<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
June 9, 1998
NETWORKS ASSOCIATES, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
0-20558 77-0316593
--------------------- ------------------------------------
(Commission File No.) (IRS Employer Identification Number)
3965 Freedom Circle
Santa Clara, California 95054
----------------------------------------
(Address of Principal Executive Offices)
(408) 988-3832
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
Item 5. Other Events
On June 9, 1998, Networks Associates, Inc., a Delaware corporation
("Network Associates"), and Dr Solomon's Group plc, a corporation duly organized
and existing under the laws of England and Wales ("Dr. Solomon"), agreed to the
terms of the proposed acquisition of all the issued share capital of Dr. Solomon
by Network Associates (the "Acquisition") by means of a Scheme of Arrangement in
accordance with Section 425 of the Companies Act (as amended) of England and
Wales. Pursuant to the terms of the Transaction Agreement, dated June 9, 1998,
by and between Dr. Solomon and Network Associates (the "Transaction Agreement"),
holders of Dr. Solomon Ordinary Shares will receive 0.27625 shares of Network
Associates Common Stock for each Dr. Solomon Ordinary Share. As one Dr. Solomon
American Depository Share ("ADS") represents three Dr. Solomon Ordinary Shares,
this is equivalent to 0.82875 shares of Network Associates Common Stock for each
Dr. Solomon ADS.
The Acquisition is expected to close within 90 days contingent upon
the fulfilment of certain conditions as outlined in the Transaction Agreement
including, but not limited to, expiration or early termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and approval of the Acquisition by both the shareholders of Dr. Solomon
and the High Court of Justice in England and Wales. The Acquisition will be
accounted for as a pooling of interests.
-2-
<PAGE> 3
Item 7. Financial Statements and Exhibits
(a) Exhibits
2.1 Press Release, dated June 9, 1998.
2.2 Scheme Document related to Recommended Proposal for
the Acquisition of Dr. Solomon's Group PLC dated
June 26, 1998, including Pro Forma Financial
Information.
23.1 Consent of Deloitte & Touche, Chartered Accountants.
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Financial Statements of Business to be Acquired.
99.2 Pro Forma Financial Information, included as part of
Exhibit 2.2.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf
by the undersigned hereunto duly authorized.
NETWORKS ASSOCIATES, INC.
Dated: July 1, 1998 By: /s/ PRABHAT K. GOYAL
-----------------------
Prabhat K. Goyal
Chief Financial Officer
-4-
<PAGE> 5
NETWORKS ASSOCIATES, INC.
CURRENT REPORT ON FORM 8-K
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Press Release, dated June 9, 1998.
2.2 Scheme Document related to Recommended Proposal
for the Acquisition of Dr. Solomon's Group PLC
dated June 26, 1998, including Pro Forma
Financial Information.
23.1 Consent of Deloitte & Touche, Chartered
Accountants.
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Financial Statements of Business to be Acquired.
99.2 Pro Forma Financial Information, included as part
of Exhibit 2.2.
</TABLE>
<PAGE> 1
Exhibit 2.1
Network Associates, Inc. and Dr Solomon's Group PLC
Goldman Sachs International
622617
For immediate release.
Not for release, publication or distribution in Australia or Japan.
June 9, 1998
NETWORK ASSOCIATES TO ACQUIRE DR SOLOMON'S
European Anti-Virus Software Vendor to Join Preeminent Network Security
and Management Company
Network Associates (NASDAQ: NETA), formed late last year by the merger of McAfee
Associates and Network General, and Dr Solomon's Group PLC (NASDAQ: SOLLY),
today announced that they have signed a definitive agreement whereby Network
Associates proposes to acquire Dr Solomon's, a leading European-based provider
of anti-virus software products. The Acquisition, valued at over $640 million,
will be a taxable transaction to US holders of Dr Solomon's Ordinary Shares and
ADSs and is expected to be accounted for as a pooling of interests for US
accounting purposes.
Today's announcement builds on the foundation of Network Associates' core
strengths and extends its popular anti-virus technology, which evolved from its
flagship product, McAfee VirusScan. Shortly after the Acquisition, Dr Solomon's
Anti-Virus Toolkit will be available as part of Network Associates' enterprise
security suites, the Total Virus Defense (TVD) suite, and Net Tools Secure, the
only integrated software bundle on the market to incorporate anti-virus,
encryption, authentication, firewall, intrusion detection and scanning
technology.
"With today's news, Network Associates further demonstrates its vision and
commitment to deliver world-class enterprise security products to the global
market," said Bill Larson, CEO, chairman and president of Network Associates.
"Network Associates is primed to deploy integrated enterprise security systems
to Europe's largest companies."
"I believe that Dr Solomon's and Network Associates represent an excellent fit
in terms of products, markets and infrastructure," said Geoff Leary, chief
executive of Dr Solomon's. "The combination should enable one of the most
comprehensive ranges of security products to be made available to Dr Solomon's
customers around the world."
Network Associates has distributed more than 50 million units of its security
and anti-virus software, and its customer base includes a significant number of
Fortune 500 companies. Its PGP encryption and authentication technology is
considered a worldwide standard for Internet email and file encryption. Network
Associates' market presence will be enhanced through access to Dr Solomon's
customers.
Network Associates was one of the first anti-virus providers on the market to
attack virus infection through a multi-tiered approach with the TVD suite. In
1998 Network Associates evolved and expanded that strategy with the delivery of
its Net Tools Secure suite, which addresses network security through an
integrated, multi-tiered security architecture.
Network Associates expects that it will incur a one time charge in the third
quarter of 1998 resulting from expenses and other charges associated with the
Acquisition. Excluding this one time charge, the Board of Network Associates
expects the Acquisition to be modestly dilutive to earnings per share in the
third quarter of its financial year ending December 31, 1998, but is expected to
be non-dilutive in the fourth quarter, and to be modestly accretive for the
financial year ending December 31, 1999. This statement should not be
interpreted to mean that the future earnings per share of Network Associates
Common Stock will necessarily be greater than the earnings per share of Network
Associates for its financial year ending December 31, 1997.
The proposed Acquisition is to take place by means of a scheme of arrangement
under section 425 of the UK Companies Act of 1985. Under the terms of the
Acquisition, holders of Dr Solomon's Ordinary Shares will receive 0.27625 shares
of Network Associates' Common Stock for each Dr Solomon's Ordinary
<PAGE> 2
Share. As one Dr Solomon's ADS represents three Dr Solomon's Ordinary Shares,
this is equivalent to 0.82875 shares of Network Associates Common Stock for each
Dr Solomon's ADS. The Boards of Dr Solomon's and Network Associates expect the
Acquisition to be completed within approximately 90 days, subject to the
approval of Dr Solomon's shareholders and the High Court in London, regulatory
reviews and the satisfaction or waiver of other conditions.
With headquarters in Aylesbury, UK, Dr Solomon's Group PLC, a leading supplier
of anti-virus software, develops, markets and supports anti-virus software
programs for PCs and PC networks. Dr Solomon's products provide effective and
easy-to-use software solutions to the risks posed by the proliferation of new
and increasingly sophisticated types of computer viruses. The most recent
version of the Dr Solomon's Anti-Virus Toolkit can detect and identify more than
19,000 known computer viruses.
With headquarters in Santa Clara, California, Network Associates, Inc., formed
by the merger of McAfee Associates and Network General, is a leading supplier of
enterprise network security and management solutions. Network Associates' Net
Tools Secure and Net Tools Manager offer suite-based network security and
management solutions. Net Tools Secure and Net Tools Manager suites combine to
create Net Tools which centralizes these solutions within an easy-to-use,
integrated systems management environment. For more information, Network
Associates can be reached at (408) 988-3832 or on the Internet at http://www.
nai.com.
<TABLE>
Enquiries:
<S> <C>
Dr Solomon's
David Stephens, Finance Director +44 1296 318 700
Goldman Sachs International
Fergal O'Driscoll +44 171 774 1000
Greg Lemkau +1 415 393 7500
Shandwick Consultants
Rollo Head +44 171 329 0096
Network Associates
Prabhat Goyal, Chief Financial Officer +1 408 346 3110
Morgan Stanley
Andrew Bell +44 171 425 5555
Nicholas Osborne +1 650 234 5500
Copithorne & Bellows
Alissa Bushnell +1 415 975 2224
</TABLE>
This summary should be read in conjunction with the full text of the
announcement.
This announcement contains forward-looking statements including with respect to
the consummation of the Acquisition and the integration of products, and
opportunities and synergies related to the Acquisition. Because such statements
apply to future events, they are subject to risks and uncertainties that could
cause the actual results to differ materially, including without limitation,
integration risks related to the Acquisition and the risk that the Acquisition
will not be consummated, and the risks that the anticipated benefits of the
Acquisition will not be realised.
This announcement is published on behalf of Network Associates and Dr Solomon's
and has been approved by Morgan Stanley & Co. Limited and Goldman Sachs
International, each of which are regulated by The Securities and Futures
Authority Limited, for the purposes of section 57 of the Financial Services Act
1986.
<PAGE> 3
Goldman Sachs International, which is regulated by The Securities and Futures
Authority Limited, is acting for Dr Solomon's in connection with the Acquisition
and no-one else and will not be responsible to anyone other than Dr Solomon's
for providing the protections afforded to customers of Goldman Sachs
International, nor for providing advice in relation to the Acquisition.
Morgan Stanley and Co. Limited, which is regulated by The Securities and Futures
Authority Limited, is acting for Network Associates in connection with the
Acquisition and no-one else and will not be responsible to anyone other than
Network Associates for providing the protections afforded to customers of Morgan
Stanley and Co. Limited, nor for providing advice in relation to the
Acquisition.
This announcement does not constitute an offer or an invitation to purchase any
securities.
<PAGE> 4
Network Associates, Inc. and Dr Solomon's Group PLC
Goldman Sachs International
622617
For immediate release.
Not for release, publication or distribution in Australia or Japan.
June 9, 1998
ACQUISITION OF DR SOLOMON'S GROUP PLC BY NETWORK ASSOCIATES INC
Introduction
The Boards of Dr Solomon's and Network Associates announce that they have agreed
the terms for the proposed Acquisition of the entire issued share capital of Dr
Solomon's by Network Associates by means of a scheme of arrangement under
section 425 of the Companies Act.
Both Boards expect the Acquisition to be completed within approximately 90 days,
subject to Dr Solomon's shareholder and Court approval, regulatory reviews and
the satisfaction or waiver of other conditions set out in Appendix I to this
announcement.
Terms of the Acquisition
Under the terms of the Acquisition, holders of Dr Solomon's Ordinary Shares will
receive 0.27625 shares of Network Associates' Common Stock for each Dr Solomon's
Ordinary Share. As one Dr Solomon's ADS represents three Dr Solomon's Ordinary
Shares, this is equivalent to 0.82875 shares of Network Associates' Common Stock
for each Dr Solomon's ADS.
The Acquisition values the entire current issued share capital of Dr Solomon's
at approximately $642 million (pound sterling 393 million) and each Dr Solomon's
ADS at $34.81, based on the last sale price of $42.00 per share of Network
Associates' Common Stock on NASDAQ on June 8, 1998 (the latest dealing day prior
to the announcement of the Acquisition). This represents a premium of 15.5 per
cent over the average last sale price of $30.15 of a Dr Solomon's ADS on NASDAQ
for the 30 days prior to the date of this announcement and a premium of 8.4 per
cent over the last sale price of $32.125 of a Dr Solomon's ADS on NASDAQ on June
8, 1998. The Acquisition will be a taxable transaction to US holders of Dr
Solomon's Ordinary Shares and Dr Solomon's ADSs. The Acquisition is expected to
be accounted for as a pooling of interests for US accounting purposes.
Following the completion of the Acquisition, it is expected that former holders
of Dr Solomon's Ordinary Shares and Dr Solomon's ADSs will hold approximately
11.7% of the enlarged Common Stock of Network Associates (excluding the effect
of the exercise of any options).
Network Associates currently holds 100 Dr Solomon's ADSs and intends to make
further purchases (subject to applicable securities laws) of a small number of
Dr Solomon's Ordinary Shares and/or Dr Solomon's ADSs (representing no more than
600 underlying shares) prior to the Effective Date. Network Associates intends
that immediately following the Effective Date, Network Associates will transfer
all or a portion of the Dr Solomon's Ordinary Shares owned by it to a direct or
indirect subsidiary.
Fractions of new Network Associates' Common Stock will not be issued. In lieu
thereof, holders of Dr Solomon's Ordinary Shares and/or Dr Solomon's ADSs will
receive cash (without interest) in an amount equal to the product of such
fractional part of Network Associates Common Stock multiplied by the closing
market price of Network Associates Common Stock on NASDAQ on the day following
the Effective Date. (Amounts of less than pound sterling 3.00 (or the US dollar
equivalent) will be retained for the benefit of Network Associates). The
Acquisition is subject to a number of terms and conditions which, together with
the obligations of Network Associates and Dr Solomon's to implement the Scheme,
are governed by the Transaction Agreement dated June 9, 1998. The conditions are
set out in Appendix I to this announcement.
