Trustee receives the
notice or revocation before the date the amendment, waiver or action becomes
effective. After an amendment, waiver or action becomes effective, it shall bind
every Securityholder.
SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. Securities
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article 9 may, and shall if required by the Trustee, bear a
notation in form approved by the Trustee as to any matter provided for in such
supplemental indenture. If the Company shall so determine, new Securities so
modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
outstanding Securities.
SECTION 9.06. TRUSTEE TO SIGN SUPPLEMENTAL INDENTURES. The Trustee
shall sign any supplemental indenture authorized pursuant to this Article 9 if
the amendment does not adversely affect the rights, duties, liabilities or
immunities of the Trustee. If it does, the Trustee may, but need not, sign such
supplemental indenture. In signing such amendment the Trustee shall be entitled
to receive, and (subject to the provisions of Section 7.01) shall be fully
protected in relying upon, an Officers' Certificate and an Opinion of Counsel
stating that such amendment is authorized or permitted by this Indenture.
SECTION 9.07. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution
of any supplemental indenture under this Article 9, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and every Holder of Securities
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.
ARTICLE 10
SUBORDINATION
SECTION 10.01. AGREEMENT OF SUBORDINATION. The Company covenants and
agrees, and each Holder of Securities issued hereunder by such Holder's
acceptance thereof likewise covenants and agrees, that all Securities shall be
issued subject to the provisions of this Article 10; and each
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Person holding any such Security whether upon original issue or upon transfer or
assignment thereof, accepts and agrees to be bound by such provisions.
The payment of the Principal Amount, Issue Price, accrued Original
Issue Discount, accrued Liquidated Damages, if any, Redemption Price, Purchase
Price, Fundamental Change Redemption Price and interest, if any, in respect of
all Securities issued hereunder shall, to the extent and in the manner
hereinafter set forth, be subordinated and subject in right of payment to the
prior payment in full in Cash or other payment satisfactory to the holders of
Senior Indebtedness of all Senior Indebtedness of the Company, whether
outstanding at the date of this Indenture or thereafter incurred.
No provision of this Article 10 shall prevent the occurrence of any
Default or Event of Default hereunder.
SECTION 10.02. PAYMENTS TO HOLDERS. No payment shall be made with
respect to the payment of Principal Amount, Issue Price, accrued Original Issue
Discount, accrued Liquidated Damages, if any, Redemption Price, Purchase Price,
Fundamental Change Redemption Price and interest, if any, on the Securities,
except payments and distributions made by the Trustee as permitted by Section
10.05, if:
(i) a default in any payment obligations in respect of
Senior Indebtedness occurs and is continuing, without regard to any applicable
period of grace (whether at maturity or at a date fixed for payment or by
declaration or otherwise); or
(ii) any other default occurs and is continuing with respect
to Designated Senior Indebtedness that permits the holders of such Designated
Senior Indebtedness as to which such default relates to accelerate its maturity
and the Trustee receives a notice of the default (a "Payment Blockage Notice")
from a holder of Designated Senior Indebtedness, a Representative of Designated
Senior Indebtedness or the Company.
If the Trustee receives any Payment Blockage Notice pursuant to
clause (ii) above, no subsequent Payment Blockage Notice shall be effective for
purposes of this Section unless and until at least 365 days shall have elapsed
since the initial effectiveness of the immediately prior Payment Blockage
Notice. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been cured or waived for a period of not less than 90 days (it being
acknowledged that (x) any action of the Company or any of its Subsidiaries
occurring subsequent to delivery of a Payment Blockage Notice that would give
rise to any event of default pursuant to any provision of Senior Indebtedness
under which an event of default previously existed (or was continuing at the
time of delivery of such Payment Blockage Notice) shall constitute a new event
of default for this purpose and (y) any breach of a financial covenant giving
rise to a nonpayment default for a period ending subsequent to the date of
delivery of the respective Payment Blockage Notice shall constitute a new event
of default for this purpose.)
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The Company may and shall resume payments on and distributions
in respect of the Securities upon the earlier of:
(1) in case of a default referred to in clause (i) above, the
date upon which the default is cured or waived in accordance with the terms of
the governing instrument or ceases to exist, or
(2) in the case of a default referred to in clause (ii) above,
the date upon which the default is cured, waived in accordance with the terms of
the governing instrument or ceases to exist or 179 days pass after notice is
received if the maturity of such Designated Senior Indebtedness has not been
accelerated,
unless this Article 10 otherwise prohibits the payment or distribution at the
time of such payment or distribution.
Upon any payment by the Company or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization or
bankruptcy of Company, whether voluntary or involuntary or insolvency,
receivership or similar proceedings relating to the Company or its property, or
an assignment of the benefit of creditors or any marshaling of the Company's
assets or liabilities, all amounts due or to become due upon all Senior
Indebtedness shall first be paid in full in Cash or other payment satisfactory
to the holders of such Senior Indebtedness, or provision is made for such
payment in Cash or other payment satisfactory to the holders of Senior
Indebtedness, before any payment is made on account of the Principal Amount,
Issue Price, accrued Original Issue Discount, accrued Liquidated Damages, if
any, Redemption Price, Purchase Price, Fundamental Change Redemption Price or
interest, if any, in respect of the Securities (except payments made pursuant to
Article 8 hereof from monies deposited with the Trustee pursuant thereto prior
to the happening of such dissolution or winding-up or liquidation or
reorganization or bankruptcy of Company, whether voluntary or involuntary or
insolvency, receivership or similar proceedings relating to the Company or its
property, or an assignment of the benefit of creditors or any marshaling of the
Company's assets or liabilities), and upon any such dissolution or winding-up or
liquidation or reorganization or bankruptcy of Company, whether voluntary or
involuntary or insolvency, receivership or similar proceedings relating to the
Company or its property, or an assignment of the benefit of creditors or any
marshaling of the Company's assets or liabilities, any payment by the Company,
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, to which the Holders or the Trustee would be
entitled, except for the provisions of this Article 10, shall (except as
aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other Person making such payment or distribution,
or by the Holders of the Securities or by the Trustee if received by them or it,
directly to the holders of Senior Indebtedness (pro rata to such holders on the
basis of the respective amounts of Senior Indebtedness held by such holders, as
calculated by the Company) or their representative or representatives, or to the
trustee or trustees under any indenture pursuant to which any instruments
evidencing any such Senior Indebtedness may have been issued, as their
respective interests may appear to the extent necessary to pay all such Senior
Indebtedness in full in Cash or other payment satisfactory to the holders of
such Senior Indebtedness, after giving effect
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to any concurrent payment or distribution to or for the holders of such Senior
Indebtedness, before any payment or distribution is made to the Holders or to
the Trustee.
In the event that any Securities are declared due and payable before
their Stated Maturity pursuant to Section 6.02, then and in such event the
Company shall promptly notify holders of its Senior Indebtedness of such
acceleration. The Company may not pay the Securities until 120 days have passed
after such acceleration occurs and may thereafter pay the Securities if this
Article 10 permits the payment at that time.
In the event that, notwithstanding the foregoing provisions, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (including, without limitation, by way
of setoff or otherwise), prohibited by the foregoing provisions in this Section
10.02, shall be received by the Trustee or the Holders of the Securities before
all Senior Indebtedness of the Company is paid in full in Cash or other payment
satisfactory to the holders of such Senior Indebtedness, or provision is made
for such payment in Cash or other payment satisfactory to the holders of such
Senior Indebtedness, such payment or distribution shall be held in trust for the
benefit of and shall be paid over or delivered to the holders of Senior
Indebtedness of the Company or their representative or representatives, or to
the trustee or trustees under any indenture pursuant to which any instruments
evidencing any such Senior Indebtedness may have been issued, as their
respective interests may appear, as calculated by the Company, for application
to the payment of all such Senior Indebtedness remaining unpaid to the extent
necessary to pay all such Senior Indebtedness in full in Cash or other payment
satisfactory to the holders of such Senior Indebtedness, after giving effect to
any concurrent payment or distribution to or for the holders of such Senior
Indebtedness.
For purposes of this Article 10, the words, "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinated at least to the extent provided in this Article 10 with respect
to the Securities to the payment of all Senior Indebtedness of the Company which
may at the time be outstanding; provided that (i) such Senior Indebtedness is
assumed by the new corporation, if any, resulting from any such reorganization
or readjustment, and (ii) the rights of the holders of such Senior Indebtedness
(other than leases that are not assumed by the Company or the new corporation,
as the case may be) are not, without the consent of such holders, altered by
such reorganization or readjustment. The consolidation of the Company with, or
the merger of the Company into, another corporation or the liquidation or
dissolution of the Company following the conveyance or transfer of its property
as an entirety, or substantially as an entirety, to another corporation upon the
terms and conditions provided for in Article 5 hereof shall not be deemed a
dissolution, winding-up, liquidation or reorganization for the purposes of this
Section 10.02 if such other corporation shall, as a part of such consolidation,
merger, conveyance or transfer, comply with the conditions stated in Article 5
hereof.
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Nothing in this Section 10.02 shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 7.07. This Section 10.02 shall be
subject to the further provisions of Section 10.05.
SECTION 10.03. SUBROGATION OF SECURITIES. Subject to the payment in
full in Cash or other payment satisfactory to the holders of Senior Indebtedness
of all Senior Indebtedness of the Company, the rights of the Holders shall be
subrogated to the rights of the holders of such Senior Indebtedness to receive
payments or distributions of cash, property or securities of the Company
applicable to such Senior Indebtedness until the Principal Amount, Issue Price,
accrued Original Issue Discount, accrued Liquidated Damages, if any, Redemption
Price, Purchase Price, Fundamental Change Redemption Price and interest, if any,
in respect of the Securities shall be paid in full; and, for the purposes of
such subrogation, no payments or distributions to the holders of such Senior
Indebtedness of any cash, property or securities to which the Holders or the
Trustee would be entitled except for the provisions of this Article 10, and no
payment over pursuant to the provisions of this Article 10, to or for the
benefit of the holders of such Senior Indebtedness by Holders or the Trustee,
shall, as between the Company, its creditors other than holders of its Senior
Indebtedness, and the Holders of the Securities be deemed to be a payment by the
Company to or on account of its Senior Indebtedness; and no payments or
distributions of cash, property or securities to or for the benefit of the
Holders pursuant to the subrogation provisions of this Article 10, which would
otherwise have been paid to the holders of Senior Indebtedness shall be deemed
to be a payment by the Company to or for the account of the Securities. It is
understood that the provisions of this Article 10 are and are intended solely
for the purpose of defining the relative rights of the Holders on the one hand,
and the holders of Senior Indebtedness, on the other hand.
Nothing contained in this Article 10 or elsewhere in this Indenture
or in the Securities is intended to or shall impair, as between the Company, its
creditors other than the holders of its Senior Indebtedness and the Holders, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders the Principal Amount, Issue Price, accrued Original Issue Discount,
accrued Liquidated Damages, if any, Redemption Price, Purchase Price,
Fundamental Change Redemption Price and interest, if any, in respect of the
Securities as and when the same shall become due and payable in accordance with
their terms, or is intended to or shall affect the relative rights of the
Holders and creditors of the Company other than the holders of the Senior
Indebtedness, nor shall anything herein or therein prevent the Trustee or the
Holder of any Security from exercising all remedies otherwise permitted by
applicable law upon an Event of Default, subject to the rights, if any, under
this Article 10 of the holders of Senior Indebtedness in respect of cash,
property or securities of the Company received upon the exercise of any such
remedy.
Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Trustee, subject to the provisions of Section 7.01, and
the Holders of the Securities shall be entitled to rely upon any order or decree
made by any court of competent jurisdiction in which such dissolution,
winding-up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making such payment or distribution, delivered to the Trustee,
to the Holders for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other
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indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 10.
SECTION 10.04. AUTHORIZATION BY HOLDERS. Each Holder by such Holder's
acceptance thereof authorizes and directs the Trustee in such Holder's behalf to
take such action as may be necessary or appropriate to effectuate the
subordination provided in this Article 10 and appoints the Trustee such Holder's
attorney-in-fact for any and all such purposes.
SECTION 10.05. NOTICE TO TRUSTEE. The Company shall give prompt
written notice in a form of an Officers' Certificate to a Trust Officer of any
fact known to the Company which would prohibit the making of any payment of
monies to or by the Trustee or any Paying Agent in respect of the Securities
pursuant to the provisions of this Article 10. Notwithstanding the provisions of
this Article 10 or any other provision of this Indenture, the Trustee shall not
be charged with knowledge of the existence of any facts which would prohibit the
making of any payment of monies to or by the Trustee in respect of the
Securities pursuant to the provisions of this Article 10, unless and until a
Trust Officer shall have received written notice thereof at the Corporate Trust
Office from the Company (in the form of an Officers' Certificate) or a holder or
holders of Senior Indebtedness or a Representative or from any trustee therefor;
and before the receipt of any such written notice, the Trustee, subject to the
provisions of Section 7.01, shall be entitled in all respects to assume that no
such facts exist; provided that if on a date not fewer than two Business Days
prior to the date upon which by the terms hereof any such monies may become
payable for any purpose (including, without limitation, the payment of the
Principal Amount, Issue Price, accrued Original Issue Discount, accrued
Liquidated Damages, if any, Redemption Price, Purchase Price, Fundamental Change
Redemption Price or interest, if any, in respect of any Security the Trustee
shall not have received, with respect to such monies, the notice provided for in
this Section 10.05, then, anything herein contained to the contrary
notwithstanding, the Trustee shall have full power and authority to receive such
monies and to apply the same to the purpose for which they were received, and
shall not be affected by any notice to the contrary which may be received by it
on or after such prior date.
Notwithstanding anything to the contrary herein set forth, nothing
shall prevent any payment by the Company or the Trustee to the Holders of monies
(A) in connection with a redemption of Securities if (i) notice of such
redemption has been given pursuant to Article 3 or Section 8.01 hereof prior to
the receipt by the Trustee of written notice as aforesaid, and (ii) such notice
of redemption is given not earlier than 60 days before the redemption date; and
(B) in connection with a repayment of a Security pursuant to Section 3.09 if,
prior to the receipt by the Trustee of written notice as aforesaid, the Company
has given notice of a Fundamental Change.
The Trustee, subject to the provisions of Section 7.01, shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder or a Representative of Designated Senior
Indebtedness or a Representative of Senior Indebtedness (or a trustee on behalf
of such holder) to establish that such notice has been given by a holder or a
Representative of Designated Senior Indebtedness or a Representative of such
Senior Indebtedness or a trustee on behalf of any such holder or holders. In the
event that the Trustee determines in good faith that
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further evidence is required with respect to the right of any Person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article 10, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of such Senior
Indebtedness held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article 10, and if such evidence is not
furnished the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment.
SECTION 10.06. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee
in its individual capacity shall be entitled to all the rights set forth in this
Article 10 in respect of any Senior Indebtedness at any time held by it, to the
same extent as any other holder of such Senior Indebtedness, and nothing or
elsewhere in this Indenture shall deprive the Trustee of any of its rights as
such holder.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of such Senior Indebtedness shall be
read into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the
provisions of Section 7.01, the Trustee shall not be liable to any holder of
such Senior Indebtedness if it shall pay over or deliver to Holders, the Company
or any other Person money or assets to which any holder of Senior Indebtedness
shall be entitled by virtue of this Article 10 or otherwise.
SECTION 10.07. NO IMPAIRMENT OF SUBORDINATION. No right of any
present or future holder of any Senior Indebtedness to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by (i)
any amendment of or addition or supplement to any such Senior Indebtedness or
any instrument or agreement relating thereto (unless otherwise expressly
provided therein), or (ii) any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of the
instrument, regardless of any knowledge thereof which any such holder may have
or otherwise be charged with.
SECTION 10.08. RELIANCE BY HOLDERS OF SENIOR INDEBTEDNESS ON
SUBORDINATION PROVISIONS. Each Holder of Securities by such Holder's acceptance
thereof, acknowledges and agrees that the foregoing subordination provisions
are, and are intended to be, an inducement and a consideration to each holder of
any Senior Indebtedness, whether such Senior Indebtedness was created or
acquired before or after the issuance of the Securities, to acquire and continue
to hold, or to continue to hold, such Senior Indebtedness and such holder of
Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Indebtedness, and no amendment or modification of the
provisions contained herein shall diminish the rights of such holder or holders
unless such holder or holders shall have agreed in writing thereto.
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SECTION 10.09. REINSTATEMENT OF SUBORDINATION. If, at any time, all
or part of any payment of any Senior Indebtedness theretofore made by the
Company or any other Person is rescinded or must otherwise be returned by the
holders of such Senior Indebtedness for any reason whatsoever (including,
without limitation, the insolvency, bankruptcy or reorganization of the Company
or such other Person), these subordination provisions shall continue to be
effective or be reinstated, as the case may be, all as though such payment had
not been made.
SECTION 10.10. PERMITTED PAYMENTS. Nothing contained in this Article
10 or elsewhere in this Indenture, or in the Securities shall prevent (a) the
Company at any time, except under the conditions described in Section 10.02,
from making payments at any time of Principal Amount, Issue Price, accrued
Original Issue Discount, accrued Liquidated Damages, if any, Redemption Price,
Purchase Price, Fundamental Change Redemption Price or interest, if any, in
respect of the Securities, or from depositing with the Trustee or any Paying
Agent money for such payments, or (b) the application by the Trustee or Paying
Agent of any moneys deposited with it under this Indenture to the payment of or
on account of the Principal Amount, Issue Price, accrued Original Issue
Discount, accrued Liquidated Damages, if any, Redemption Price, Purchase Price,
Fundamental Change Redemption Price or interest, if any, in respect of the
Securities to the Holders entitled thereto to the beneficiaries thereof, if such
payment would not have been prohibited by the provisions of Section 10.02.
SECTION 10.11. ARTICLE APPLICABLE TO PAYING AGENTS. If at any time
any Paying Agent other than the Trustee shall have been appointed by the Company
and be then acting hereunder, the term "Trustee" as used in this Article 10
shall (unless the context otherwise requires) be construed as extending to and
including such Paying Agent within its meaning as fully for all intents and
purposes as if such Paying Agent were named in this Article 10 in addition to or
in place of the Trustee; provided, however, that the first paragraph of Section
10.05 shall not apply to the Company or any Affiliate of the Company if it or
such Affiliate acts as Paying Agent.
SECTION 10.12. TREATMENT OF CONVERSION PAYMENTS. Notwithstanding
anything in this Indenture to the contrary, neither the issuance and delivery of
junior securities upon conversion of the Securities in accordance with Article
11 nor the payment of Cash in lieu of fractional shares of Common Stock in
accordance with Article 11 shall be deemed to constitute a payment or
distribution on account of the Principal Amount, Issue Price, accrued Original
Issue Discount, accrued Liquidated Damages, if any, Redemption Price or
Fundamental Change Purchase Price or interest, if any, in respect of the
Securities. For the purposes of this paragraph, the term "junior securities"
means (a) shares of any stock of any class of the Company, (b) securities of the
Company which are subordinated in right of payment to all Senior Indebtedness
which may be outstanding at the time of issuance or delivery of such securities
to substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article 10, and (c) any securities into
which the Securities become convertible pursuant to Section 11.14 which are
securities of a Person required to enter into a supplemental indenture pursuant
to such section (or Section 5.01) and are either (x) shares of any stock of any
class of such Person, or (y) securities of such Person which are subordinated in
right of payment to all Senior Indebtedness of such Person which may be
outstanding at the time of issuance or delivery of such securities to
substantially the
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same extent as, or to a greater extent than, the Securities or, are so
subordinated as provided in this Article 10. Nothing contained in this Article
10 or elsewhere in this Indenture or in the Securities is intended to or shall
impair, as among the Company, its creditors other than the holders of Senior
Indebtedness and the Holders, the right, which is absolute and unconditional, of
the Holder to convert such Security in accordance with Article 11.