Recommendation
The directors of Dr Solomon's, who have been so advised by Goldman Sachs
<PAGE> 5
International, financial adviser to Dr Solomon's, consider the terms of the
Acquisition to be fair and reasonable. In providing advice to the directors of
Dr Solomon's, Goldman Sachs International has taken into account the directors'
commercial assessments.
The directors of Dr Solomon's are unanimously recommending holders of Dr
Solomon's Ordinary Shares and Dr Solomon's ADSs to approve the Scheme and
Acquisition, as they intend to do in respect of their own beneficial holdings
totalling 10,125,000 Dr Solomon's Ordinary Shares, representing 18.3% of Dr
Solomon's issued share capital.
Information on Dr Solomon's
Dr Solomon's, a leading supplier of anti-virus software in the UK and elsewhere
in Europe, develops, markets and supports anti-virus software programs for PCs
and PC networks. Dr Solomon's products provide effective and easy-to-use
software solutions to the risks posed by the proliferation of new and
increasingly sophisticated types of computer viruses. Dr Solomon's principal
product line is the "Dr Solomon's Anti-Virus Toolkit" family of anti-virus
software programs. Since its introduction in 1989, the Toolkit has become one of
the leading global anti-virus software programs. The most recent version of the
Toolkit can detect and identify more than 19,000 known computer viruses.
Dr Solomon's targets its sales and marketing efforts primarily at medium and
large corporate customers with networks of PCs. A substantial percentage of Dr
Solomon's sales are in the form of recurring revenues from corporate licenses.
Dr Solomon's has over 150 people working in sales and approximately 60 third
party international partners. Dr Solomon's products include award winning virus
detection engine technology and feature-rich anti-virus management technology.
For the nine months ended February 28, 1998, on an unaudited basis, Dr Solomon's
recorded operating profit of pound sterling 9.6 million (1997: pound sterling
6.1 million) and net income of pound sterling 6.9 million (1997: pound sterling
2.4 million), based on revenues of pound sterling 41.5 million (1997: pound
sterling 25.4 million). For the last four reported quarters, ended February 28,
1998, on an unaudited basis, Dr Solomon's had total bookings of pound sterling
63.1 million, representing a 58% increase over the prior four quarters.
Dr Solomon's ADSs are quoted on NASDAQ and on EASDAQ. Dr Solomon's had a market
capitalisation of $592 million as of June 8, 1998, based on a last sale price of
$32.125 of Dr Solomon's ADSs on NASDAQ on that date. This represents a 89%
increase on the IPO price of $17 per Dr Solomon's ADS. The IPO was completed in
December 1996.
Information on Network Associates
With headquarters in Santa Clara, California, Network Associates, formed late
last year by the merger of McAfee Associates and Network General, is a leading
supplier of enterprise network security and management solutions. Network
Associates focuses on providing broad and integrated network security and
management software products for enterprise customers, targeting in particular
the Windows NT/Intel platform. Network Associates customer base includes a
significant number of Fortune 500 companies. Its PGP encryption and
authentification technology is considered a worldwide standard for internet
email and file encryption. Network Associates offers a comprehensive suite of
network security products under the Net Tools Secure product suite including the
Total Virus Defense suite of anti-virus products, featuring a multi-tiered
approach to virus detection and eradication, and the Total Network Security
suite of products including encryption, intrusion detection, authentication, and
firewall products. Network Associates was one of the first anti-virus providers
on the market to attack virus infection through a multi-tiered approach with the
Total Virus Defense (TVD) suite. Network Associates Net Tools Manager product
suite includes the Total Network Visibility suite of network fault and
performance solutions and the Total Service Desk suite of integrated service
desk solutions.
Network Associates' four product suites are sold under a product umbrella called
Net Tools. Net Tools is being designed as a fully integrated product offering
intended to reduce the total cost of managing an enterprise network.
Many of Network Associates' network security and management products are
<PAGE> 6
available on a stand-alone basis. Network Associates is also a leader in
electronic software distribution, which is the principal means by which it
markets and distributes its software products to its customers.
For the year ended December 31, 1997, Network Associates recorded operating
profit of $194.0 million (1996: $136.5 million) (pre-acquisition and related
costs) and net income of $147.5 million (1996: $94.8 million) (pre-acquisition
and related costs), based on revenues of $612.2 million (1996: $407.6 million).
For the year ended December 31, 1997, revenue growth for 1997 was 50%. As of
March 31, 1998, Network Associates had $627 million in cash and $77 million in
deferred revenue.
On May 29, 1998, Network Associates effected a 3-for-2 stock split by means of a
stock dividend paid to stockholders of record on May 12, 1998.
Network Associates' Common Stock is quoted on NASDAQ. Network Associates had a
market capitalisation of approximately $4.9 billion as of June 8, 1998, based on
a last sale price of $42.00 per share of Network Associates' Common Stock on
that date.
In April 1998 Network Associates acquired Magic Solutions International, Inc, a
privately held provider of internal help desk and asset management solutions,
and Trusted Information Systems, Inc, a publicly held provider of comprehensive
security systems for computer networks for approximately $110 million and $300
million, respectively.
Background to and reasons for the Acquisition
The Boards of Dr Solomon's and Network Associates believe that Dr Solomon's and
Network Associates represent an excellent fit in terms of technology, products,
markets and infrastructure. The combined group will be one of the world's
largest companies catering primarily to the network security and management
markets, and offering a broad suite of products to protect, manage and monitor
corporate networks for enterprise customers seeking the benefits of a secure,
reliable computing network.
Today's announcement builds on the foundation of Network Associates' core
strengths and extends its popular anti-virus technology, which evolved from its
flagship product, McAfee VirusScan, an industry leader. Network Associates' core
strengths include its broad product line, its position in the rapidly growing
security market, its scale, its high quality services organisation with more
than 85 seasoned security consultants, its installed base with over 50 million
units distributed and its award-winning global virus research team with
laboratories on 5 continents. Shortly after the Acquisition, Dr Solomon's
Anti-Virus Toolkit will be available as part of Network Associates' enterprise
security suites, the Total Virus Defense (TVD) suite, and Net Tools Secure, the
only integrated software bundle on the market to incorporate anti-virus,
encryption, authentication, firewall, intrusion detection and scanning
technology.
Dr Solomon's strategy for the past two years has been based on three principal
themes: the maintenance of its leadership in anti-virus technology; the defense
and enhancement of its market leadership in the UK and Northern Europe; and
achieving sustainable and profitable market shares.
The combination will provide Network Associates with the potential to access Dr
Solomon's strong European distribution channels, benefit from Dr Solomon's
strategic product technologies, strengthen Network Associates' suite of
integrated security products, and achieve significant distribution channel and
services synergies.
Dr Solomon's should benefit from being part of a larger group with a broader
product range and greater overall market strength. Combining Network Associates'
successful marketing, sales, distribution and customer service expertise with Dr
Solomon's infrastructure, leading anti-virus technology, strong European
distribution channels and loyal customer base, should provide for greater
success for the combined Network Associates group than is likely to be achieved
separately by either Dr Solomon's or Network Associates. Given the expected
synergies and increased market opportunities created by the Acquisition, the
Boards of Network Associates and Dr Solomon's believe the Acquisition will be
beneficial to their respective shareholders and customers.
<PAGE> 7
The Board of Network Associates expects that it will incur a one time charge in
the third quarter of 1998, resulting from expenses and other charges associated
with the Acquisition. Excluding this one time charge, the Board of Network
Associates expects the Acquisition to be modestly dilutive to earnings per share
in the third quarter of its financial year ending December 31, 1998, but is
expected to be non-dilutive to earnings per share in the fourth quarter of its
financial year ending December 31, 1998, and to be modestly accretive for the
financial year ending December 31, 1999. This statement should not be
interpreted to mean that the future earnings per share of Network Associates
Common Stock will necessarily be greater than the earnings per share of Network
Associates for its financial year ended December 31, 1997.
Bill Larson, CEO, Chairman and President of Network Associates, said:
"With today's news, Network Associates further demonstrates its vision and
commitment to deliver world-class enterprise security products to the global
market.
Network Associates is primed to deploy integrated enterprise security systems to
Europe's largest companies."
Geoff Leary, Chief Executive of Dr Solomon's, said:
"I believe that Dr Solomon's and Network Associates represent an excellent fit
in terms of products, markets and infrastructure. The combination should enable
one of the most comprehensive ranges of security products to be made available
to Dr Solomon's customers around the world."
Integration and growth opportunities
Network Associates intends managing the integration of Dr Solomon's as rapidly
and as efficiently as possible. Dr Solomon's Anti-Virus Toolkit 8 is expected to
be shipped on schedule in Fall 1998 and both complete product lines will be
included in Network Associates suites shortly after the transaction closes. In
early 1999, Network Associates expects to begin shipping an upgrade
incorporating the best of Network Associates and Dr Solomon's technology. This
will be a free upgrade to subscribers of either existing product.
Through the Acquisition, Network Associates is expected to benefit from enhanced
growth opportunities including acceleration of growth in the international
security software market, acceleration of the enterprise transition in Europe,
and incorporation of the best elements from both product lines. Further, Network
Associates intends expanding penetration into large European accounts through
the breadth of its product line and the strength of its services and consulting
organisation. Also, Network Associates intends upgrading Dr Solomon's customers
to comprehensive Network Security suites.
Management and employees
Since the two companies compete in many of the same markets with similar product
lines, it is expected that in order to achieve synergistic benefits from the
Acquisition, there will be some rationalisation within the combined workforce.
Transition planning for the merging of the worldwide combined workforce will
begin immediately. Our staff are a major asset of the business and ensuring
their effective and productive deployment will be a key success factor for the
enlarged organisation. Network Associates confirms that existing employment
rights, including pension rights, of the management and all employees of Dr
Solomon's Group will be fully safeguarded.
Dr Solomon's Share Option Schemes
The terms of the Scheme, if approved by Dr Solomon's Shareholders and the Court,
will bind the holders of all Dr Solomon's Ordinary Shares (and the holders of Dr
Solomon's ADSs via the Depositary), including those issued upon exercise of
options, in issue on the day prior to the Effective Date.
Options granted under the Dr Solomon's Company Share Option Scheme 1996 and the
Dr Solomon's Executive Share Option Scheme 1996 (the "1996 Schemes")
<PAGE> 8
become exercisable during a six month period commencing on the date option
holders are formally notified about the Scheme. Such exercise will be
conditional on the Scheme becoming effective. Options granted under the Dr
Solomon's Group Share Option Scheme will be exercisable for one month following
the date the Scheme becomes effective. As an alternative to exercise, option
holders will be permitted to release their options over Dr Solomon's Ordinary
Shares in consideration for the grant of options of an equivalent value over
shares of Common Stock in Network Associates. As a further alternative, holders
of options granted under the 1996 Schemes will be permitted to cancel their
options and receive Network Associates Common Stock with a value equal to the
latent profit in their options.
Expected Timetable (Subject to change)
Posting of Scheme Circular - June 26, 1998
Latest date for Dr Solomon's ADS holders to instruct the Depositary how to vote
- - July 16,1998
Latest date for proxies from Dr Solomon's Ordinary Shareholders to be received -
July 19, 1998
Dr Solomon's Shareholders' Meetings - July 21, 1998
Final Court hearing to sanction the Scheme - August 12, 1998
Effective date of the Scheme, de-listing and completion of Acquisition -
August 13, 1998
General
The Acquisition will be subject to the conditions and certain further terms
which are set out in Appendix I to this announcement and to such other terms
which will be set out in the Scheme Circular as may be required to comply with
the Companies Act and the provisions of the City Code. Persons not resident in
the United Kingdom may be affected by the laws of the relevant jurisdictions.
Persons who are not resident in the United Kingdom should inform themselves
about and observe any applicable requirements.
<TABLE>
Enquiries:
<S> <C>
Dr Solomon's
Geoff Leary, Chief Executive +44 1296 318 700
David Stephens, Finance Director +44 1296 318 700
Goldman Sachs International
Fergal O'Driscoll +44 171 774 1000
Greg Lemkau +1 415 393 7500
Shandwick Consultants
Rollo Head +44 171 329 0096
Network Associates
Prabhat Goyal, Chief Financial Officer +1 408 346 3110
Morgan Stanley
Andrew Bell +44 171 425 5555
Nicholas Osborne +1 650 234 5500
</TABLE>
This announcement contains forward-looking statements including with respect to
the consummation of the Acquisition and the integration of products, and
opportunities and synergies related to the Acquisition. Because such statements
apply to future events, they are subject to risks and uncertainties that could
cause the actual results to differ materially, including without limitation,
integration risks related to the Acquisition and the risk that the Acquisition
will not be consummated, and the risks that the anticipated benefits of the
Acquisition will not be realised.
<PAGE> 9
This announcement is published on behalf of Network Associates and Dr Solomon's
and has been approved by Morgan Stanley & Co. Limited and Goldman Sachs
International, each of which are regulated by The Securities and Futures
Authority Limited, for the purposes of section 57 of the Financial Services Act
1986.
Goldman Sachs International, which is regulated by The Securities and Futures
Authority Limited, is acting for Dr Solomon's in connection with the Acquisition
and no-one else and will not be responsible to anyone other than Dr Solomon's
for providing the protections afforded to customers of Goldman Sachs
International, nor for providing advice in relation to the Acquisition.
Morgan Stanley and Co. Limited, which is regulated by The Securities and Futures
Authority Limited, is acting for Network Associates in connection with the
Acquisition and no-one else and will not be responsible to anyone other than
Network Associates for providing the protections afforded to customers of Morgan
Stanley and Co. Limited, nor for providing advice in relation to the
Acquisition.
This announcement does not constitute an offer or an invitation to purchase any
securities.
Appendix I contains the conditions of the Scheme and certain other terms of the
Acquisition.
Appendix II contains the definitions of terms used in this announcement.
APPENDIX I
<PAGE> 10
The conditions of the Scheme and certain other terms of the Acquisition
Under the terms of the Transaction Agreement, the obligations of Network
Associates and Dr Solomon's to effect the Scheme are subject to the satisfaction
or waiver on or prior to the Effective Date in the case of the condition set out
in paragraph 2 below, and immediately prior to commencement of the hearing at
which the Court grants the Final Court Order (the hearing at which such order is
granted being the Final Hearing) in the case of each of the other conditions set
forth below, of the following conditions:
1. approval of the Scheme by a majority in number, representing at least 75%
in value, of the holders of the Dr Solomon's Ordinary Shares present and
voting in person or by proxy at the Court Meeting and the special
resolution to be proposed at the Extraordinary General Meeting being duly
passed (the Required Shareholders Vote);
2. the Scheme being sanctioned, and the reduction of capital involved therein
being confirmed, by the Court, with or without modification; and an office
copy of such order shall have been duly delivered to the Registrar of
Companies for registration and the Registrar shall have issued its
certificate of such registration;
3. the waiting period (and any extension thereof) applicable to the
Acquisition under the US Hart-Scott Rodino Antitrust Improvements Act of
1976 shall have been terminated or shall have expired; the U.K. Office of
Fair Trading shall have indicated prior to the commencement of the Final
Hearing, in terms satisfactory to Network Associates, that it is not the
intention of the Secretary of State for Trade and Industry to refer the
proposed acquisition by Network Associates of Dr Solomon's, or any matters
arising therefrom, to the Monopolies and Mergers Commission; and the
receipt of such other consents, authorisations, filings, approvals and
registrations as are necessary;
4. no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Scheme shall
be in effect; provided, however, that each of the parties shall have used
all reasonable best efforts to prevent the entry of any such injunction or
other order and to appeal as promptly as possible to any such injunction
or other order that may be entered;
5. there not being any pending or threatened any suit, action, investigation
or proceeding by any court, administrative agency or commission or other
governmental or regulatory body or authority or instrumentality (each
being a Governmental Entity), (i) seeking to restrain or prohibit the
consummation of the Scheme or any of the other transactions contemplated
by the Transaction Agreement or seeking to obtain from Network Associates
or Dr Solomon's or any of their respective subsidiaries any damages that
are material in relation to Network Associates and its subsidiaries taken
as a whole or Dr Solomon's and its subsidiaries, taken as a whole, as
applicable, (ii) seeking to prohibit or limit the ownership or operation
by Network Associates or Dr Solomon's or any of their respective
subsidiaries of any material portion of the business or assets of Network
Associates and its subsidiaries taken as a whole or Dr Solomon's and its
subsidiaries taken as a whole, or seeking to require Network Associates or
Dr Solomon's or any of their respective subsidiaries to dispose of or hold
separate any material portion of the business or assets of Network
Associates and its subsidiaries, taken as a whole, or Dr Solomon's and its
subsidiaries, taken as a whole, as a result of the Scheme or any of the
other transactions contemplated by the Transaction Agreement, or (iii)
which otherwise is reasonably likely to have a material adverse effect on
either Network Associates or Dr Solomon's.
6. Network Associates having received letters from each of Coopers & Lybrand
L.L.P. and Deloitte & Touche, respectively, dated within two (2) business
days prior to the date of the Final Hearing, regarding that firm's
concurrence with Network Associates' management's and Dr Solomon's
management's conclusions as to the appropriateness of pooling of interest
accounting for the Scheme under U.S. Accounting Principles Board Opinion
No. 16, if the Scheme is consummated in
<PAGE> 11
accordance with the Transaction Agreement.
The obligations of Dr Solomon's to effect the Scheme are further subject to
satisfaction (or waiver by Dr Solomon's) immediately prior to commencement of
the Final Hearing of the following conditions:
1. The representations and warranties of Network Associates set forth in the
Transaction Agreement that are qualified as to materiality being true and
correct, and the representations and warranties of Network Associates set
forth in the Transaction Agreement that are not so qualified being true
and correct in all material respects, in each case as of the date of the
Transaction Agreement and, except to the extent such representations and
warranties speak as of an earlier date or as could not reasonably be
expected to have a material adverse effect on Network Associates, as of
the date of the Final Hearing as though made on and as of commencement of
the Final Hearing, except as otherwise contemplated by the Transaction
Agreement and Dr Solomon's having received a certificate signed on behalf
of Network Associates by the chief executive officer and the chief
financial officer of Network Associates to that effect.
2. Network Associates having performed in all material respects all
obligations required to be performed by it under the Transaction Agreement
prior to the date of the Final Hearing, and Dr Solomon's having received a
certificate signed on behalf of Network Associates by the chief executive
officer and the chief financial officer of Network Associates to such
effect.
3. Dr Solomon's having received, in a form reasonably acceptable to the
directors of Dr Solomon's, clearance from the Inland Revenue under Section
138 of the Taxation of Chargeable Gains Act 1992 for transactions involved
in the Scheme.
4. The shares of Network Associates Common Stock to be issued to effect the
Acquisition being approved for listing on NASDAQ.
5. No material adverse effect with respect to Network Associates having
occurred since the date of the Transaction Agreement and continuing.
6. Dr Solomon's having received a legal opinion in the agreed form, dated as
of the date of the Final Hearing, from Wilson Sonsini Goodrich & Rosati.
The obligations of Network Associates to effect the Acquisition are further
subject to the satisfaction (or waiver by Network Associates) immediately prior
to the commencement of the Final Hearing of the following conditions:
1. The representations and warranties of Dr Solomon's set forth in the
Transaction Agreement that are qualified as to materiality being true
and correct, and the representations and warranties of Dr Solomon's set
forth in the Transaction Agreement that are not so qualified being true
and correct in all material respects, in each case as of the date of
the Transaction Agreement and, except to the extent such
representations and warranties speak as of an earlier date or as could
not reasonably be expected to have a material adverse effect on Dr
Solomon's, as of the date of the Final Hearing as though made on and as
of commencement of the Final Hearing, except as otherwise contemplated
by the Transaction Agreement and Network Associates having received a
certificate signed on behalf of Dr Solomon's by the chief executive
officer and the chief financial officer of Dr Solomon's to that effect.
2. Dr Solomon's having performed in all material respects all obligations
required to be performed by it under the Transaction Agreement prior to
the date of the Final Hearing, and Network Associates having received a
certificate signed on behalf of Dr Solomon's by the chief executive
officer and the chief financial officer of Dr Solomon's to that effect.
3. No material adverse effect with respect to Dr Solomon's having occurred
since the date of the Transaction Agreement and continuing.
4. Each of the directors of Dr Solomon's at the request of Network Associates
having submitted their resignation as directors to take
<PAGE> 12
effect as of the Effective Date, but without prejudice to their respective
rights as employees and Dr Solomon's and Network Associates acknowledge
that such resignations shall not constitute resignations by any director
as an employee or breach by the directors of their terms of employment, or
entitle Dr Solomon's to terminate the employment of any of the directors.
5. Network Associates having received a legal opinion in the agreed form,
dated the date of the Final Hearing, from Macfarlanes.
Termination of the Transaction Agreement
The Transaction Agreement may be terminated at any time prior to the
commencement of the Final Hearing, whether before or after approval of matters
presented in connection with the Scheme by the shareholders of Dr Solomon's:
1. by mutual written consent of Dr Solomon's and Network Associates;
2. by either Dr Solomon's or Network Associates,
(i) if the Required Shareholders Vote shall not have been obtained at the duly
held Dr Solomon's shareholder meetings or an adjournment thereof;
(ii) if any Governmental Entity shall have issued an order, decree or ruling or
taken any other action permanently enjoining, restraining or otherwise
prohibiting the Acquisition and such order, decree, ruling or other action
shall have become final and nonappealable;
(iii) in the event of a breach by the other party of any representation,
warranty, covenant or other agreement contained in the Transaction
Agreement which would result in the failure of a condition to the
obligations of such party under the Transaction Agreement and cannot
reasonably be or has not been cured within 20 days after the giving of
written notice to the breaching party of such breach but in any event
prior to the commencement of the Final Hearing (a Material Breach)
(provided that the terminating party is not then in Material Breach of any
representation, warranty, covenant or other agreement contained in the
Transaction Agreement);or
(iv) if the Effective Date shall not have occurred by October 31, 1998, for any
reason provided, however, that the right to terminate the Transaction
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
Effective Date to occur on or before such date and such action or failure
to act constitutes a breach of the Transaction Agreement.
3. by Dr Solomon's: if the Board of Directors of Dr Solomon's approves or
recommends a bona fide Dr Solomon's Acquisition Proposal (see below) to
acquire, directly or indirectly, for consideration consisting of cash
and/or securities, more than 50% of the Dr Solomon's Ordinary Shares then
outstanding or all or substantially all the assets of Dr Solomon's, and
otherwise on terms which the Board of Directors of Dr Solomon's determines
in its good faith reasonable judgement to be more favourable to Dr
Solomon's stockholders than the Acquisition (after having received the
advice of Dr Solomon's independent financial adviser as to the value of
the consideration provided for in such proposal) and for which financing,
to the extent required, is then committed or which, in the good faith
reasonable judgement of the Dr Solomon's Board of Directors, is reasonably
capable of being financed by such third party (a Dr Solomon's Superior
Proposal) and Dr Solomon's shall have paid to Network Associates the break
up fee;
4. by Network Associates:
(i) if, prior to the Dr Solomon's shareholders meetings, any proposal for
a merger or other business combination, any scheme of arrangement,
exchange offer, liquidation, or takeover offer (within the meaning of
Section 428 of the Companies Act) involving Dr Solomon's or any of its
subsidiaries or any proposal or offer to acquire in any manner,
directly or indirectly, an equity interest of 15% or more in any voting
<PAGE> 13
securities of or a substantial portion of the assets of Dr Solomon's or
any of its subsidiaries, or any other similar transactions the
consummation of which could reasonably be expected to prevent or
materially impede, interfere with, or delay the Acquisition (a Dr
Solomon's Acquisition Proposal) is commenced, publicly proposed,
publicly disclosed or communicated to Dr Solomon's (or the willingness
of any person to make a Dr Solomon's Acquisition Proposal is publicly
disclosed or communicated to Dr Solomon's) and the Board of Directors
of Dr Solomon's or any committee thereof shall have withdrawn or
modified in a manner adverse to Network Associates its approval or
recommendation for the Required Shareholders Vote, and approved or
recommended the Dr Solomon's Acquisition Proposal, or resolved to do
the foregoing actions;
(ii) if Dr Solomon's shall have entered into any agreement with respect to any
Dr Solomon's Superior Proposal; or
(iii) if the Effective Date shall not have occurred on or prior to August 31,
1998, other than as a result of a material breach of the Transaction
Agreement by Network Associates or as a result of the failure to satisfy
the U.S. anti-trust condition in paragraph 3 above (set out in the
conditions to be satisfied or waived prior to the Final Hearing) prior to
such date (when such failure shall be the result of a material breach by
Dr Solomon's of its objections contained in the
Transaction Agreement).
Payment on Termination
1. Dr Solomon's shall promptly pay, or cause to be paid, to Network
Associates:
(i) U.S. $3,500,000, if the Transaction Agreement is terminated by Dr
Solomon's in the circumstances set out in 3 above;
(ii) U.S. $3,500,000, if the Transaction Agreement is terminated by Network
Associates in the circumstances set out in (4)(i) or (ii) above;
(iii) U.S. $500,000, if the Transaction Agreement is terminated by either Dr
Solomon's or Network Associates in the circumstances set out in (2)(i)
above (provided that Network Associates is not in material breach of the
Transaction Agreement and at the time of the Extraordinary General
Meeting there shall have been no material adverse effect on Network
Associates) or U.S.$3,500,000, (less any earlier payment) if the
Transaction Agreement is so terminated and within the nine month period
following any such transaction Dr Solomon's shall consummate a Dr
Solomon's Acquisition Proposal or enter into any agreement, understanding
or commitment with respect to a Dr Solomon's Acquisition Proposal and such
transaction is consummated.
(iv) U.S. $3,500,000, if the Transaction Agreement is terminated by Network
Associates in the circumstances set out in (4)(iii) above (provided
that Network Associates is not in material breach of the Transaction
Agreement and at the time of such termination there shall have been no
material adverse effect on Network Associates) and within the nine
month period following any such termination Dr Solomon's shall
consummate a Dr Solomon's Acquisition Proposal or enter into any
agreement, understanding or commitment with respect to a Dr Solomon's
Acquisition Proposal and such transaction is consummated.