SECTION 10.13. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF
LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company
referred to in this Article 10, the Trustee and the Holders shall be entitled to
rely upon any order or decree entered by any court of competent jurisdiction in
which such insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, liquidating trustee, custodian,
receiver, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the Holders, for
the purpose of ascertaining the Persons entitled to participate in such payment
or distribution, the holders of Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
10.
SECTION 10.14. HOLDERS OF SENIOR INDEBTEDNESS MAY FILE PROOFS OF
CLAIM. If the Trustee does not file a claim or proof of debt in the form
required in any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding pursuant to Section 6.09 prior to 30 days before the expiration of
the time to file such claims or proofs, then any holder or holders of Senior
Indebtedness or their representative or representatives shall have the right to
demand, sue for, collect, receive and receipt for the payments and distributions
in respect of the Securities which are required to be paid or delivered to the
holders of Senior Indebtedness as provided in this Article 10 and to file and
prove all claims therefor and to take all such other action in the name of the
holders or otherwise, as such holders of Senior Indebtedness or representative
thereof may determine to be necessary or appropriate for the enforcement of the
provisions of this Article 10.
ARTICLE 11
CONVERSION
SECTION 11.01. CONVERSION PRIVILEGE. A Holder of a Security may
convert such Security for Common Stock at any time during the period stated in
paragraph 9 of the Securities. The number of shares of Common Stock issuable
upon conversion of a Security per $1,000 of Principal Amount thereof (the
"Conversion Rate") shall be that set forth in paragraph 9 in the Securities,
subject to adjustment as herein set forth.
A Holder may convert a portion of the Principal Amount of a Security
if the portion is $1,000 or a multiple of $1,000. Provisions of this Indenture
that apply to conversion of all of a Security also apply to conversion of a
portion of a Security.
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SECTION 11.02. CONVERSION PROCEDURE. To convert a Security a Holder
must satisfy the requirements in paragraph 9 of the Securities. The date on
which the Holder of Securities satisfies all those requirements is the
conversion date (the "Conversion Date"). As soon as practicable after the
Conversion Date the Company shall deliver to the Holder, through the Conversion
Agent, a certificate for the number of full shares of Common Stock issuable upon
the conversion and Cash in lieu of any fractional share determined pursuant to
Section 11.03. The Person in whose name the certificate is registered shall be
treated as a stockholder of record on and after the Conversion Date; provided,
however, that no surrender of a Security on any date when the stock transfer
books of the Company shall be closed shall be effective to constitute the Person
or Persons entitled to receive the shares of Common Stock upon such conversion
as the record holder or holders of such shares of Common Stock on such date, but
such surrender shall be effective to constitute the Person or Persons entitled
to receive such shares of Common Stock as the record holder or holders thereof
for all purposes at the close of business on the next succeeding day on which
such stock transfer books are open; such conversion shall be at the Conversion
Rate in effect on the date that such Security shall have been surrendered for
conversion, as if the stock transfer books of the Company had not been closed.
Upon conversion of a Security, such Person shall no longer be a Holder of such
Security.
No payment or adjustment will be made for dividends on or other
distribution with respect to any Common Stock except as provided in this Article
11. On conversion of a Security, that portion of accrued Original Issue Discount
attributable to the period from the Issue Date of the Security to the Conversion
Date with respect to the converted Security shall not be canceled, extinguished
or forfeited, but rather shall be deemed to be paid in full to the Holder
thereof through delivery of the Common Stock (together with the Cash payment, if
any, in lieu of fractional shares) in exchange for the Security being converted
pursuant to the provisions hereof.
If a Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon the conversion shall be based on
the total Principal Amount of the Securities converted.
Upon surrender of a Security that is convert in part, the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder, a
new Security in an authorized denomination equal in Principal Amount to the
unconverted portion of the Security surrendered.
If the last day on which a Security may be converted is a Legal
Holiday in a place where a Conversion Agent is located, the Security may be
surrendered to that Conversion Agent on the next succeeding day that it is not a
Legal Holiday.
SECTION 11.03. FRACTIONAL SHARES. The Company will not issue a
fractional share of Common Stock upon conversion of a Security. Instead the
Company will deliver Cash for the current market value of the fractional share.
The current market value of a fractional share shall be determined to the
nearest 1/10,000th of a share by multiplying the last reported sale price
(determined as set forth in the definition of Current Market Price) on the last
Trading Day prior to
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the Conversion Date of a full share by the fractional amount and rounding the
product to the nearest whole cent.
SECTION 11.04. TAXES ON CONVERSION. If a Holder converts a Security,
the Company shall pay any documentary, stamp or similar issue or transfer tax
due on the issue of shares of Common Stock upon the conversion. However, the
Holder shall pay any such tax which is due because the Holder requests the
shares to be issued in a name other than the Holder's name. The Conversion Agent
may refuse to deliver the certificates representing the Common Stock being
issued in a name other than the Holder's name until the Conversion Agent
receives a sum sufficient to pay any tax which will be due because the shares
are to be issued in a name other than the Holder's name.
Nothing herein shall preclude any tax withholding required by law or
regulations.
SECTION 11.05. COMPANY TO PROVIDE STOCK. The Company shall, prior to
issuance of any Securities hereunder, and from time to time as may be necessary,
reserve out of its authorized but unissued Common Stock a sufficient number of
shares of Common Stock to permit the conversion of the Securities.
All shares of Common Stock delivered upon conversion of the
Securities shall be newly issued shares or treasury shares, shall be duly and
validly issued and fully paid and nonassessable and shall be free from
preemptive rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all Federal and
state securities laws regulating the order and delivery of shares of Common
Stock upon conversion of Securities, if any, and will endeavor promptly, if
permitted by the rules of such exchange, over-the-counter market or other
market, to list or cause to have quoted such shares of Common Stock on each
national securities exchange or in the over-the-counter market or such other
market on which the Common Stock is then listed or quoted.
SECTION 11.06. ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. In case the
Company shall (i) pay a dividend, or make a distribution, in shares of its
Common Stock, on its Common Stock, (ii) subdivide its outstanding Common Stock
into a greater number of shares, or (iii) combine its outstanding Common Stock
into a smaller number of shares, the Conversion Rate in effect immediately prior
thereto shall be adjusted so that the holder of any Security thereafter
surrendered for conversion shall be entitled to receive the number of shares of
Common Stock which such Holder would have owned or have been entitled to receive
after the happening of any of the events described above had such Security been
converted immediately prior to the happening of such event. If any dividend or
distribution of the type described in clause (i) above is not so paid or made,
the Conversion Rate shall again be adjusted to the Conversion Rate which would
then be in effect if such dividend or distribution had not been declared. An
adjustment made pursuant to this Section 11.06 shall become effective
immediately after the record date in the case of a dividend and shall become
effective immediately after the effective date in the case of subdivision or
combination.
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SECTION 11.07. ADJUSTMENT FOR RIGHTS ISSUE. In case the Company shall
issue rights or warrants to all holders of its Common Stock entitling them (for
a period expiring within 45 days after the record date mentioned below) to
subscribe for or purchase Common Stock at a price per share less than the
Current Market Price per share of Common Stock at the record date for the
determination of stockholders entitled to receive such rights or warrants, the
Conversion Rate in effect immediately prior thereto shall be adjusted so that
the same shall equal the Conversion Rate determined by multiplying the
Conversion Rate in effect immediately prior to the date of issuance of such
rights or warrants by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered would purchase at such Current Market Price.
Such adjustment shall be made successively whenever any such rights or warrants
are issued, and shall become effective immediately after the opening of business
on the day following the record date for the determination of the stockholders
entitled to receive such rights or warrants. To the extent that shares of Common
Stock are not delivered after the expiration of such rights or warrants, the
Conversion Rate shall be readjusted to the Conversion Rate which would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made on the basis of delivery of only the number of shares of Common Stock
actually delivered. If such rights or warrants are not so issued, the Conversion
Rate shall again be adjusted to be the Conversion Rate which would then be in
effect if such record date for the determination of stockholders entitled to
receive such rights or warrants had not been fixed. In determining whether any
rights or warrants entitle the holders to subscribe for or purchase shares of
Common Stock at less than such Current Market Price, and in determining the
aggregate offering price of such shares of Common Stock, there shall be taken
into account any consideration received by the Company for such rights or
warrants, the value of such consideration, if other than cash, to be determined
by the Board of Directors.
SECTION 11.08. ADJUSTMENT FOR OTHER DISTRIBUTIONS.
(a) In case the Company shall distribute to all holders of its Common
Stock (excluding any distribution in connection with the liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary) any
shares of any class of capital stock of the Company (other than Common Stock) or
evidences of its indebtedness or assets (other than cash) or rights or warrants
to subscribe for or purchase any of its securities (excluding those referred to
in Section 11.07 hereof) (any of the foregoing hereinafter in this Section
11.08(a) called the "Distributed Securities"), then, the Conversion Rate shall
be adjusted so that the same shall equal the Conversion Rate determined by
multiplying the Conversion Rate in effect immediately prior to the date of such
distribution by a fraction of which the numerator shall be the Current Market
Price per share of the Common Stock on the record date mentioned below, and the
denominator shall be the Current Market Price per share of the Common Stock on
such record date less the fair market value on such record date (as determined
by the Board of Directors of the Company, whose determination shall be
conclusive, and described in a certificate filed with the Trustee) of the
Distributed Securities so distributed applicable to one share of Common Stock.