In no event shall more than $3,500,000 be payable to Network Associates
under the foregoing provisions.
APPENDIX II
<PAGE> 14
Definitions
In this announcement, the following definitions apply unless the context
requires otherwise:
"Acquisition" the proposed acquisition of the entire issued share
capital of Dr Solomon's to be effected by means of
the Scheme;
"Business Day" a day (other than a Saturday or Sunday) on which
banks are generally open in London for normal
business;
"City Code" the City Code on Takeovers and Mergers;
"Companies Act" the Companies Act of 1985 (as amended) of England
and Wales;
"Court" the High Court of Justice in England and Wales;
"Court Meeting" the meeting of the holders of Dr Solomon's Shares
to be convened pursuant to an Order of the Court
for the purposes of approving the Scheme;
"Depositary" The Bank of New York;
"Dr Solomon's" Dr Solomon's Group PLC;
"Dr Solomon's ADS(s)" American Depositary Share(s) of Dr Solomon's, each
representing three ordinary shares of 1p each in
the share capital of Dr Solomon's which are traded
on NASDAQ and EASDAQ;
"Dr Solomon's Group" Dr Solomon's and its subsidiary and associated
undertakings;
"Dr Solomon's ordinary shares of 1p each in the share capital of
Ordinary Shares" Dr Solomon's;
"Dr Solomon's holders of Dr Solomon's Ordinary Shares and Dr
Shareholders" Solomon's ADSs;
"Dr Solomon's Share the Dr Solomon's Company Scheme 1996, the Dr
Option Schemes" Solomon's Group Share Option Scheme, the
Dr Solomon's Executive Share Option Scheme 1996,
and the Dr Solomon's Savings Related Option Scheme;
"Dr Solomon's Trust" the Dr Solomon's Employee Benefit Trust constituted
by a trust deed between Dr Solomon's and Bank of
Scotland (International) Limited dated August
15,1996;
"EASDAQ" European Association of Securities Dealers
Automated Quotation;
"Effective Date" the date on which the Scheme becomes effective,
which is expected to be August 13, 1998,
"Extraordinary the extraordinary general meeting of Dr Solomon's
General Meeting" to be convened inter alia for the purposes of
approving the Acquisition;
"Final Court Order" the order of the Court sanctioning the Scheme under
Section 425 of the Companies Act and confirming the
cancellation of the share capital in connection
therewith under Section 137 of the Companies Act;
"Goldman Sachs" Goldman Sachs International;
"Meetings" the Court Meeting and the Extraordinary General
Meeting;
<PAGE> 15
<TABLE>
<S> <C>
"Morgan Stanley" Morgan Stanley & Co. Limited;
"NASDAQ" The NASDAQ National Market;
"Network Associates" Networks Associates, Inc.;
"Network Associates' common stock of Network Associates, par value
Common Stock" $0.01;
"Offer period" the period commencing on June 9, 1998 (being the
date of this announcement) until close of business
in the UK on the date of the Meetings;
"Panel" the Panel on Takeovers and Mergers;
"Record Date" the business day immediately preceding the Effective Date;
"Record Time" 10.00 p.m. (London time) on the Record Date;
"Registrar" The Registrar of Companies in England and Wales
"1996 Schemes" Dr Solomon's Company Share Option Scheme 1996 and
the Dr Solomon's Executive Share Option Scheme
1996;
"Scheme" the proposed scheme of arrangement under section
425 of the Companies Act between Dr Solomon's and
Dr Solomon's Ordinary Shareholders to be set out in
the Scheme Circular
"Scheme Circular" the circular proposed to be despatched to holders
of Dr Solomon's Ordinary Shares and Dr Solomon's
ADSs setting out details of the Acquisition and the
Scheme, information about Dr Solomon's and Network
Associates and containing the notices of the
Meetings;
"Scheme Shares" the Dr Solomon's Ordinary Shares in the capital of
Dr Solomon's in issue at the date of the Scheme
Circular, together with all (if any) additional Dr
Solomon's Ordinary Shares which (i) may be issued
prior to the Court Meeting and (ii) may be issued
on or after the date of the Court Meeting and up
until the Record Time;
"Transaction the agreement dated June 9, 1998, between Network
Agreement" Associates and Dr Solomon's, containing the terms
and conditions of the Acquisition;
"United Kingdom" or "UK" the United Kingdom of Great Britain and Northern
Ireland;
"United States" or "US" the United States of America, its territories and
possessions, any state of the United States of
America, the District of Columbia, and all other
areas subject to its jurisdiction;
</TABLE>
In this document, where the sterling equivalent is given for a US dollar sum, or
vice versa, the exchange rate used (save where otherwise stated) is US
$1.6340/pound sterling1.
References to June 8, 1998 are to the latest practicable date prior to the
making of this announcement.
<PAGE> 1
EXHIBIT 2.2
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. WHEN
CONSIDERING WHAT ACTION YOU SHOULD TAKE, YOU ARE RECOMMENDED IMMEDIATELY TO
CONSULT AN INDEPENDENT FINANCIAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICES
ACT 1986.
If you have sold or transferred all your ordinary shares or American
Depositary Shares in Dr Solomon's Group PLC, please forward this document,
together with the enclosed Forms of Proxy and/or the Letter of Instruction, at
once to the purchaser or transferee or to the stockbroker or other agent through
whom the sale or transfer was effected, for transmission to the purchaser or
transferee.
------------------------
RECOMMENDED PROPOSAL FOR THE ACQUISITION OF
DR SOLOMON'S GROUP PLC
BY
NETWORKS ASSOCIATES, INC.
TO BE EFFECTED BY MEANS OF A
SCHEME OF ARRANGEMENT
UNDER SECTION 425 OF THE COMPANIES ACT 1985
------------------------
Your attention is drawn to the letter from Terence Osborne, Chairman of Dr
Solomon's Group PLC, on pages 8 to 11 of this document, which contains the Dr
Solomon's Group PLC board's unanimous recommendation that you approve the
proposal.
The action you are recommended to take is set out on pages 10 and 11 of
this document. Notices of a Meeting convened by order of the Court and of an
Extraordinary General Meeting of Dr Solomon's Group PLC, each of which will be
held on 21 July 1998, are set out at the end of this document.
If you hold ordinary shares of Dr Solomon's Group PLC, and whether or not
you intend to be present at the Meetings convened by the above-mentioned
notices, please complete and sign the two enclosed Forms of Proxy and return
them in the enclosed reply paid envelope to 10 Norwich Street, London EC4A 1BD
(reference: BRA/545707) as soon as possible and, in any event, so as to be
received by no later than 11.00 a.m. (London time) in the case of the GREEN Form
of Proxy and no later than 11.15 a.m. (London time) in the case of the BLUE Form
of Proxy, in each case on 19 July 1998.
If you hold Dr Solomon's ADSs, and whether or not you intend to be present
at the Meetings convened by the above-mentioned notices, please complete and
sign the enclosed WHITE Letter of Instruction and return it in the enclosed
envelope to The Bank of New York, 101 Barclay Street, New York, NY 10286 as soon
as possible and, in any event, so as to be received by no later than 2.00 p.m.
(New York City time) on 16 July 1998.
<PAGE> 2
CONTENTS OF DOCUMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Expected Timetable of Principal Events..................................... 3
Definitions................................................................ 4
Letter from the Chairman of Dr Solomon's Group PLC......................... 8
Explanatory Statement...................................................... 12
Appendix 1: Conditions of the Scheme and Other Terms of the Transaction
Agreement................................................... 30
Appendix 2: Information on Dr Solomon's................................. 39
A: Description of business of Dr Solomon's..................... 39
B: Financial Information on Dr Solomon's....................... 43
Appendix 3: Information on Network Associates........................... 65
A: Description of business of Network Associates............... 65
B: Financial Information on Network Associates................. 69
Appendix 4: Dr Solomon's Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 97
Appendix 5: Network Associates' Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 106
Appendix 6: Unaudited Pro Forma Combined Financial Information.......... 115
Appendix 7: Risk Factors................................................ 122
Appendix 8: Further Information on Dr Solomon's......................... 139
Appendix 9: Further Information on Network Associates................... 142
Appendix 10: Comparison of Rights of Dr Solomon's Shareholders and
Network Associates Stockholders............................. 149
Appendix 11: General Information......................................... 159
Scheme of Arrangement...................................................... 180
Notice of Court Meeting.................................................... 183
Notice of Extraordinary General Meeting.................................... 184
</TABLE>
2
<PAGE> 3
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
<TABLE>
<CAPTION>
1998
----
<S> <C>
Record Date for holders of Dr Solomon's ADSs to instruct The 5.30 p.m.
Bank of New York to vote on their behalf at the (New York City time)
Extraordinary General Meeting on 23 June
Latest time for receipt of the WHITE Letter of Instruction 2.00 p.m.
for use by holders of Dr Solomon's ADSs (New York City time) on 16 July
Requested time for lodging the GREEN Form of Proxy for the 11.00 a.m.
Court Meeting(1) (London time)
on 19 July
Latest time for receipt of the BLUE Form of Proxy for the 11.15 a.m.
Extraordinary General Meeting (London time)
on 19 July
Dr Solomon's Court Meeting 11.00 a.m.
(London time)
on 21 July
Dr Solomon's Extraordinary General Meeting 11.15 a.m.
(London time)(2)
on 21 July
Record Time for the Scheme 10.00 p.m.
(London time)
on 12 August
Date of Court hearing of the petition to sanction the Scheme 12 August
Effective Date of the Scheme 13 August
Dealings commence on NASDAQ in new Network Associates Common 13 August
Stock
Date by which certificates in respect of new Network 20 August
Associates Common Stock will be despatched to holders of Dr
Solomon's Ordinary Shares
Date by which Letters of Transmittal in respect of new 20 August
Network Associates Common Stock will be despatched to
holders of Dr Solomon's ADSs
</TABLE>
- ---------------
(1) Forms of Proxy for the Court Meeting not so lodged may be handed to the
Chairman of that Meeting.
(2) Or (if later) as soon thereafter as the preceding Court Meeting shall have
concluded or been adjourned.
3
<PAGE> 4
DEFINITIONS
In this document, except in the text of the Scheme and the notices of the
Meetings, the following definitions apply unless the context requires otherwise:
"Acquisition"................. the proposed acquisition of the entire issued
share capital of Dr Solomon's to be effected by
means of the Scheme;
"Board"....................... board of directors;
"Business Day"................ a day (other than a Saturday or Sunday) on
which banks are generally open in London for
normal business;
"City Code"................... The City Code on Takeovers and Mergers;
"Commission" or "SEC"......... the U.S. Securities and Exchange Commission;
"Companies Act"............... the Companies Act 1985 (as amended) of England
and Wales;
"Court" or "High Court"....... the High Court of Justice in England and Wales;
"Court Meeting"............... the meeting of the holders of Dr Solomon's
Ordinary Shares convened pursuant to an Order
of the Court to be held at 11.00 a.m. (London
time) on 21 July 1998 (and any adjournment
thereof), notice of which is set out on page
183 of this document;
"Depositary".................. The Bank of New York;
"Deposit Agreement"........... the deposit agreement dated 2 December 1996
between the Depositary and Dr Solomon's;
"Dr Solomon's"................ Dr Solomon's Group PLC;
"Dr Solomon's ADR(s)"......... American Depositary Receipt(s) evidencing Dr
Solomon's ADSs;
"Dr Solomon's ADS(s)"......... American Depositary Share(s) of Dr Solomon's,
each representing three Dr Solomon's Ordinary
Shares, which are traded on NASDAQ and EASDAQ;
"Dr Solomon's Group".......... Dr Solomon's and its subsidiary undertakings;
"Dr Solomon's Ordinary
Shares"....................... ordinary shares of 1p each in the share capital
of Dr Solomon's;
"Dr Solomon's Shares"......... Dr Solomon's Ordinary Shares and Dr Solomon's
ADSs and any further such Dr Solomon's Ordinary
Shares or Dr Solomon's ADSs;
"Dr Solomon's Shareholders"... holders of Dr Solomon's Shares;
"Dr Solomon's Share Option
Schemes"..................... the 1996 Schemes, the Group Scheme and the Dr
Solomon's Savings Related Share Option Scheme;
"Dr Solomon's Trust".......... the S&S International Holdings Employee Benefit
Trust constituted by a trust deed made between
Dr Solomon's and Bank of Scotland Trust Company
(International) Limited dated 15 August 1996;
4
<PAGE> 5
"EASDAQ"...................... European Association of Securities Dealers
Automated Quotation;
"Effective Date".............. the date on which the Scheme becomes effective,
which is expected to be 13 August 1998;
"Exchange Act"................ U.S. Securities Exchange Act of 1934, as
amended;
"Explanatory Statement"....... the explanatory statement given in accordance
with section 426 of the Companies Act set out
on pages 12 to 29 of this document;
"Extraordinary General
Meeting"...................... the extraordinary general meeting of Dr
Solomon's to be held at 11.15 a.m. (London
time) (or, if later, as soon thereafter as the
preceding Court Meeting shall have concluded or
been adjourned) on 21 July 1998 (and any
adjournment thereof) notice of which is set out
on pages 184 to 186 of this document;
"FASB"........................ the U.S. Financial Accounting Standards Board;
"Final Court Order"........... the order of the Court sanctioning the Scheme
and confirming the associated cancellation of
the share capital in connection therewith under
Section 137 of the Companies Act;
"Final Hearing"............... the Court hearing at which the Final Court
Order is granted;
"Forms of Proxy".............. the GREEN form of proxy for use in relation to
the Court Meeting and the BLUE form of proxy
for use in relation to the Extraordinary
General Meeting, in each case by the holders of
Dr Solomon's Ordinary Shares;
"GAAP"........................ generally accepted accounting principles;
"Goldman Sachs"............... Goldman Sachs International;
"Group Scheme"................ the Dr Solomon's Group Share Option Scheme;
"HSR"......................... the U.S. Hart-Scott-Rodino Antitrust
Improvements Act of 1976;
"Letter of Instruction"....... the WHITE letter of instruction for use by
holders of Dr Solomon's ADSs directing the
Depositary how to vote at the Meetings;
"Letter of Transmittal"....... the letter pursuant to which holders of Dr
Solomon's ADSs are required to instruct the
Transfer Agent as to the issuance of their new
Network Associates Common Stock;
"Magic Solutions"............. Magic Solutions International, Inc., acquired
by Network Associates in April 1998.
"Meetings".................... the Court Meeting and the Extraordinary General
Meeting;
"Morgan Stanley".............. Morgan Stanley & Co. Limited;
"NASDAQ"...................... The NASDAQ National Market;
5
<PAGE> 6
"Network Associates 3-for-2
Stock Split"................. the Network Associates 3-for-2 stock split
effected on 29 May 1998 by means of a stock
dividend pursuant to which stockholders of
record on 12 May 1998 received one share of
Network Associates Common Stock for every two
shares of Network Associates Common Stock held
by them (with cash paid in lieu of fractional
shares);
"new Network Associates Common
Stock"........................ the new common stock, $0.01 par value per
share, in Network Associates to be issued to
the holders of Dr Solomon's Shares under the
terms of the Scheme;
"Network Associates".......... Networks Associates, Inc.;
"Network Associates Common
Stock"........................ common stock, $0.01 par value per share, in
Network Associates;
"Network Associates Group".... Networks Associates, Inc. and its subsidiary
undertakings;
"Offer period"................ the period commencing on 9 June 1998 (being the
date on which the proposed Acquisition was
announced) until 5.30 p.m. (London time) on 21
July 1998;
"Panel"....................... The Panel on Takeovers and Mergers;
"Record Time"................. 10.00 p.m. (London time) on the business day
immediately preceding the date of the Final
Hearing;
"Registrar"................... The Registrar of Companies in England and
Wales;
"1996 Schemes"................ Dr Solomon's Company Share Option Scheme 1996
and the Dr Solomon's Executive Share Option
Scheme 1996;
"Scheme"...................... the proposed scheme of arrangement under
section 425 of the Companies Act set out on
pages 180 to 182 of this document;
"Scheme Shares"............... shall bear the meaning set out in the Scheme;
"Securities Act".............. the U.S. Securities Act of 1933, as amended;
"TIS"......................... Trusted Information Systems, Inc., acquired by
Network Associates in April 1998;
"Transaction Agreement"....... the agreement dated 9 June 1998 between Network
Associates and Dr Solomon's containing the terms and conditions of the
Acquisition;
"Transfer Agent".............. Boston Equiserve, Inc., as transfer agent for
the new Network Associates Common Stock;
"United Kingdom" or "U.K.".... the United Kingdom of Great Britain and
Northern Ireland;
6
<PAGE> 7
"United States" or "U.S."..... the United States of America, its territories
and possessions, any state of the United States
of America, the District of Columbia, and all
other areas subject to its jurisdiction;
In this document, where the sterling equivalent is given for a U.S. dollar
sum, or vice versa, the exchange rate used (save in Appendices 2 to 6 inclusive
and where otherwise stated) is $1.6657/L1 (being the London spot rate quoted in
The Financial Times for 23 June 1998).
References to the current issued share capital of Dr Solomon's are to
55,310,000 Dr Solomon's Ordinary Shares.
References to 23 June 1998 are to the latest practicable date prior to the
publication of this document.
References to $ are to United States dollars, and references to L are to
United Kingdom pounds sterling.
7
<PAGE> 8
LETTER FROM THE CHAIRMAN OF DR SOLOMON'S GROUP PLC
[DR SOLOMON'S LETTERHEAD]
26 JUNE 1998
To holders of Dr Solomon's Ordinary Shares and Dr Solomon's ADSs and, for
information only, to participants in the Dr Solomon's Share Option Schemes
Dear Shareholder
ACQUISITION OF DR SOLOMON'S BY NETWORK ASSOCIATES
INTRODUCTION
On 9 June 1998, the Boards of Dr Solomon's and Network Associates announced
that they had agreed terms for the proposed acquisition of the entire issued
share capital of Dr Solomon's by Network Associates to be effected by means of a
scheme of arrangement under Section 425 of the Companies Act. I am writing to
explain the background to the Acquisition and the reasons why Dr Solomon's
directors consider that the terms of the Acquisition and the Scheme are fair and
reasonable and are unanimously recommending that you approve the Acquisition and
the Scheme.
TERMS OF THE ACQUISITION
Under the terms of the Acquisition, holders of Dr Solomon's Ordinary Shares
will receive:
FOR EACH DR SOLOMON'S ORDINARY SHARE
0.27625 SHARES OF NEW NETWORK
ASSOCIATES COMMON STOCK
For holders of Dr Solomon's ADSs, each representing three Dr Solomon's
Ordinary Shares, this is equivalent to:
FOR EACH DR SOLOMON'S ADS
0.82875 SHARES OF NEW NETWORK
ASSOCIATES COMMON STOCK
The Acquisition values the entire current issued share capital of Dr
Solomon's at approximately $642 million (L393 million) and each Dr Solomon's ADS
at $34.81, based on the last sale price of $42.00 per share of Network
Associates Common Stock on NASDAQ on 8 June 1998 (the latest dealing day prior
to the announcement of the Acquisition). On the basis of the last sale price of
$45.31 per share of Network Associates Common Stock on NASDAQ on 23 June 1998,
the Acquisition values the entire current issued share capital of Dr Solomon's
at approximately $692 million (L416 million) and each Dr Solomon's ADS at
$37.55.
DR SOLOMON'S GROUP PLC
REGISTERED OFFICE: ALTON HOUSE,
GATEHOUSE WAY,
AYLESBURY,
BUCKS, HP19 3XU,
UNITED KINGDOM.
HTTP://WWW.DRSOLOMON.COM
REGISTERED IN ENGLAND, NO. 3146991
8
<PAGE> 9
The Acquisition represents a premium of 15.5 per cent. over the average
last sale price of $30.15 of a Dr Solomon's ADS on NASDAQ for the 30 days prior
to the date of the announcement of the Acquisition and a premium of 8.4 per
cent. over the last sale price of $32.125 of a Dr Solomon's ADS on NASDAQ on 8
June 1998. The Acquisition will be a taxable transaction to U.S. holders of Dr
Solomon's Ordinary Shares and Dr Solomon's ADSs. The Acquisition is expected to
be accounted for as a pooling of interests for U.S. accounting purposes.
Immediately following completion of the Acquisition, it is expected that
former holders of Dr Solomon's Ordinary Shares and Dr Solomon's ADSs will hold
approximately 11.7 per cent. of the enlarged Common Stock of Network Associates
(excluding the effect of the exercise of any option, conversion, any other
subscription rights or share issues).
Fractions of new Network Associates Common Stock will not be issued. In
lieu thereof, holders of Dr Solomon's Ordinary Shares and/or Dr Solomon's ADSs
will receive cash (without interest) in an amount equal to the product of such
fractional share of Network Associates Common Stock multiplied by the last sale
price of Network Associates Common Stock on NASDAQ on the Business Day following
the Effective Date.
The new Network Associates Common Stock will be issued fully paid and
non-assessable and will rank pari passu in all respects with the existing
Network Associates Common Stock, including the right to all dividends and other
distributions declared or made after the Effective Date. The new Network
Associates Common Stock will be issued free from all liens, charges,
encumbrances and other interests.
For the nine months ended 28 February 1998, on an unaudited basis, Dr
Solomon's recorded operating profit of L9.6 million (1997: L6.1 million) and net
income of L6.9 million (1997: L2.4 million), based on revenues of L41.5 million
(1997: L25.4 million). For the last four reported quarters, ended 28 February
1998, on an unaudited basis, Dr Solomon's had total bookings of L63.1 million,
representing a 58 per cent. increase over the prior four quarters.
Dr Solomon's is currently reviewing its results of operations for the three
months ended 31 May 1998. Based on preliminary indications, which are subject to
additional review and amendment, bookings for such period were approximately
L20.5 million (compared to L14.8 million for the three months ended 31 May
1997). Dr Solomon's does not currently expect that its financial results for
such period will deviate materially from historical trends adjusted for this
level of bookings.
Dr Solomon's ADSs are quoted on NASDAQ and on EASDAQ. Dr Solomon's had
market capitalisations of $592 million (L362 million) as at 8 June 1998 (the
latest dealing day prior to the announcement of the Acquisition) and $613
million (L368 million) as at 23 June, respectively, based on last sale prices of
$32.125 and $33.25 of a Dr Solomon's ADS on NASDAQ on each of those respective
dates. This represents an 89 per cent. increase and a 96 per cent. increase,
respectively, on the initial public offer price of $17 per Dr Solomon's ADS. The
Dr Solomon's initial public offering was completed in December 1996.
Network Associates Common Stock is quoted on NASDAQ. Network Associates had
market capitalisations of approximately $4.9 billion (L3.0 billion) as at 8 June
1998 (the latest dealing day prior to the announcement of the Acquisition) and
$5.3 billion (L3.2 billion) as at 23 June 1998, respectively, based on last sale
prices of $42.00 and $45.31 per share of Network Associates Common Stock on such
dates.
BACKGROUND TO AND REASONS FOR THE ACQUISITION
Over the last few years Network Associates and Dr Solomon's have
periodically discussed potential benefits that could be derived from combining
their respective businesses. Discussions with respect to the Acquisition began
in early 1998 when the parties authorised their financial, legal and accounting
advisors to evaluate various issues and to develop a mutually acceptable
structure for any proposed transaction. In May and early June 1998, the parties
and their advisors conducted due diligence and negotiated the terms for the
Acquisition. As part of its overall plan to acquire the entire issued share
capital of Dr Solomon's, Network Associates purchased 200 Dr Solomon's
9
<PAGE> 10
ADSs for $32.375 per Dr Solomon's ADS prior to the announcement of the
Acquisition. The Transaction Agreement was signed on 9 June 1998 and a joint
press release announcing the Acquisition was issued on the same day.
The Boards of each of Dr Solomon's and Network Associates believe that Dr
Solomon's and Network Associates represent an excellent fit in terms of
technology, products, markets and infrastructure. The combined group will be one
of the world's largest companies catering primarily to the network security and
management markets, and offering a broad suite of products to protect, manage
and monitor corporate networks for enterprise customers seeking the benefits of
a secure, reliable computing network.
Dr Solomon's strategy for the past two years has been based on three
principal themes: the maintenance of its leadership in anti-virus technology;
the defence and enhancement of its market leadership in the U.K. and Northern
Europe; and achieving sustainable and profitable market shares elsewhere.
Dr Solomon's should benefit from being part of a larger group with a
broader product range and greater overall market strength. Combining Network
Associates' successful marketing, sales, distribution and customer service
expertise with Dr Solomon's infrastructure, leading anti-virus technology,
strong European distribution channels and loyal customer base, should provide
for greater success for the combined companies than is likely to be achieved
separately by either Dr Solomon's or Network Associates. Given the expected
synergies and increased opportunities created by the Acquisition, the Boards of
each of Network Associates and Dr Solomon's believe the Acquisition will be
beneficial to their respective shareholders and customers.
MANAGEMENT AND EMPLOYEES
Since the two companies compete in many of the same markets with similar
product lines, it is expected that in order to achieve synergistic benefits from
the Acquisition, there will be some rationalisation within the combined
workforce. Transition planning for the merging of the worldwide combined
workforce has already begun. The staff of the two companies are a major asset of
the businesses and ensuring their effective and productive deployment will be a
key success factor for the enlarged organisation.
Network Associates has confirmed that existing employment rights, including
pension rights, of the management and all employees of the Dr Solomon's Group
will be fully safeguarded.
DR SOLOMON'S SHARE OPTION SCHEMES
The terms of the Scheme, if approved by Dr Solomon's Shareholders and the
Court, will bind the holders of all Dr Solomon's Ordinary Shares (including
those issued upon exercise of options) in issue at the Record Time.
Options granted under the 1996 Schemes will become exercisable for a period
of six months from the date on which option holders are formally notified about
the Scheme. Such exercise will be conditional on the Scheme becoming effective.