Such adjustment shall become effective immediately
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after the record date for the determination of stockholders entitled to receive
such distribution. Notwithstanding the foregoing, in the event the then fair
market value (as so determined) of the portion of the Distributed Securities so
distributed applicable to one share of Common Stock is equal to or greater than
the Current Market Price of the Common Stock on the record date, in lieu of the
foregoing adjustment, adequate provision shall be made so that each
Securityholder shall have the right to receive upon conversion the amount of
Distributed Securities such Holder would have received had such Holder converted
each Security on such record date. In the event that such distribution is not so
paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate
which would then be in effect if such distribution had not been declared. If the
Board of Directors determines the fair market value of any distribution for
purposes of this Section 11.08(a) by reference to the actual or when issued
trading market for any securities, it must in doing so consider the prices in
such market over the same period used in computing the Current Market Price of
the Common Stock.
Notwithstanding the foregoing provisions of this Section 11.08(a), no
adjustment shall be made thereunder for any distribution of Distributed
Securities if the Company makes proper provision so that each Holder of a
Security who converts such Security (or any portion thereof) after the record
date for such distribution shall be entitled to receive upon such conversion, in
addition to the shares of Common Stock issuable upon such conversion, the amount
and kind of Distributed Securities that such Holder would have been entitled to
receive if such Holder had, immediately prior to such record date, converted
such Security for Common Stock; provided that, with respect to any Distributed
Securities that are convertible, exchangeable or exercisable, the foregoing
provision shall only apply to the extent (and so long as) the Distributed
Securities receivable upon conversion of such Security would be convertible,
exchangeable or exercisable, as applicable, without any loss of rights or
privileges for a period of at least 60 days following conversion of such
Security.
(b) In case the Company shall, by dividend or otherwise, distribute
to all holders of its Common Stock cash (excluding (x) any quarterly cash
dividend on the Common Stock to the extent the aggregate cash dividend per share
of Common Stock in any fiscal quarter does not exceed the greater of (A) the
amount per share of Common Stock of the next preceding quarterly cash dividend
on the Common Stock to the extent such preceding quarterly dividend did not
require any adjustment of the Conversion Rate pursuant to this Section 11.08(b)
(as adjusted to reflect subdivisions or combinations of the Common Stock), and
(B) 3.75% of the average of the last reported sales prices of the Common Stock
(determined as provided in the definition of Current Market Price) during the
ten Trading Days next preceding the date of declaration of such dividend and (y)
any dividend or distribution in connection with the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary), then, in such
case, unless the Company elects to reserve such cash for distribution to the
holders of the Securities upon the conversion of the Securities so that any such
holder converting Securities will receive upon such conversion in addition to
the shares of Common Stock to which such holder is entitled, the amount of cash
which such holder would have received if such holder had, immediately prior to
the record date for such distribution of cash, converted its Securities for
Common Stock, the Conversion Rate shall be increased so that the same shall
equal the Conversion Rate determined by multiplying the
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Conversion Rate in effect immediately prior to the record date by a fraction of
which the numerator shall be such Current Market Price of the Common Stock and
the denominator shall be the Current Market Price of the Common Stock on the
record date less the amount of cash so distributed (and not excluded as provided
above) applicable to one share of Common Stock, such increase to be effective
immediately prior to the opening of business on the day following the record
date; provided, however, that in the event the portion of the cash so
distributed applicable to one share of Common Stock is equal to or greater than
the Current Market Price of the Common Stock on the record date, in lieu of the
foregoing adjustment, adequate provision shall be made so that each
Securityholder shall have the right to receive upon conversion the amount of
cash such Holder would have received had such Holder converted each Security on
the record date. If such dividend or distribution is not so paid or made, the
Conversion Rate shall again be adjusted to be the Conversion Rate which would
then be in effect if such dividend or distribution had not been declared. If any
adjustment is required to be made as set forth in this Section 11.08(b) as a
result of a distribution that is a quarterly dividend, such adjustment shall be
based upon the amount by which such distribution exceeds the amount of the
quarterly cash dividend permitted to be excluded pursuant hereto. If an
adjustment is required to be made as set forth in this Section 11.08(b) above as
a result of a distribution that is not a quarterly dividend, such adjustment
shall be based upon the full amount of the distribution.
(c) In case a tender or exchange offer made by the Company or any
Subsidiary of the Company for all or any portion of the Common Stock shall
expire and such tender or exchange offer shall involve the payment by the
Company or such Subsidiary of consideration per share of Common Stock having a
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive, and described in a resolution of such Board of Directors at
the last time (the "Expiration Time") tenders or exchanges may be made pursuant
to such tender or exchange offer (as it shall have been amended)) that exceeds
the Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time, the Conversion Rate shall be increased so that the same
shall equal the Conversion Rate determined by multiplying the Conversion Rate in
effect immediately prior to the Expiration Time by a fraction of which the
numerator shall be the sum of (x) the fair market value (determined as
aforesaid) of the aggregate consideration payable to stockholders based on the
acceptance (up to any maximum specified in the terms of the tender or exchange
offer) of all shares validly tendered or exchanged and not withdrawn as of the
Expiration Time (the shares deemed so accepted up to any such maximum, being
referred to as the "Purchased Shares") and (y) the product of the number of
shares of Common Stock outstanding (less any Purchased Shares) on the Expiration
Time and the Current Market Price of the Common Stock on the Trading Day next
succeeding the Expiration Time, and the denominator shall be the number of
shares of Common Stock outstanding (including any tendered or exchanged shares)
on the Expiration Time multiplied by the Current Market Price of the Common
Stock on the Trading Day next succeeding the Expiration Time, such increase to
become effective immediately prior to the opening of business on the day
following the Expiration Time. In the event that the Company is obligated to
purchase shares pursuant to any such tender or exchange offer, but the Company
is permanently prevented by applicable law from effecting any such purchases or
all such purchases are rescinded, the Conversion Rate shall again be adjusted to
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be the Conversion Rate which would then be effect if such tender or exchange
offer had not been made.
(d) In case of a tender or exchange offer by a Person other than the
Company or any Subsidiary for an amount which increases the offeror's ownership
of Common Stock to more than 25% of the Common Stock outstanding and shall
involve the payment by such Person of consideration per share of Common Stock
having a fair market value (as determined by the Board of Directors, whose
determination shall be conclusive, and described in a resolution of the Board of
Directors at the last time (the "Tender Expiration Time") tenders or exchanges
may be made pursuant to such tender or exchange offer (as it shall have been
amended)) at the Tender Expiration Time that exceeds the Current Market Price of
the Common Stock on the Trading Day next succeeding the Tender Expiration Time,
and in which, as of the Tender Expiration Time the Board of Directors is not
recommending rejection of the offer, the Conversion Rate shall be increased so
that the same shall equal the Conversion Rate determined by multiplying the
Conversion Rate in effect immediately prior to the Tender Expiration Time by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding (including any tendered or exchanged shares) on the Tender
Expiration Time multiplied by the Current Market Price of the Common Stock on
the Trading Day next succeeding the Tender Expiration Time and the denominator
shall be the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up to
an maximum specified in the terms of the tender or exchanged offer) of all
shares validly tendered or exchanged and not withdrawn as of the Tender
Expiration Time (the shares deemed so accepted, up to any such maximum, being
referred to as the "Tender Purchased Shares") and (y) the product of the number
of shares of Common Stock outstanding (less any Tender Purchased Shares) on the
Tender Expiration Time and the Current Market Price of the Common Stock on the
Trading Day next succeeding the Tender Expiration Time, such reduction to become
effective immediately prior to the opening of business on the day following the
Tender Expiration Time. In the event that such Person is obligated to purchase
shares pursuant to any such tender or exchange offer, but such Person is
permanently prevented by applicable law from effecting any such purchases or all
such purchases are rescinded, the Conversion Rate shall again be adjusted to be
the Conversion Rate which would then be in effect if such tender or exchange
offer had not been made. Notwithstanding the foregoing, the adjustment described
in this Section 11.08(d) shall not be made if, as of the Tender Expiration Time,
the offering documents with respect to such offer disclose a plan or intention
to cause the Company to engage in any transaction described in Article 5.
SECTION 11.09. WHEN ADJUSTMENT MAY BE DEFERRED. No adjustment in the
Conversion Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Conversion Rate. Any adjustments that are made
shall be carried forward and taken into account any subsequent adjustment.
All calculations under this Article 11 shall be made to the nearest
cent or to the nearest 1/10,000th of a share, as the case may be.
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SECTION 11.10. WHEN NO ADJUSTMENT REQUIRED. No adjustment need be
made for rights to purchase Common Stock pursuant to a Company plan for
reinvestment of dividends or interest.
No adjustment need be made for a change in the par value or no par
value of the Common Stock.
To the extent the Securities become convertible into cash, assets,
property or securities (other than capital stock of the Company), no adjustment
need be made thereafter as to the cash, assets, property or such securities.
Interest will not accrue on the cash.
SECTION 11.11. NOTICE OF ADJUSTMENT. Whenever the Conversion Rate is
adjusted, the Company shall promptly mail to Holders a notice of the adjustment.
The Company shall file with the Trustee and the Conversion Agent such notice.
The certificate shall, absent manifest error, be conclusive evidence that the
adjustment is correct. Neither the Trustee nor any Conversion Agent shall be
under any duty or responsibility with respect to any such certificate except to
exhibit the same to any Holder desiring inspection thereof.
SECTION 11.12. VOLUNTARY INCREASE. The Company may make such
increases in the Conversion Rate, in addition to those required by Sections
11.06, 11.07 and 11.08, as the Board of Directors considers to be advisable to
avoid or diminish any income tax to holders of Common Stock or rights to
purchase Common Stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes. To the extent permitted by applicable law, the Company may from time
to time increase the Conversion Rate by any amount for any period of time if the
period is at least 20 days, the increase is irrevocable during the period and
the Board of Directors shall have made a determination that such increase would
be in the best interests of the Company, which determination shall be
conclusive. Whenever the Conversion Rate is so increased, the Company shall mail
to Holders and file with the Trustee and the Conversion Agent a notice of such
increase. Such Company shall mail the notice at least 15 days before the date
the increased Conversion Rate takes effect. The notice shall state the increased
Conversion Rate and the period it will be in effect.
SECTION 11.13. NOTICE OF CERTAIN TRANSACTIONS. If:
(1) the Company makes any distribution or dividend that would
require an adjustment in the Conversion Rate pursuant to Section 11.06, 11.07 or
11.08; or
(2) the Company takes any action that would require a
supplemental indenture pursuant to Section 11.14; or
(3) there is a liquidation, dissolution or winding up of the
Company;
then the Company shall mail to Holders and file with the Trustee and the
Conversion Agent a notice stating the proposed record date for a dividend or
distribution or the proposed effective date of a subdivision, combination,
reclassification, consolidation, merger, sale, transfer, dissolution,
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liquidation or winding-up. The Company shall file and mail the notice at least
15 days before such date. Failure to file or mail the notice or any defect in it
shall not affect the validity of the transaction.
SECTION 11.14. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any of the following events occur, namely (i) any reclassification or
change of outstanding shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which holders
of Common Stock shall be entitled to receive stock, securities or other property
or assets (including cash) with respect to or in exchange for such Common Stock,
or (iii) any sale or conveyance of the properties and assets of the Company as,
or substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock, then the Company or the successor or purchasing corporation, as
the case may be, shall execute with the Trustee a supplemental indenture,
providing that each Security shall be convertible into the kind and amount of
shares of stock and other securities or property or assets (including cash)
receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance by a holder of a number of shares of Common
Stock issuable upon conversion of such Securities immediately prior to such
reclassification, change, consolidation, merger, combination, sale or
conveyance. Such supplemental indenture shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Article.
The Company shall cause notice of the execution of such supplemental
indenture to be mailed to each Holder at such Holder's address appearing on the
Security register provided for in Section 2.03 of this Indenture.
The above provisions of this Section shall similarly apply to
successive reclassifications, consolidations, mergers, combinations, and sales.
If this Section 11.14 applies, neither Section 11.06, 11.07 nor 11.08
applies.
SECTION 11.15. COMPANY DETERMINATION FINAL. Any determination that
the Company or the Board of Directors must make pursuant to Section 11.03,
11.06, 11.07, 11.08, 11.09, 11.10, 11.14 or 11.17 is conclusive.
SECTION 11.16. TRUSTEE'S ADJUSTMENT DISCLAIMER. The Trustee has no
duty to determine when an adjustment under this Article 11 should be made, how
it should be made or what it should be. The Trustee has no duty to determine
whether a supplemental indenture under Section 11.14 need be entered into or
whether any provisions of any supplemental indenture are correct. The Trustee
shall not be accountable for and makes no representation as to the validity or
value of any securities or assets issued upon conversion of Securities. The
Trustee shall not be responsible for the Company's failure to comply with this
Article 11, and shall not be deemed to have knowledge of any adjustment unless
and until it shall have received a notice of adjustment pursuant to
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Section 11.11. Each Conversion Agent shall have the same protection under this
Section 11.16 as the Trustee.
SECTION 11.17. SIMULTANEOUS ADJUSTMENTS. In the event that this
Article 11 requires adjustments to the Conversion Rate under more than one of
Sections 11.06, 11.07, 11.08(a) or 11.08(b), and the record dates for the
distributions giving rise to such adjustments shall occur on the same date, then
such adjustments shall be made by applying, first, the provisions of Section
11.08(a), second, the provisions of Section 11.08(b), third the provisions of
Section 11.06 and, fourth, the provisions of Section 11.07.
SECTION 11.18. SUCCESSIVE ADJUSTMENTS. After an adjustment to the
Conversion Rate under this Article 11, any subsequent event requiring an
adjustment under this Article 11 shall cause an adjustment to the Conversion
Rate as so adjusted.
SECTION 11.19. RIGHTS ISSUED IN RESPECT OF COMMON STOCK ISSUED UPON
CONVERSION. Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase shares
of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events ("Trigger Event"):
(i) are deemed to be transferred with such shares of Common
Stock,
(ii) are not exercisable, and
(iii) are also issued in respect of future issuances of
Common Stock,
shall not be deemed distributed for purposes of Section 11.08(a) until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights or warrants, or any Trigger Event with respect thereto,
that shall have resulted in an adjustment to the Conversion Rate under Section
11.08(a), (1) in the case of any such rights or warrants which shall all have
been redeemed or repurchased without exercise by any holders thereof, the
Conversion Rate shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be, as
thought it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder of Common Stock with respect to such
rights or warrants (assuming such holder had retained such rights or warrants),
made to all holders of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of any such rights or warrants all of which
shall have expired without exercise by any holder thereof, the Conversion Rate
shall be readjusted as if such issuance had not occurred.
SECTION 11.20. GENERAL CONSIDERATIONS. Whenever successive
adjustments to the Conversion Rate are called for pursuant to this Article 11,
such adjustments shall be made to the Current Market Price as may be necessary
or appropriate to effectuate the intent of this Article 11 and to avoid unjust
or inequitable results as determined in good faith by the Board of Directors.
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ARTICLE 12
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT. This Indenture is hereby made
subject to, and shall be governed by, the provisions of the TIA required to be
part of and to govern indentures qualified under the TIA; provided, however that
this Section 12.01 shall not require this Indenture or the Trustee to be
qualified under the TIA prior to the time such qualification is in fact required
under the terms of the TIA, nor shall it constitute any admission or
acknowledgment by any party that any such qualification is required prior to the
time such qualification is in fact required under the terms of the TIA. If any
provision hereof limits, qualifies or conflicts with another provision hereof
which is required to be included in an indenture qualified under the TIA, such
required provision shall control.
SECTION 12.02. NOTICES. Any request, demand, authorization, notice,
waiver, consent or communication shall be in writing and delivered in Person or
mailed by first class mail, postage prepaid, addressed as follows or transmitted
by facsimile transmission (confirmed by overnight courier) to the following
facsimile numbers:
if to the Company:
Networks Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Attn: Prabhat K. Goyal
Telephone Number: (408) 988-3832
Facsimile Number: (408) 346-3175
if to the Trustee:
State Street Bank and Trust Company of California, N.A.
633 West 5th Street
12th Floor
Los Angeles, California 90071
(Attention: Networks Associates, Inc., Zero Coupon Convertible
Subordinated
Debentures due 2018)
Telephone Number: (213) 362-7338
Facsimile Number: (213 ) 362-7357
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
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Any notice or communication given to a Securityholder shall be mailed
to the Securityholder, by first class mail, postage prepaid, at the
Securityholder's address as it appears on the registration books of the
Registrar and shall be sufficiently given if so mailed within the time
prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not received by the addressee.
If the Company mails a notice or communication to the Holders, it
shall mail a copy to the Trustee and each Registrar, Paying Agent, Conversion
Agent or co-registrar.
SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Holders
may communicate pursuant to TIA Section 312(b) with other Holders with respect
to their rights under this Indenture or the Securities. The Company, the
Trustee, the Registrar, the Paying Agent, the Conversion Agent and anyone else
shall have the protection of TIA Section 312(c).
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
Officers' Certificate or Opinion of Counsel with respect to compliance with a
covenant or condition provided for in this Indenture shall include:
(1) a statement that each individual making such Officers'
Certificate or Opinion of Counsel has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such Officers' Certificate or Opinion of Counsel are based;
(3) a statement that, in the opinion of each such individual, he
or she has made such examination or investigation as is necessary to enable him
or her to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement that, in the opinion of such individual, such
covenant or condition has been complied with.
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SECTION 12.06. SEPARABILITY CLAUSE. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 12.07. RULES BY TRUSTEE, PAYING AGENT, CONVERSION AGENT AND
REGISTRAR. The Trustee may make reasonable rules for action by or a meeting of
Holders. The Registrar, Conversion Agent and the Paying Agent may make
reasonable rules for their functions.
SECTION 12.08. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL
GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICTS OF LAWS.
SECTION 12.09. NO RECOURSE AGAINST OTHERS. A director, officer,
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.
SECTION 12.10. SUCCESSORS. All agreements of the Company in this
Indenture and the Securities shall bind its successor. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 12.11. MULTIPLE ORIGINALS. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
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IN WITNESS WHEREOF, the undersigned, being duly authorized, has
executed this Indenture on behalf of the respective parties hereto as of the
date first written above.
Networks Associates, Inc.
By: /s/ signature
---------------------------------------------------
Title:
State Street Bank and Trust Company of California, N.A.
By: /s/ signature
---------------------------------------------------
Authorized Signatory
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EXHIBIT A
[FORM OF FACE OF SECURITY]
FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, THIS SECURITY BEARS ORIGINAL
ISSUE DISCOUNT. INFORMATION INCLUDING THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE
DISCOUNT, THE ISSUE DATE, AND THE YIELD TO MATURITY WILL BE MADE AVAILABLE TO
HOLDERS UPON REQUEST TO PRABHAT K. GOYAL, CHIEF FINANCIAL OFFICER, AT (408)
988-3832.
[FORM OF LEGEND FOR GLOBAL SECURITY]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC) , ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THE SECURITY EVIDENCED HEREBY IN AN OFFSHORE TRANSACTION; (2) AGREES THAT IT
WILL NOT, PRIOR TO EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE
SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY
SUCCESSOR PROVISION), RESELL OR OTHERWISE TRANSFER THE SECURITY EVIDENCED HEREBY
OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF SUCH SECURITY WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT (A) TO
NETWORKS ASSOCIATES, INC. OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (D) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE
EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3) PRIOR TO SUCH TRANSFER (OTHER THAN
A TRANSFER PURSUANT TO CLAUSE 2(D) ABOVE), IT WILL FURNISH TO STATE STREET BANK
AND TRUST COMPANY OF CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS
APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THE
TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
<PAGE> 76
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (4) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SECURITY EVIDENCED HEREBY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION
WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER
RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), THE HOLDER
MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE
MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO STATE STREET BANK AND
TRUST COMPANY OF CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS
APPLICABLE). IF THE PROPOSED TRANSFEREE IS A PURCHASER WHO IS NOT A U.S. PERSON,
THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE),
SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF
THE SECURITY EVIDENCED HEREBY PURSUANT TO CLAUSE 2(D) ABOVE OR UPON ANY TRANSFER
OF THE SECURITY EVIDENCED HEREBY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR
ANY SUCCESSOR PROVISION).