Options granted under the Group Scheme which are not already exercisable will
become exercisable for one month from the Effective Date. As an alternative to
exercise, option holders will have the opportunity to release their options over
Dr Solomon's Ordinary Shares in consideration for the grant of options of an
equivalent value over shares of Network Associates Common Stock. As a further
alternative, holders of options granted under the 1996 Schemes will have the
opportunity to cancel their options in return for shares of Network Associates
Common Stock.
ACTION TO BE TAKEN
HOLDERS OF DR SOLOMON'S ORDINARY SHARES
The proposals require the approval of holders of Dr Solomon's Ordinary
Shares which will be sought at two meetings to be held, the first commencing at
11.00 a.m. (London time), on 21 July 1998 at the offices of Shandwick
Consultants Limited, Aldermary House, 10-15 Queen Street,
10
<PAGE> 11
London EC4N 1TX. To become effective, the Scheme will also require the
subsequent sanction of the High Court.
Notices of the Court Meeting and the Extraordinary General Meeting are set
out on pages 183 to 186 of this document.
Holders of Dr Solomon's Ordinary Shares are requested to complete and
return the enclosed GREEN and BLUE Forms of Proxy to 10 Norwich Street, London
EC4A 1BD (reference: BRA 545707), so as to be received by no later than 11.00
a.m. (London time) in the case of the GREEN Form of Proxy and by no later than
11.15 a.m. (London time) in the case of the BLUE Form of Proxy, in each case on
19 July 1998. The Form of Proxy for use at the Court Meeting may, however, be
handed to the Chairman of that Meeting prior to commencement of that Meeting.
The return of Forms of Proxy will not preclude holders of Dr Solomon's Ordinary
Shares from attending and voting at the Meetings should they so wish.
HOLDERS OF DR SOLOMON'S ADSS
Holders of Dr Solomon's ADSs may attend the Court Meeting and the
Extraordinary General Meeting, but may not vote in person at either of the
Meetings (unless they become registered holders of Dr Solomon's Ordinary Shares
by arranging for the surrender of their Dr Solomon's ADRs in accordance with the
Deposit Agreement). However, they may instruct The Bank of New York, the
Depositary for the Dr Solomon's ADR programme, how to vote the Dr Solomon's
Ordinary Shares underlying their Dr Solomon's ADSs at the Court Meeting and the
Extraordinary General Meeting. A WHITE Letter of Instruction is enclosed for
this purpose and must be completed, signed and returned to the Depositary at 101
Barclay Street, New York, NY 10286 so as to arrive by no later than 2.00 p.m.
(New York City time) on 16 July 1998.
FAILURE TO RETURN THE FORMS OF PROXY OR THE LETTER OF INSTRUCTION MAY
JEOPARDISE THE PROSPECTS OF THE SCHEME BEING APPROVED AND THE ACQUISITION BEING
COMPLETED. HOLDERS OF DR SOLOMON'S SHARES ARE, THEREFORE, STRONGLY URGED TO
COMPLETE, SIGN AND RETURN THEIR FORMS OF PROXY AND THE LETTER OF INSTRUCTION (AS
RELEVANT) AS SOON AS POSSIBLE.
RECOMMENDATION
The directors of Dr Solomon's, who have been so advised by Goldman Sachs
(financial adviser to Dr Solomon's), consider the terms of the Acquisition to be
fair and reasonable. In providing advice to the directors of Dr Solomon's,
Goldman Sachs has taken into account the directors' commercial assessments.
The directors of Dr Solomon's unanimously recommend holders of Dr Solomon's
Ordinary Shares and Dr Solomon's ADSs to approve the Scheme and Acquisition, as
they intend to do in respect of their own beneficial holdings totalling, in
aggregate, 10,125,000 Dr Solomon's Ordinary Shares, representing, in aggregate,
approximately 18.3 per cent. of Dr Solomon's current issued share capital.
Yours sincerely
Terence Osborne
Chairman
11
<PAGE> 12
EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
GOLDMAN SACHS INTERNATIONAL MORGAN STANLEY & CO. LIMITED
Peterborough Court 25 Cabot Square
133 Fleet Street Canary Wharf
London EC4A 2BB London E14 4QA
Registered in England No. 2263951 Registered in England No. 2164628
26 JUNE 1998
To the holders of Dr Solomon's Ordinary Shares and Dr Solomon's ADSs and,
for information only, to participants in the Dr Solomon's Share Option Schemes
Dear Sir or Madam,
RECOMMENDED PROPOSAL FOR THE ACQUISITION OF
DR SOLOMON'S BY NETWORK ASSOCIATES
1. INTRODUCTION
On 9 June 1998, the Boards of Dr Solomon's and Network Associates announced
that they had reached agreement on the terms for an acquisition by Network
Associates of Dr Solomon's entire issued share capital, to be effected by means
of a scheme of arrangement under Section 425 of the Companies Act 1985.
Pursuant to the Scheme and subject to the requisite approvals of Dr
Solomon's Shareholders and the High Court, all of the Dr Solomon's Shares in
issue on a specified date, including the Dr Solomon's Ordinary Shares
represented by the Dr Solomon's ADSs (being the Scheme Shares), will be
cancelled and an equal number of new Dr Solomon's Ordinary Shares will be issued
to Network Associates, leaving Network Associates as Dr Solomon's only
shareholder. In consideration, holders of Scheme Shares will receive new Network
Associates Common Stock according to the exchange offer ratio referred to below.
In the formulation and consideration of this proposal, Dr Solomon's has
been advised by Goldman Sachs and Network Associates has been advised by Morgan
Stanley. We have been authorised by the directors of Dr Solomon's and Network
Associates to write to you to explain the provisions of the Scheme, which is set
out on pages 180 to 182 of this document.
You will see from the letter addressed to you from the Chairman of Dr
Solomon's on pages 8 to 11 above that the directors of Dr Solomon's consider the
terms of the Acquisition and the Scheme to be fair and reasonable. Accordingly,
they have unanimously recommended holders of Dr Solomon's Shares to approve the
proposal, as they intend to do in respect of their own beneficial holdings
totalling, in aggregate, 10,125,000 Dr Solomon's Ordinary Shares, which
represent, in aggregate, approximately 18.3 per cent. of Dr Solomon's current
issued share capital.
2. THE CONSIDERATION
Under the Scheme, each Dr Solomon's Ordinary Share in issue at 10.00 p.m.
(London time) on the Business Day immediately prior to the date on which the
Scheme becomes effective (being the Record Time) will be cancelled and an equal
number of new Dr Solomon's Ordinary Shares will be issued to Network Associates
so that Dr Solomon's will become a wholly-owned subsidiary of Network
Associates. As consideration for the Acquisition, Network Associates will issue
to the
12
<PAGE> 13
holders of Dr Solomon's Ordinary Shares on the share register of Dr Solomon's at
the Record Time shares of new Network Associates Common Stock on the following
basis:
<TABLE>
<S> <C>
0.27625 SHARES OF NEW NETWORK
FOR EACH DR SOLOMON'S ORDINARY SHARE ASSOCIATES COMMON STOCK
</TABLE>
For holders of Dr Solomon's ADSs (each representing three Dr Solomon's
Ordinary Shares), this is equivalent to:
<TABLE>
<S> <C>
0.82875 SHARES OF NEW NETWORK
FOR EACH DR SOLOMON'S ADS ASSOCIATES COMMON STOCK
</TABLE>
Fractions of new Network Associates Common Stock will not be issued. In
lieu thereof, holders of Dr Solomon's Ordinary Shares and/or Dr Solomon's ADSs
will receive cash (without interest) in an amount equal to the product of such
fractional part of Network Associates Common Stock multiplied by the last sale
price of Network Associates Common Stock on NASDAQ on the Business Day following
the Effective Date.
The new Network Associates Common Stock issued in consideration for the
cancellation of Dr Solomon's Ordinary Shares represented by Dr Solomon's ADSs
will be issued to the custodian for the Depositary, and not directly to holders
of Dr Solomon's ADSs. At least one Business Day before the Effective Date, the
Depositary will deliver to the Transfer Agent the names and addresses of the
holders of Dr Solomon's ADRs. Registered holders of Dr Solomon's ADRs will be
requested to surrender their Dr Solomon's ADRs to the Transfer Agent, together
with a properly executed Letter of Transmittal, in exchange for the transfer to
them of new Network Associates Common Stock, together with cheques in relation
to any fractional entitlements arising thereon.
Further particulars of the new Network Associates Common Stock are set out
in Appendices 9 and 10 of this document.
The Acquisition values the entire current issued share capital of Dr
Solomon's at approximately $642 million (L393 million) and each Dr Solomon's ADS
at $34.81, based on the last sale price of $42.00 per share of Network
Associates Common Stock on NASDAQ on 8 June 1998 (the latest dealing day prior
to the date of announcement of the Acquisition). On the basis of the last sale
price of $45.31 per share of Network Associates Common Stock on NASDAQ on 23
June 1998, the Acquisition values the entire current issued share capital of Dr
Solomon's at approximately $692 million (L416 million) and each Dr Solomon's ADS
at $37.55. The Acquisition represents a premium of 15.5 per cent. over the
average last sale price of $30.15 of a Dr Solomon's ADS on NASDAQ for the 30
days prior to the date of the announcement of the Acquisition and a premium of
8.4 per cent. over the last sale price of $32.125 for a Dr Solomon's ADS on
NASDAQ on 8 June 1998.
Immediately following completion of the Acquisition, it is expected that
former holders of Dr Solomon's Ordinary Shares and Dr Solomon's ADSs will hold
approximately 11.7 per cent. of the enlarged Common Stock of Network Associates
(excluding the effect of the exercise of any option, conversion, or other
subscription rights or further share issues).
As part of its overall plan to acquire the entire issued share capital of
Dr Solomon's, Network Associates purchased 200 Dr Solomon's ADSs for $32.375 per
Dr Solomon's ADS prior to the announcement of the Acquisition and intends to
make further purchases (subject to applicable securities laws) of a small number
of Dr Solomon's Ordinary Shares and/or Dr Solomon's ADSs (representing no more
than 600 underlying Dr Solomon's Ordinary Shares) prior to the Effective Date.
Network Associates intends that, immediately following the Effective Date,
Network Associates will transfer all or a portion of the Dr Solomon's Ordinary
Shares owned by it to a direct or indirect subsidiary.
13
<PAGE> 14
DIVIDENDS
No dividends will be declared or paid on the Dr Solomon's Ordinary Shares
prior to their cancellation under the Scheme.
GENERAL
Application is being made to NASDAQ for the new Network Associates Common
Stock to be listed on NASDAQ as soon as possible following the Effective Date.
The new Network Associates Common Stock will be issued as fully paid and
non-assessable and will rank pari passu in all respects with the existing
Network Associates Common Stock, including the right to all dividends and the
distributions declared or made after the Effective Date. The new Network
Associates Common Stock will be issued free from all liens, charges,
encumbrances and other interests.
3. CONDITIONS OF THE SCHEME
The terms and conditions of the Scheme, and the obligations of Dr Solomon's
and Network Associates to implement the Scheme which are governed by the
Transaction Agreement, comply with the appropriate regulations of the City Code.
The Scheme is expected to become effective on 13 August 1998.
The Scheme is conditional, inter alia, upon:
(a) approval of the Scheme by a majority in number representing at
least 75 per cent. in value of the holders of Dr Solomon's Ordinary Shares
present and voting in person or by proxy at the Court Meeting;
(b) the special resolution required to implement the Scheme and amend
the Articles of Association of Dr Solomon's being passed at the
Extraordinary General Meeting;
(c) the approval for listing on NASDAQ of the new Network Associates
Common Stock;
(d) the Office of Fair Trading indicating prior to the Final Hearing,
in terms satisfactory to Network Associates, that it is not the intention
of the Secretary of State for Trade and Industry to refer the Acquisition,
or any matters arising therefrom, to the Monopolies and Mergers Commission;
(e) any applicable waiting period and any extension to such period
under the HSR relating to the Acquisition having expired or been
terminated;
(f) Dr Solomon's having received, in a form reasonably acceptable to
the directors of Dr Solomon's, clearance from the Inland Revenue under
Section 138 of the Taxation of Chargeable Gains Act 1992 for the
transactions involved in the Scheme;
(g) Networks Associates having received letters from each of Coopers
& Lybrand LLP and Deloitte & Touche respectively regarding that firm's
concurrence with the conclusions of the management of Networks Associates
and Dr Solomon's as to the appropriateness of pooling of interest
accounting for the Scheme under U.S. Accounting Principles Board Opinion
No. 16;
(h) the grant of the Final Court Order; and
(i) the delivery to the Registrar of an office copy of the Final
Court Order and registration of the same.
Network Associates and Dr Solomon's will not proceed with the Scheme if,
prior to 5.30 p.m. (London time) on the date of the Meetings, the Secretary of
State for Trade and Industry refers the Acquisition, or any matters arising
therefrom, to the Monopolies and Mergers Commission. In such
14
<PAGE> 15
event, neither Network Associates nor any holder of Dr Solomon's Shares will be
bound by any term or condition of the Scheme. However, neither of the Boards of
Dr Solomon's or Network Associates have any reason to believe that the
Acquisition will be referred to the Monopolies and Mergers Commission.