A-2
<PAGE> 77
NETWORKS ASSOCIATES, INC.
ZERO COUPON CONVERTIBLE SUBORDINATED DEBENTURE DUE 2018
No.
Issue Date: February 13, 1998 Original Issue Discount: $608.94
Issue Price: $391.06 (for each $1,000 Principal Amount)
(for each $1,000 Principal Amount)
CUSIP: [640938-10-6]
Networks Associates, Inc., a Delaware corporation,
promises to pay to or registered assigns, on
February 13, 2018 [the Principal Amount of Dollars ($ )].(1)
This Security shall not bear interest except as specified on the
other side of this Security. Original Issue Discount will accrue as specified on
the other side of this Security. This Security is convertible as specified on
the other side of this Security.
Additional provisions of this Security are set forth on the other
side of this Security.
IN WITNESS WHEREOF, Networks Associates, Inc. has caused this
instrument to be duly executed under its corporate seal.
NETWORKS ASSOCIATES, INC.
By:___________________________________________
Title:
By:___________________________________________
Title:
[SEAL]
Dated: ________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee, certifies
that this is one of the Securities referred to in the within-mentioned
Indenture.
By___________________________________
Authorized Signatory
- -------
(1) The global Security will read instead: "The Principal Amount then
shown on Schedule A hereto."
A-3
<PAGE> 78
[FORM OF REVERSE SIDE OF SECURITY]
NETWORKS ASSOCIATES, INC.
ZERO COUPON CONVERTIBLE SUBORDINATED DEBENTURE DUE 2018
1. INTEREST
This Security shall not bear interest, except that if the Principal
hereof or any portion of such Principal is not paid when due (whether upon
acceleration pursuant to Section 6.02 of the Indenture, upon the date set for
payment of the Redemption Price pursuant to paragraph 5 hereof, upon the date
set for payment of a Purchase Price or Fundamental Change Redemption Price
pursuant to paragraph 6 hereof or upon the Stated Maturity of this Security),
then in each such case the overdue amount shall bear interest at the rate of
4.75% per annum, compounded semiannually (to the extent that the payment of such
interest shall be legally enforceable), which interest shall accrue from the
date such overdue amount was due to the date payment of such amount, including
interest thereon, has been made or duly provided for. All such interest shall be
payable on demand. The accrual of such interest on overdue amounts shall be in
lieu of, and not in addition to, the continued accrual of Original Issue
Discount.
The Original Issue Discount (the difference between the Issue Price
and the Principal Amount of the Security) in the period during which a Security
remains outstanding, shall accrue at 4.75% per annum, on a semiannual bond
equivalent basis using a 360-day year composed of twelve 30-day months,
commencing on the Issue Date of this Security.
2. METHOD OF PAYMENT
Subject to the terms and conditions of the Indenture, the Company
will make payments in respect of the Securities to the Persons who are
registered Holders of Securities at the close of business on the Business Day
preceding the Redemption Date or Stated Maturity, as the case may be, or at the
close of business on a Purchase Date or Fundamental Change Redemption Date, as
the case may be. Holders must surrender Securities to the Paying Agent to
collect such payments in respect of the Securities. The Company will pay cash
amounts in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Company may make
such cash payments by check payable in such money.
3. PAYING AGENT, CONVERSION AGENT AND REGISTRAR
Initially, State Street Bank and Trust Company of California, N.A., a
national banking association organized under the laws of the United States of
America (the "Trustee"), will act as Paying Agent, Conversion Agent and
Registrar. The Company may appoint and change any Paying Agent, Conversion
Agent, Registrar or co-registrar without notice, other than notice to the
Trustee. The Company or any of its Subsidiaries or any of their Affiliates may
act as Paying Agent, Conversion Agent, Registrar or co-registrar.
A-4
<PAGE> 79
4. INDENTURE
The Company issued the Securities under an Indenture (the
"Indenture"), dated as of February 13, 1998, between the Company and the
Trustee. Capitalized terms used herein and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such terms,
and Holders are referred to the Indenture for a statement of those terms.
The Securities are general unsecured obligations of the Company
limited to $885,500,000 aggregate Principal Amount (subject to Sections 2.02 and
2.07 of the Indenture). The Indenture does not limit other indebtedness of the
Company, secured or unsecured, including Senior Indebtedness of the Company.
5. REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Securities. The Securities are
redeemable as a whole, or from time to time in part, at any time at the option
of the Company at the Redemption Prices set forth below, provided that the
Securities are not redeemable prior to February 13, 2003.
The table below shows Redemption Prices of a Security per $1,000
Principal Amount on the dates shown below and at Stated Maturity, which prices
reflect accrued Original Issue Discount calculated to each such date. The
Redemption Price of a Security redeemed between such dates would include an
additional amount reflecting the additional Original Issue Discount accrued
since the next preceding date in the table to the actual Redemption Date.
<TABLE>
<CAPTION>
ACCRUED
ORIGINAL
ISSUE REDEMPTION
SECURITY DISCOUNT PRICE
REDEMPTION DATE ISSUE PRICE AT 4.75% (1) + (2)
- --------------------------------- ------------- ----------- ------------
<S> <C> <C> <C>
February 13, 2003................ $391.06 $103.46 $494.52
February 13, 2004................ 391.06 127.23 518.29
February 13, 2005................ 391.06 152.14 543.20
February 13, 2006................ 391.06 178.25 569.31
February 13, 2007................ 391.06 205.61 596.67
February 13, 2008................ 391.06 234.29 625.35
February 13, 2009................ 391.06 264.34 655.40
February 13, 2010................ 391.06 295.85 686.91
February 13, 2011................ 391.06 328.86 719.92
February 13, 2012................ 391.06 363.46 754.52
February 13, 2013................ 391.06 399.73 790.79
February 13, 2014................ 391.06 437.74 828.80
February 13, 2015................ 391.06 477.57 868.63
February 13, 2016................ 391.06 519.32 910.38
February 13, 2017................ 391.06 563.08 954.14
At maturity...................... 391.06 608.94 1,000.00
</TABLE>
A-5
<PAGE> 80
6. PURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER; REDEMPTION AT
THE OPTION OF THE HOLDER UPON A FUNDAMENTAL CHANGE
(a) Subject to the terms and conditions of the Indenture,
the Company shall become obligated to purchase, at the option of the Holder, the
Securities held by such Holder on the following Purchase Dates and at the
following Purchase Prices per $1,000 Principal Amount, upon delivery of a
Purchase Notice containing the information set forth in the Indenture, from the
opening of business on the date that is 20 Business Days prior to such Purchase
Date until the close of business on such Purchase Date and upon delivery of the
Securities to the Paying Agent by the Holder as set forth in the Indenture. Such
Purchase Prices may be paid, at the option of the Company, in cash or by the
issuance and delivery of shares of Common Stock of the Company, or in any
combination thereof.
<TABLE>
<CAPTION>
PURCHASE DATE PURCHASE PRICE
------------- --------------
<S> <C>
February 13, 2003................ $ 494.52
February 13, 2008 ............... 625.35
February 13, 2013 ............... 790.79
</TABLE>
Securities in denominations larger than $1,000 of Principal Amount may be
purchased in part, but only in multiples of $1,000 of Principal Amount.
(b) At the option of the Holder and subject to the terms and
conditions of the Indenture, the Company shall become obligated to redeem the
Securities held by such Holder 45 days after the date of the Company's notice of
such Fundamental Change occurring on or prior to February 13, 2018 for a
Fundamental Change Redemption Price equal to the Issue Price plus accrued
Original Issue Discount to the Fundamental Change Redemption Date, which
Fundamental Change Redemption Price shall be paid in Cash. Securities in
denominations larger than $1,000 of Principal Amount may be redeemed in part in
connection with a Fundamental Change, but only in multiples of $1,000 of
Principal Amount.
(c) Holders have the right to withdraw any Purchase Notice
or Fundamental Change Redemption Notice, as the case may be, by delivering to
the Paying Agent a written notice of withdrawal in accordance with the
provisions of the Indenture.
(d) If Cash (and/or securities if permitted under the
Indenture) sufficient to pay a Purchase Price or Fundamental Change Redemption
Price, as the case may be, of all Securities or portions thereof to be purchased
as of the Purchase Date or the Fundamental Change Redemption Date, as the case
may be, is deposited with the Paying Agent on the Business Day following the
Purchase Date or the Fundamental Change Redemption Date, as the case may be,
Original Issue Discount ceases to accrue on such Securities (or portions
thereof) on and after such date, and the Holder thereof shall have no other
rights as such (other than the right to receive the Purchase Price or
Fundamental Change Redemption Price, as the case may be, upon surrender of such
Security).
A-6
<PAGE> 81
7. NOTICE OF REDEMPTION AT THE OPTION OF THE COMPANY
Notice of redemption at the option of the Company will be mailed at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at the Holder's registered address. If money
sufficient to pay the Redemption Price of all Securities (or portions thereof)
to be redeemed on the Redemption Date is deposited with the Paying Agent prior
to or on the Redemption Date, on and after such date Original Issue Discount
ceases to accrue on such Securities or portions thereof. Securities in
denominations larger than $1,000 of Principal Amount may be redeemed in part but
only in multiples of $1,000 of Principal Amount.