The conditions to implementation of the Scheme are set out in full in
Appendix 1 of this document. Subject to such conditions being satisfied (or
waived), it is expected that the Effective Date will be on or about 13 August
1998, with certificates representing the new Network Associates Common Stock and
cheques in respect of any relevant fractional entitlements being posted to
holders of Dr Solomon's Ordinary Shares by 20 August 1998 and with Letters of
Transmittal being posted to holders of Dr Solomon's ADSs by 20 August 1998.
Under the terms of the Scheme, Dr Solomon's will reduce its share capital
by the cancellation of the Scheme Shares. The reserve arising on the
cancellation of the Scheme Shares will be capitalised by the issue to Network
Associates of a corresponding number of new Dr Solomon's Ordinary Shares so that
Dr Solomon's becomes a wholly-owned subsidiary of Network Associates.
In addition, the Acquisition is intended to qualify as a pooling of
interests for U.S. financial reporting purposes in accordance with U.S. GAAP.
Completion of the Acquisition is conditional upon receipt at the closing of the
Acquisition by Network Associates and Dr Solomon's of letters from Coopers &
Lybrand LLP, Network Associates' independent public accountants, and Deloitte &
Touche, Dr Solomon's independent public accountants, regarding their respective
concurrence with the conclusion of the management of each of Network Associates
and Dr Solomon's, as to the use of pooling of interest accounting for the
Acquisition under U.S. Accounting Principle Bulletin Number 16, if the Scheme is
consummated in accordance with the Transaction Agreement.
THE ACQUISITION WILL NOT QUALIFY AS A TAX-FREE TRANSACTION FOR U.S. PERSONS
WHO ARE DR SOLOMON'S SHAREHOLDERS AND WILL BE TAXABLE UNDER U.S. TAX LAWS TO
SUCH DR SOLOMON'S SHAREHOLDERS. SEE PARAGRAPH 11(A) BELOW.
Announcements of the results of the Court Meeting, the Extraordinary
General Meeting and the Final Hearing will be made as soon as practicable after
the Meetings and the Final Hearing, respectively.
Further details of the conditions of the Scheme and the other terms of the
Transaction Agreement are set out in Appendix 1 of this document. The Board of
Dr Solomon's will not take the necessary steps to make the Scheme effective
unless all the conditions to Network Associates' obligation to proceed with the
Acquisition are fulfilled or waived immediately prior to the date of the Final
Hearing.
The Scheme will become effective when a copy of the Final Court Order is
registered by the Registrar, at which time Network Associates will own the
entire issued share capital of Dr Solomon's. The Scheme will lapse if it does
not become effective by 31 August 1998 (or such later date as the parties agree
and the Court may allow, being not later than 31 December 1998).
IT IS EXPECTED THAT THE SCHEME WILL BECOME EFFECTIVE ON 13 AUGUST 1998.
UPON THE SCHEME BECOMING EFFECTIVE, IT WILL BE BINDING ON ALL HOLDERS OF DR
SOLOMON'S ORDINARY SHARES AS AT THE RECORD DATE IRRESPECTIVE OF WHETHER THEY
ATTENDED OR VOTED AT THE COURT MEETING.
4. INFORMATION ON DR SOLOMON'S
HISTORY OF DR SOLOMON'S
Dr Solomon's, a leading supplier of anti-virus software in the U.K. and
elsewhere in Europe, develops, markets and supports anti-virus and other
software programs for PCs and PC networks, Macintosh and UNIX systems. Dr
Solomon's products provide effective and easy-to-use software solutions to the
risks posed by the proliferation of new and increasingly sophisticated types of
15
<PAGE> 16
computer viruses. Dr Solomon's principal product line is the "Dr Solomon's
Anti-Virus Toolkit" family of anti-virus software programs. Since its
introduction in 1989, the Toolkit has become one of the leading global
anti-virus software programs. The most recent version of the Toolkit can detect
and identify more than 19,000 known computer viruses.
Dr Solomon's targets its sales and marketing efforts primarily at medium
and large corporate customers with networks of PCs. A substantial percentage of
Dr Solomon's sales are in the form of recurring revenues from corporate
licenses. Dr Solomon's has over 150 people working in sales and approximately 60
third party international partners. Dr Solomon's products include award winning
virus detection engine technology and feature-rich anti-virus management
technology.
For the nine months ended 28 February 1998, on an unaudited basis, Dr
Solomon's recorded operating profit of L9.6 million (1997: L6.1 million) and net
income of L6.9 million (1997: L2.4 million), based on revenues of L41.5 million
(1996: L25.4 million). For the last four reported quarters, ended 28 February
1998, on an unaudited basis, Dr Solomon's had total bookings of L63.1 million,
representing a 58 per cent. increase over the prior four quarters.
Dr Solomon's ADSs are quoted on NASDAQ and on EASDAQ. Dr Solomon's had
market capitalisations of $592 million (L362 million) as at 8 June 1998 (the
latest dealing day prior to the announcement of the Acquisition), and $613
million (L368 million) as at 23 June 1998, respectively, based on last sale
prices of $32.125 and $33.25 respectively of a Dr Solomon's ADS on NASDAQ on
those dates. This represents an 89 per cent. and a 96 per cent. increase
respectively on the initial public offering price of $17 per Dr Solomon's ADS.
The initial public offering was completed in December 1996.
Further information concerning Dr Solomon's is set out in Appendices 2, 4,
10 and 11 of this document.
5. INFORMATION ON NETWORK ASSOCIATES
With headquarters in Santa Clara, California, Network Associates, formed
late last year by the merger of McAfee Associates, Inc. and Network General
Corporation, is a leading supplier of enterprise network security and management
solutions. Network Associates focuses on providing broad and integrated network
security and management software products for enterprise customers, targeting in
particular the Windows NT/Intel platform. Network Associates' customer base
includes a significant number of Fortune 500 companies. Its PGP encryption and
authentication technology is considered a worldwide standard for internet email
and file encryption. Network Associates offers a comprehensive suite of network
security products under the Net Tools Secure product suite including the Total
Virus Defense suite ("TVD suite") of anti-virus products, featuring a
multi-tiered approach to virus detection and eradication, and the Total Network
Security suite of products including encryption, intrusion detection,
authentication, and firewall products. Network Associates was one of the first
anti-virus providers on the market to attack virus infection through a
multi-tiered approach with the TVD suite. Network Associates' Net Tools Manager
product suite includes the Total Network Visibility suite of network fault and
performance solutions and the Total Service Desk suite of integrated service
desk solutions.
Network Associates' four product suites are sold under a product umbrella
called Net Tools. Net Tools is being designed as a fully integrated product
offering intended to reduce the total cost of managing an enterprise network.
Many of Network Associates network security and management products are
available on a stand-alone basis. Network Associates is also a leader in
electronic software distribution, which is the principal means by which it
markets and distributes its software products to its customers.
For the year ended 31 December 1997, Network Associates recorded operating
profit of $194.0 million (1996: $136.5 million) (pre-acquisition and related
costs) and net income of $147.4 million (1996: $94.8 million) (pre-acquisition
and related costs), based on revenues of $612.2 million (1996: $421.8 million).
For the year ended 31 December 1997, revenue growth for
16
<PAGE> 17
1997 was 45 per cent. As of 31 March 1998, Network Associates had $782.5 million
in cash and marketable securities and $77 million in deferred revenue.
On 29 May 1998, Network Associates effected the Network Associates 3-for-2
Stock Split.
Network Associates Common Stock is quoted on NASDAQ. Network Associates had
a market capitalisation of approximately $4.9 billion as at 8 June 1998 (the
latest dealing day prior to the announcement of the Acquisition) and $5.3
billion as at 23 June, respectively, based on last sale prices of $42.00 and
$45.31 per share, respectively, of Network Associates Common Stock on those
dates.
In April 1998 Network Associates acquired Magic Solutions, a privately held
provider of internal help desk and asset management solutions, and TIS, a
publicly held provider of comprehensive security systems for computer networks,
for approximately $110 million in cash and $300 million in Network Associates
Common Stock, respectively.
6. BACKGROUND TO AND REASONS FOR THE ACQUISITION
Over the last few years, Network Associates and Dr Solomon's have
periodically discussed potential benefits that could be derived from combining
their respective businesses. Discussions with respect to the Acquisition began
in early 1998 when the parties authorised their financial, legal and accounting
advisors to evaluate various issues and to develop a mutually acceptable
structure for any proposed transaction. In May and early June 1998, the parties
and their advisors conducted due diligence and negotiated the terms for the
Acquisition. As part of its overall plan to acquire the entire issued share
capital of Dr Solomon's, Network Associates purchased 200 Dr Solomon's ADSs for
$32.375 per Dr Solomon's ADS prior to the announcement of the Acquisition. The
Transaction Agreement was signed on 9 June 1998 and a joint press release
announcing the Acquisition was issued on the same day.
The Boards of each of Dr Solomon's and Network Associates believe that Dr
Solomon's and Network Associates represent an excellent fit in terms of
technology, products, markets and infrastructure. The combined group will be one
of the world's largest companies catering primarily to the network security and
management markets, and offering a broad suite of products to protect, manage
and monitor corporate networks for enterprise customers seeking the benefits of
a secure, reliable computing network.
The Acquisition builds on the foundation of Network Associates' core
strengths and extends its popular anti-virus technology, which evolved from its
flagship product, McAfee VirusScan, an industry leader. Network Associates' core
strengths include its broad product line, its position in the rapidly growing
security market, its scale, its high quality services organisation with 85
seasoned security consultants, its installed base with over 50 million units
distributed and its award-winning global virus research team with laboratories
on 5 continents. Shortly after the Acquisition, Dr Solomon's Anti-Virus Toolkit
is expected to be available as part of Network Associates' enterprise security
suites, the TVD suite, and Net Tools Secure, the only integrated software bundle
on the market to incorporate anti-virus, encryption, authentication, firewall,
intrusion detection and scanning technology.
Dr Solomon's strategy for the past two years has been based on three
principal themes: the maintenance of its leadership in anti-virus technology;
the defence and enhancement of its market leadership in the U.K. and Northern
Europe; and achieving sustainable and profitable market shares elsewhere.
The combination will provide Network Associates with the potential to
access Dr Solomon's strong European distribution channels, to benefit from Dr
Solomon's strategic product technologies, to strengthen Network Associates'
suite of integrated security products and to achieve significant distribution
channel and services synergies.
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Dr Solomon's should benefit from being part of a larger group with a
broader product range and greater overall market strength. Combining Network
Associates' successful marketing, sales, distribution and customer service
expertise with Dr Solomon's infrastructure, leading anti-virus technology,
strong European distribution channels and loyal customer base, should provide
for greater success for the combined companies than is likely to be achieved
separately by either Dr Solomon's or Network Associates. Given the expected
synergies and increased market opportunities created by the Acquisition, the
Boards of each of Network Associates and Dr Solomon's believe the Acquisition
will be beneficial to their respective shareholders and customers.
There are a number of risks associated with the Acquisition and the ability
to achieve the contemplated benefits thereof. See Appendix 7 -- "Risk
Factors -- Risks Related to the Acquisition."
The Board of Network Associates expects that it will incur a one time
charge in the third quarter of 1998, resulting from expenses and other charges
associated with the Acquisition. Excluding this one time charge, the Board of
Network Associates expects the Acquisition to be modestly dilutive to earnings
per share in the third quarter of its financial year ending 31 December 1998,
but is expected to be non-dilutive to earnings per share in the fourth quarter
of its financial year ending 31 December 1998, and to be modestly accretive to
earnings per share for the financial year ending 31 December 1999. This
statement should not be interpreted to mean that the future earnings per share
of Network Associates Common Stock will necessarily be greater than the earnings
per share of Network Associates Common Stock for its financial year ended 31
December 1997.
7. PRODUCT INTEGRATION AND GROWTH OPPORTUNITIES
Network Associates intends managing the integration of Dr Solomon's as
rapidly and as efficiently as possible. Dr Solomon's Anti-Virus Toolkit 8 is
expected to be shipped on schedule in Fall 1998 and both it and McAfee's
VirusScan product lines are expected to be included in Network Associates'
suites shortly after the Effective Date.
Through the Acquisition, Network Associates expects to benefit from
enhanced growth opportunities including acceleration of growth in the
international security software market, acceleration of the enterprise
transition in Europe, and incorporation of the best elements from both
companies' product lines. Further, Network Associates intends expanding
penetration into large European accounts through the breadth of its product line
and the strength of its services and consulting organisation. Also, Network
Associates intends upgrading Dr Solomon's customers to comprehensive Network
Security suites.
See Appendix 7, "Risk Factors -- Risks Related to the
Acquisition -- Difficulties of Integrating Two Companies", for a discussion of
the risks inherent in integrating the two companies.
8. DIRECTORS, MANAGEMENT AND EMPLOYEES
Since the two companies compete in many of the same markets with similar
product lines, it is expected that in order to achieve synergistic benefits from
the Acquisition, there will be some rationalisation within the combined
workforce. Transition planning for the merging of the worldwide combined
workforce will begin immediately. The staff of the two companies are a major
asset of the businesses and ensuring their effective and productive deployment
will be a key success factor for the enlarged organisation. It has been agreed
that all of the directors of Dr Solomon's will resign from the Board on the
Effective Date.