8. SUBORDINATION
The Securities are subordinated to all existing and future Senior
Indebtedness. To the extent provided in the Indenture, Senior Indebtedness must
be paid before the Securities may be paid. The Indenture does not limit the
present or future amount of Senior Indebtedness that the Company may have. The
Company agrees, and each Securityholder by accepting a Security agrees, to the
subordination and authorizes the Trustee to give it effect and appoints the
Trustee as attorney-in-fact for such purpose.
9. CONVERSION
Subject to the next two succeeding sentences, a Holder of a Security
may convert this Security for Common Stock at any time after 90 days following
the Issue Date of the Securities and before the close of business on February
13, 2018. If this Security is called for redemption, the Holder may convert it
at any time before the close of the last Trading Day prior to the Redemption
Date. A Security in respect of which a Holder has delivered a notice of exercise
of the option to require the Company to purchase such Security or to redeem such
Security in the event of a Fundamental Change may be converted only if the
notice of exercise is withdrawn in accordance with the terms of the Indenture.
The initial Conversion Rate is 5.692 shares of Common Stock per
$1,000 Principal Amount, subject to adjustment in certain events described in
the Indenture. The Company will deliver Cash or a check in lieu of any
fractional share of Common Stock.
To convert this Security a Holder must (1) complete and manually sign
the conversion notice on the back of this Security (or complete and manually
sign a facsimile of such notice) and deliver such notice to the Conversion
Agent, (2) surrender this Security to the Conversion Agent, (3) furnish
appropriate endorsements and transfer documents if required by the Conversion
Agent, the Company or the Trustee and (4) pay any transfer or similar tax, if
required.
A Holder may convert a portion of this Security if the Principal
Amount of such portion is $1,000 or a multiple of $1,000. No payment or
adjustment will be made for dividends on the Common Stock except as provided in
the Indenture. On conversion of this Security, that portion of accrued Original
Issue Discount attributable to the period from the Issue Date to the Conversion
Date with respect to the converted portion of this Security shall not be
canceled, extinguished or forfeited, but rather shall be deemed to be paid in
full to the Holder thereof through the delivery of the Common Stock (together
A-7
<PAGE> 82
with any cash payment in lieu of fractional shares) in exchange for the portion
of this Security being converted pursuant to the terms hereof.
10. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION
Any Securities called for redemption, unless surrendered for
conversion before the close of business on the last Trading Day prior to the
Redemption Date, may be deemed to be purchased from the Holders of such
Securities at an amount not less than the Redemption Price, by one or more
investment bankers or other purchasers who may agree with the Company to
purchase such Securities from the Holders, to convert them for Common Stock and
to make payment for such Securities to the Trustee in trust for such Holders.
11. REGISTRATION RIGHTS
The Holder of this Security and the Common Stock issuable upon
conversion thereof is entitled to the benefits of a Registration Rights
Agreement (subject to the provisions thereof), dated as of February 13, 1998,
between the Company and the Initial Purchaser.
12. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in registered form, without coupons, in
denominations of $1,000 of Principal Amount and multiples of $1,000. A Holder
may transfer or convert Securities in accordance with the Indenture. The
Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not transfer or exchange
any Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or any
Securities in respect of which a Purchase Notice or Fundamental Change
Redemption Notice has been given and not withdrawn (except, in the case of a
Security to be purchased in part, the portion of the Security not to be
purchased) or any Securities for a period of 15 days before a selection of
Securities to be redeemed.
13. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of
this Security for all purposes.
14. UNCLAIMED MONEY OR SECURITIES
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any
amount with respect to the Securities that remains unclaimed for two years;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such return, shall at the expense of the Company cause to be
published once in a newspaper of general circulation in The City of New York or
mail to each Holder notice that such money or securities remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication or mailing, any unclaimed money or securities then
remaining will be returned to the Company. After return to the Company, Holders
entitled to the money
A-8
<PAGE> 83
or securities must look to the Company for payment as general creditors unless
an applicable abandoned property law designates another Person.
15. AMENDMENT; WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate Principal Amount of the Securities
at the time outstanding and (ii) certain Defaults and Events of Defaults may be
waived with the written consent of the Holders of a majority in aggregate
Principal Amount of the Securities at the time outstanding. Subject to certain
exceptions set forth in the Indenture, without the consent of any
Securityholder, the Company and the Trustee may amend the Indenture or the
Securities to cure any ambiguity, defect or inconsistency, or to comply with
Article 5 or Section 11.14 of the Indenture, to provide for uncertificated
Securities in addition to or in place of certificated Securities or to make any
change that does not adversely affect the rights of any Securityholder or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the TIA.
16. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) default in payment
of the Principal Amount, Issue Price, accrued Original Issue Discount, accrued
Liquidated Damages, if any, Redemption Price, Purchase Price or Fundamental
Change Redemption Price, as the case may be, in respect of the Securities when
the same becomes due and payable, provided that in the case of any failure to
pay Liquidated Damages, such failure to pay continues for a period of 30 days;
(ii) failure by the Company to comply with other agreements in the Indenture or
the Securities, subject to notice and lapse of time; and (iii) certain events of
bankruptcy or insolvency. If an Event of Default occurs and is continuing, the
Trustee, or the Holders of at least 25% in aggregate Principal Amount of the
Securities at the time outstanding, may declare all the Securities to be due and
payable immediately. Certain events of bankruptcy or insolvency are Events of
Default which will result in the Securities being declared due and payable
immediately upon the occurrence of such Events of Default.
Holders may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate Principal Amount of the
Securities at the time outstanding may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Holders notice of any continuing
Default (except a Default in payment of amounts specified in clause (i) above)
if it determines that withholding notice is in their interests.
17. TRUSTEE DEALINGS WITH THE COMPANY
The Trustee under the Indenture, in its individual or any other
capacity, may become the owner or pledgee of Securities and may otherwise deal
with and collect obligations owed to it by the Company or its Affiliates and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee.
A-9
<PAGE> 84
18. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Securityholder waives and releases all such liability. The waiver and release
are part of the consideration for the issue of the Securities.
19. AUTHENTICATION
This Security shall not be valid until an authorized officer of the
Trustee manually signs the Trustee's Certificate of Authentication on the other
side of this Security.
20. ABBREVIATIONS
Customary abbreviations may be used in the name of a Securityholder
or an assignee, such as TEN COM (=tenants in common), TENANT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
21. GOVERNING LAW
THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THIS
SECURITY.
The Company will furnish to any Securityholder upon written request
and without charge a copy of the Indenture which has in it the text of this
Security in larger type. Requests may be made to:
Networks Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Attn: Prabhat K. Goyal
A-10
<PAGE> 85
[FORM OF CONVERSION NOTICE]
CONVERSION NOTICE
To: Networks Associates, Inc.
The undersigned registered holder of this Security hereby irrevocably
exercises the option to convert this Security, or portion hereof (which is
$1,000 principal amount or a multiple thereof) below designated, for shares of
Common Stock of Networks Associates, Inc. in accordance with the terms of the
Indenture referred to in this Security, and directs that the shares issuable and
deliverable upon such conversion, together with any check in payment for
fractional shares and any Securities representing any unconverted principal
amount hereof, be issued and delivered to the registered holder hereof unless a
different name has been indicated below. If shares or any portion of this
Security not converted are to be issued in the name of a Person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto.
Dated:
_________________________________________
_________________________________________
Signature (s)
Fill in for registration of shares if to be delivered,
and Securities if to be issued other than to and in
the name of the registered holder:
____________________________________
(Name)
____________________________________
(Street Address)
____________________________________
(City, state and zip code)
Please print name and address
Principal amount to be converted
(if less than all):
$___,000
_________________________________________
Social Security or Other Taxpayer
Identification Number
A-11
<PAGE> 86
[FORM OF OPTION TO ELECT REDEMPTION
UPON A FUNDAMENTAL CHANGE]
To: Networks Associates, Inc.
The undersigned registered holder of this Security hereby
acknowledges receipt of a notice from Networks Associates, Inc. (the "Company")
as to the occurrence of a Fundamental Change with respect to the Company and
requests and instructs the Company to redeem this Security, or the portion
hereof (which is $1,000 Principal Amount or a multiple thereof) below
designated, in accordance with the terms of the Indenture referred to in this
Security.
Dated:_______________________
_________________________________________
_________________________________________
Signature (s)
Principal amount to be converted
(if less than all):
$_______________
_________________________________________
Social Security or Other Taxpayer
Identification Number
A-12
<PAGE> 87
ASSIGNMENT
For value received ___________________ hereby sell(s), assign(s) and transfer(s)
unto __________________ (Please insert social security or other Taxpayer
Identification Number of assignee) the within Security, and hereby irrevocably
constitutes and appoints ________________ attorney to transfer the said Security
on the books of the Company, with full power of substitution in the premises.
In connection with any transfer of the Security within the period
prior to the expiration of the holding period applicable to sales thereof under
Rule 144(k) (other than any transfer pursuant to a registration statement that
has been declared effective under the Securities Act), under the Securities Act
(or any successor provision), the undersigned confirms that such Security is
being transferred:
o To Networks Associates, Inc. or a subsidiary thereof; or
o Pursuant to and in compliance with Rule 144A under the
Securities Act of 1933, as amended; or
o Pursuant to and in compliance with Regulation S under the
Securities Act of 1933, as amended; or
o Pursuant to and in compliance with Rule 144 under the
Securities Act of 1933, as amended;
and unless the box below is checked, the undersigned confirms that to its
knowledge such Security is not being transferred to an "affiliate" of the
Company as defined in Rule 144 under the Securities Act of 1933, as amended (an
"Affiliate").
o The transferee is an Affiliate of the Company.
Dated:______________________
_________________________________________
_________________________________________
Signature (s)
Signature(s) must be guaranteed by a
commercial bank or trust company or a
member firm of a major stock exchange if
shares of Common Stock are to be issued,
or Securities to be delivered, other than
to or in the name of the registered
holder.
_________________________________________
Signature Guarantee
NOTICE: The above signatures of the holder(s) hereof must correspond with the
name as written upon the face of the Security in every particular without
alteration or enlargement or any change whatever.
A-13
<PAGE> 88
[FORM OF SCHEDULE FOR ENDORSEMENTS ON GLOBAL SECURITY
TO REFLECT CHANGES IN PRINCIPAL AMOUNT]
Schedule A
Changes to Principal Amount of Global Security
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF SECURITIES
BY WHICH THIS GLOBAL SECURITY IS
TO BE REDUCED OR INCREASED, AND
REASON FOR REMAINING PRINCIPAL AMOUNT OF NOTATION
DATE REDUCTION OR INCREASE THIS GLOBAL SECURITY MADE BY
<S> <C> <C> <C>
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
- ----------- ---------------------------------- ---------------------------- --------
</TABLE>
A-14
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
March 24, 1998
Networks 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 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> 1
Exhibit 8.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
________, 1998
Network Associates, Inc.
2805 Bowers Avenue
Santa Clara, California 95051
Ladies and Gentlemen:
We have acted as counsel for Network Associates, Inc., a Delaware
corporation ("Network") in connection with the preparation and execution of the
Agreement and Plan of Reorganization (the "Merger Agreement") dated as of
February 22, 1998, among Network, Thor Acquisition Corp., a wholly-owned
subsidiary of Network incorporated in Delaware ("Sub"), and Trusted Information
Systems, Inc., a Delaware corporation ("TIS"). Pursuant to the Merger Agreement,
Sub will merge with and into TIS (the "Merger"), and TIS will become a
wholly-owned subsidiary of Network. 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") which includes the Joint
Proxy Statement/Prospectus of Network and TIS dated March __, 1998 (the "Proxy
Statement"), the Merger Agreement (including Exhibits) and such other documents
pertaining to the Merger as we have deemed necessary or appropriate. We have
also relied upon certificates of officers to TIS and Network respectively (the
"Officers' Certificates").
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> 2
Network Associates, Inc.
________, 1998
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 action have been (or will be) taken which are
inconsistent with such representations; and
4. The Merger will be reported by Network and TIS on their respective
federal income tax returns in a manner consistent with the opinion set forth
below.
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:
(i) For federal income tax purposes, the Merger will qualify as a
"reorganization" as defined in Section 368(a) of the Code and Network, TIS and
Sub will each be a party to such reorganization within the meaning of Section
368(b) of the Code; and
(ii) The summary of Federal income tax consequences set forth in the
Proxy Statement/Prospectus under the headings "Approval of the Merger and
Related Transactions -- Certain Federal Income Tax Considerations" is accurate
in all material respects as to matters of law and legal conclusions.
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 results 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 TIS 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 TIS stock pursuant to the
exercise of options or otherwise as compensation).
<PAGE> 3
Network Associates, Inc.
________, 1998
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 solely in connection with the
effectiveness of the Registration Statement. 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> 1
EXHIBIT 8.2
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET WASHINGTON
BALTIMORE, MARYLAND 21201-3018 NEW YORK
410-539-2530 PHILADELPHIA
FAX: 410-539-0489 EASTON
March ___, 1998
Trusted Information Systems, Inc.
3060 Washington Road
Glenwood, Maryland 21738
Agreement and Plan of Reorganization (the "Merger Agreement"), dated as
of February 22, 1998, by and among Trusted Information Systems, Inc. (the
"Company"), Parent and Thor Acquisition Corp. ("Sub")
Ladies and Gentlemen:
We have acted as special counsel to Trusted Information Systems, Inc.
(the "Company") in connection with the transactions contemplated by the
Agreement and Plan of Reorganization (the "Merger Agreement"), dated as of
February 22, 1998, by and among the Company, Network Associates, Inc. ("Parent")
and Thor Acquisition Corp. ("Merger Sub"). This opinion is delivered on the
effective date of a Registration Statement on Form S-4 (the "Registration
Statement"), which includes the definitive Joint Proxy Statement/Prospectus of
Parent and Company dated March ____, 1998 (the "Proxy Statement/Prospectus"),
with respect to the transactions contemplated by the Merger Agreement. The
delivery of a letter expressing opinions in substantially the form hereof, and
the reconfirmation of such opinions on and as of the Effective Time, are
conditions to the obligations of Company to consummate the Merger pursuant to
section 6.1(d) of the Merger Agreement. All capitalized terms used herein,
unless otherwise specified, shall have the meanings ascribed to them in the
Merger Agreement.
In rendering our opinions, we have examined and relied upon the accuracy
and completeness of the facts, information, covenants and representations
contained in originals or copies, certified or otherwise identified to our
satisfaction, of the Merger Agreement, the Proxy Statement/Prospectus and such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below. Our opinions assume, among other things, the accuracy
as of the date hereof, and the accuracy as of the Effective Time, of such facts,
information, covenants, statements and representations, as well as an absence of
any change in the foregoing that are material to such opinions between the date
hereof and the Effective Time.
<PAGE> 2
Trusted Information Systems, Inc.
March ___, 1998
Page 2
We have assumed the genuineness of all signatures, the legal capacity of
all natural persons, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies and the authenticity of the originals of such
documents. We have also assumed that the transactions related to the Merger or
contemplated by the Merger Agreement that are to be consummated at the Effective
Time will be consummated at the Effective Time in accordance with the Merger
Agreement and as described in the Proxy Statement/Prospectus. In addition, our
opinions are expressly conditioned on, among other things, the accuracy as of
the date hereof, and the accuracy as of the Effective Time, of statements and
representations contained in certificates executed by officers of Parent and
Company as to certain facts relating to, and knowledge and intentions of, Parent
and Company, and certain facts relating to the Merger. We have assumed that such
statements and representations will be reconfirmed as of the Effective Time.
In rendering our opinion, we have considered the applicable provisions
of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations promulgated thereunder by the Treasury Department (the
"Regulations"), pertinent judicial authorities, rulings of the U.S. Internal
Revenue Service and such other authorities as we have considered relevant. It
should be noted that the Code, the Regulations, judicial decisions,
administrative interpretations and such other authorities are subject to change
at any time and, in some circumstances, with retroactive effect. A material
change in any of the authorities upon which our opinions are based could affect
our conclusions stated herein. In addition, there can be no assurance that the
Internal Revenue Service would not take a position contrary to that which is
stated in this opinion letter.
Based upon and subject to the foregoing, we are of the opinion that, for
United States federal income tax purposes:
1. the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Company, Parent and Merger Sub will each be a
party to such reorganization within the meaning of Section 368(b) of the Code;
and
2. the summaries of Federal income tax consequences set forth in the
Proxy Statement/Prospectus under the headings "Summary -- Income Tax Treatment"
and "Approval of the Merger and Related Transactions -- Certain Federal Income
Tax Considerations" are accurate in all material respects as to matters of law
and legal conclusions.
Except as set forth above, we express no opinion to any party as to any
consequences of the Merger or any transactions related thereto. We are
furnishing this
<PAGE> 3
Trusted Information Systems, Inc.
March ___, 1998
Page 3
opinion to you solely in connection with the effectiveness of the Registration
Statement, and it is not to be used, relied upon, circulated, quoted or
otherwise referred to by any other person for any other purpose without our
prior written consent. In accordance with the requirements of Item 601(b)(23) of
Regulation S-K under the Securities Act, we hereby consent to the use of our
name in the Proxy Statement/Prospectus and to the filing of this opinion as an
Exhibit to the Registration Statement. In giving this consent, we do not admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations of the Securities
Exchange Commission thereunder. This opinion is expressed as of the date hereof,
and we disclaim any undertaking to advise you of any subsequent changes of the
matters stated, represented or assumed herein or any subsequent changes in
applicable law.
Very truly yours,
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-4 of our report dated January 20, 1998, except for the matters
discussed in Notes 14 and 16 as to which the date is February 13, 1998, on our
audits of the financial statements and financial statement schedule of Network
Associates, Inc. (formerly McAfee Associates, Inc.). We also consent to the
references to our firm under the caption "Experts" and "Selected Financial
Data."
Coopers & Lybrand L.L.P.
/s/ Coopers & Lybrand L.L.P.
----------------------------------
San Jose, California
March 24, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "EXPERTS", "SUMMARY
- -- Accounting Treatment", "APPROVAL OF THE MERGER AND RELATED TRANSACTIONS --
Accounting Treatment" and "TERMS OF THE MERGER -- Conditions to the Merger" and
to the use of our report dated March 2, 1998, with respect to the consolidated
financial statements of Trusted Information Systems, Inc. included in the Proxy
Statement of Trusted Information Systems, Inc. that is made a part of this
Registration Statement (Form S-4) and related Prospectus of Network Associates,
Inc. for the registration of 5,035,140 shares of its common stock.
We also consent to the incorporation by reference in this Registration Statement
(Form S-4) and related Prospectus of Network Associates, Inc. for the
registration of 5,035,140 shares of its common stock of our report dated March
2, 1998, with respect to the consolidated financial statements and schedule of
Trusted Information Systems, Inc. included in the Annual Report on Form 10-K, as
amended on Form 10-K/A, for the year ended December 26, 1997, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Vienna, Virginia
March 24, 1998
<PAGE> 1
Exhibit 23.5
CONSENT OF J.P. MORGAN SECURITIES INC.
We hereby consent to the (i) the use of our opinion letter dated February
22, 1998 to the Board of Directors of Trusted Information Systems, Inc. ("TIS"),
included as Annex C to the Proxy Statement/Prospectus which forms a part of the
Registration Statement on Form S-4 relating to the proposed merger of TIS and
Thor Acquisition Corp., a wholly owned subsidiary of Network Associates, Inc.,
and (ii) the reference to such opinion in such Proxy Statement/Prospectus. In
giving such consent, we do not 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 of the Securities and Exchange Commission
thereunder, nor do we hereby 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 thereunder.
J.P. Morgan Securities, Inc.
By: /s/ JOHN A. FORLINES III
---------------------------
Name: John A. Forlines III
Title: Managing Director
March 24, 1998