Network Associates confirms that existing employment rights, including
pension rights, of the management and all employees of the Dr Solomon's Group
will be fully safeguarded.
The interests of the directors of Dr Solomon's in Dr Solomon's Shares are
set out in Appendix 11 of this document. The effect of the Scheme on the
interests of the directors of Dr Solomon's is no different from the effect of
the Scheme on the like interests of other persons,
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save with regard to their interests as option holders (as described in paragraph
12 below and Appendix 11) and the requirement that they enter into Affiliate
Agreements (as described in paragraph 9 below).
The directors of Dr Solomon's intend to vote in favour of the resolutions
to be proposed at the Court Meeting and the Extraordinary General Meeting in
respect of the Dr Solomon's Ordinary Shares held by them which amount to, in
aggregate, 10,125,000 Dr Solomon's Ordinary Shares which represent, in
aggregate, approximately 18.3 per cent. of Dr Solomon's current issued share
capital.
See Appendix 7, "Risk Factors -- Risks Related to the
Acquisition -- Dependence on Key Personnel".
9. STATUS OF NEW NETWORK ASSOCIATES COMMON STOCK UNDER THE SECURITIES LAWS AND
POOLING RULES; AFFILIATES
The new Network Associates Common Stock will not be registered under the
Securities Act, in reliance upon the exemption from the registration
requirements of the Securities Act provided by Section 3(a)(10) thereof. Shares
of new Network Associates Common Stock issued to a Dr Solomon's Shareholder who
is neither an affiliate, for the purposes of the Securities Act, of Dr Solomon's
prior to implementation of the Scheme nor an affiliate of Network Associates
after implementation of the Scheme may be resold without restriction under the
Securities Act. Dr Solomon's Shareholders who are affiliates of Dr Solomon's
prior to implementation of the Scheme but will not be affiliates of Network
Associates after implementation of the Scheme will be subject to the timing,
manner of sale and volume restrictions on the sale of shares of new Network
Associates Common Stock for a one year period pursuant to Rule 145(d) under the
Securities Act. For the purposes of the Securities Act, "affiliates" are
generally defined as persons who control, or are controlled by, or are under
common control with Network Associates or Dr Solomon's (generally, certain
executive officers and directors and principal shareholders thereof). The
Transaction Agreement provides that each of the Dr Solomon's Shareholders who
may be deemed to be affiliates of Dr Solomon's will execute and deliver to
Network Associates an agreement (an "Affiliate Agreement") acknowledging that
such person may be deemed to be an affiliate of Dr Solomon's and agreeing that
such person will not sell, pledge, transfer or otherwise dispose of any new
Network Associates Common Stock obtained as a result of the Acquisition except
in compliance with the Securities Act and the rules and regulations of the
Commission thereunder.
In addition, in order that Network Associates may obtain the benefit of
accounting for the Acquisition as a pooling of interests under U.S. GAAP, Dr
Solomon's Shareholders who may be deemed to be affiliates of Dr Solomon's will
agree in their Affiliate Agreement that such person will not sell, pledge,
transfer or otherwise dispose of any Dr Solomon's Shares or Network Associates
Common Stock, respectively, during the period commencing 30 Business Days prior
to the Effective Date and ending upon the publication by Network Associates of
financial results relating to the combined company covering a period of at least
30 days of combined operations of Network Associates and Dr Solomon's. Network
Associates will ensure that persons who may be deemed to be affiliates of
Network Associates will also be subject to such restriction.
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10. FINANCIAL EFFECTS FOR DR SOLOMON'S SHAREHOLDERS
(A) CAPITAL VALUE AND INCOME
The following table illustrates the financial effects of the Scheme
becoming effective for a holder of 100 Dr Solomon's ADSs, compared with the
market value of 100 Dr Solomon's ADSs on 8 June 1998 (being the last trading day
prior to the announcement of the Scheme) and on 23 June 1998:
<TABLE>
<CAPTION>
EASDAQ NASDAQ
(FIGURES ARE IN (FIGURES ARE IN
U.S.$) U.S.$)
------------------ ------------------
8 JUNE 23 JUNE 8 JUNE 23 JUNE
FOR 100 DR SOLOMON'S ADSS SEE NOTE (A) 1998 1998 1998 1998
-------------------------------------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Implied value................................ 3,481 3,755 3,481 3,755
Market value................................. 3,150 3,275 3,213 3,325
Increase in value............................ 331 480 268 430
This represents an increase of: See Note
(b)........................................ 10.50% 14.70% 8.35% 12.90%
</TABLE>
- ---------------
Notes: (a) One Dr Solomon's ADS represents three Dr Solomon's Ordinary Shares.
(b) In calculating the increase:
(i) no account has been taken of any liability to taxation or for
sales expenses associated with a transfer of Dr Solomon's Shares;
and
(ii) it is assumed that fractional shares of Network Associates
Common Stock will be issued.
(B) DIVIDEND POLICY
Dr Solomon's has not paid any cash dividends on its issued share capital
since its initial public offering in December 1996. It is the current policy of
the Board of Dr Solomon's to retain all of its future earnings to finance its
operations and future growth.
Network Associates has not paid any cash dividends on its issued common
stock since its initial public offering on 6 October 1992. Network Associates
intends to retain future earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.
11. TAXATION
(A) U.S. TAXATION
The following discussion summarizes the material United States federal
income tax consequences to U.S. Holders (as defined below) of the Scheme and of
the ownership and disposition of new Network Associates Common Stock received in
the Scheme. This summary is based upon the United States Internal Revenue Code
of 1986, as amended (the "Code"), its legislative history, final, temporary and
proposed regulations promulgated thereunder, published rulings of the Internal
Revenue Service and court decisions, all as currently in effect and all of which
are subject to change possibly with retroactive effect. This summary assumes
that holders of Dr Solomon's Ordinary Shares hold such shares and will hold new
Network Associates Common Stock as capital assets (generally, assets held for
investment). The summary does not address all aspects of United States federal
income taxation, nor does it address all aspects of United States federal income
taxation that may apply to particular Dr Solomon's Shareholders, such as
shareholders who are dealers in securities, foreign persons, or those that
acquired their shares as compensation or those that have engaged in conversion
straddles or similar transactions. This discussion also does not address the
United States federal income tax treatment to holders of options or warrants to
purchase Dr Solomon's Ordinary Shares. In addition, this summary does not
address any United States state or local or foreign tax consequences of the
Scheme.
As used herein, a U.S. Holder means (i) citizens or residents of the United
States, (ii) corporations, partnerships or other entities organised or created
in or under the laws of the
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United States or any political subdivision thereof, (iii) estates the income of
which is subject to United States federal income tax regardless of its source
and (iv) trusts subject to the primary supervision of a court within the United
States and the control of a United States person. A Non-U.S. Holder is any
holder other than a U.S. Holder.
THIS SUMMARY IS FOR GENERAL PURPOSES ONLY AND IS NOT INTENDED TO ADDRESS
ALL OF THE UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS THAT MAY APPLY TO A
PARTICULAR DR SOLOMON'S SHAREHOLDER. DR SOLOMON'S SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE SCHEME.
THE SCHEME. The directors of Dr Solomon's have been advised that the
exchange of Dr Solomon's Ordinary Shares for new Network Associates Common Stock
pursuant to the Scheme will constitute a taxable transaction for United States
federal income tax purposes. Accordingly, a U.S. Holder who receives new Network
Associates Common Stock in exchange for Dr Solomon's Ordinary Shares will
recognise taxable gain or loss in an amount equal to the difference between the
sum of (A) the fair market value of new Network Associates Common Stock received
and (B) the amount of cash received in lieu of fractional shares of new Network
Associates Common Stock, and the adjusted basis of the Dr Solomon's Ordinary
Shares surrendered in the exchange. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if the Dr Solomon's Ordinary
Shares exchanged have been held for more than one year on the Effective Date.
Under the Code, the net amount of such capital gain recognised by a
non-corporate U.S. Holder generally will be subject to tax at a maximum rate of
(i) 20 per cent., if the Dr Solomon's Ordinary Shares were held for more than 18
months, (ii) 28 per cent., if the Dr Solomon's Ordinary Shares were held for
more than 12 months but not more than 18 months or (iii) 39.6 per cent., if the
Dr Solomon's Ordinary Shares were held for 12 months or less. The deductibility
of capital losses is subject to limitations.
Any such gain generally will be treated as United States source income for
purposes of the rules applicable to the limitations on foreign tax credits. It
is unclear whether a loss would be treated as United States source loss or
foreign source loss.
OWNERSHIP OF NETWORK ASSOCIATES COMMON STOCK. U.S. Holders will have a tax
basis in the new Network Associates Common Stock received equal to the fair
market value of the new Network Associates Common Stock on the Effective Date.
The holding period of the new Network Associates Common Stock will begin on the
day after the Effective Date.
Cash distributions on the new Network Associates Common Stock paid out of
earnings and profits will be subject to tax as ordinary dividend income. Cash
distributions on the Network Associates Common Stock in excess of current or
accumulated earnings and profits will be treated as tax-free return of capital
to the extent of the U.S. Holder's adjusted tax basis in the new Network
Associates Common Stock, and thereafter as gain from the sale or exchange of a
capital asset (which gain will be taxed in the manner described above under "The
Scheme").
On the sale, exchange or other disposition of new Network Associates Common
Stock, a U.S. Holder will recognize capital gain or loss equal to the difference
between the amount realized on the sale, exchange or other disposition and the
U.S. Holder's tax basis in such Network Associates Common Stock (which gain or
loss will be taxed in the manner described above under The Scheme).
NON-U.S. HOLDERS. A Non-U.S. Holder of Dr Solomon's Ordinary Shares
generally will not be subject to United States federal income tax on gain
realized on the receipt of the new Network Associates Common Stock, or upon a
subsequent exchange (or sale) of the new Network Associates Common Stock, unless
(i) such gain is effectively connected with a United States trade or business
(or in the case of Non-U.S. Holders entitled to the benefits of the United
Kingdom -- United States Income Tax Convention as in effect on the date of these
documents (the "Treaty"), or another income tax treaty that requires a permanent
establishment in the United States as a basis
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for taxing such gains, such gain is attributable to a permanent establishment in
the United States) or (ii) in the case of gain recognised by an individual upon
a subsequent exchange (or sale) of the new Network Associates Common Stock, such
individual is present in the United States for 183 days or more in the taxable
year of such exchange (or sale) and certain other conditions are met.
Dividends received by a Non-U.S. Holder with respect to new Network
Associates Common Stock generally will be subject to United States withholding
tax at the rate of 30 per cent., which rate may be subject to reduction by an
applicable income tax treaty in effect between the United States and the
Non-U.S. Holder's country of residence. Under the Treaty, the rate of
withholding tax is generally reduced to 15 per cent. in respect of dividends
paid to a person who is the beneficial owner thereof and who is a resident of
the United Kingdom for the purposes of the Treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING.
U.S. HOLDERS. Information reporting will apply to payments of dividends on
and the proceeds of the sale or other disposition of Networks Associates Common
Stock to certain noncorporate U.S. Holders, and backup withholding at a rate of
31 per cent. may apply unless the U.S. Holder supplies a taxpayer identification
number, certified under penalties of perjury, as well as certain other
information or otherwise establishes an exemption from backup withholding. A
U.S. Holder who does not provide its correct tax identification number ("TIN")
also may be subject to penalties imposed by the IRS. Any amount withheld from a
payment to a U.S. Holder under the backup withholding rules is creditable
against the holder's federal income tax liability, provided that the required
information is furnished to the IRS.
NON-U.S. HOLDERS. The Company must report annually to the IRS and to each
Non-U.S. Holder any dividend that is subject to withholding, or that is exempt
from U.S. withholding tax pursuant to a tax treaty. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides.
The payment of the proceeds from the disposition of Network Associates
Common Stock to or through the U.S. office of any broker, U.S. or foreign, will
be subject to information reporting and possible backup withholding unless the
owner certifies as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of the proceeds from
the disposition of new Network Associates Common Stock to or through a non-U.S.
office of a non-U.S. broker that is not a U.S. related person will not be
subject to information reporting or backup withholding (absent actual knowledge
that the payee is a U.S. person). For this purpose, a "U.S. related person" is
(i) a "controlled foreign corporation" for U.S. federal income tax purposes,
(ii) a foreign person 50 per cent. or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with the
conduct of a U.S. trade or business, or (iii) with respect to payments made
after 31 December 1999, a foreign partnership that, at any time during its
taxable year, is 50 per cent. or more (by income or capital interest) owned by
United States persons or is engaged in the conduct of a U.S. trade or business.
In the case of the payment of proceeds from the disposition of Network
Associates Common Stock to or through a non-U.S. office of a broker that is
either a U.S. person or U.S. related person, information reporting (but not
backup withholding) is required on the payment unless the broker has documentary
evidence in its files that the owner is a Non-U.S. Holder and the broker has no
knowledge to the contrary.
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(B) U.K. TAXATION
The following paragraphs, which are intended as a general guide only, are
based on current U.K. legislation and what is understood to be U.K. Inland
Revenue practice and take account of certain changes announced in the Budget
Statement of 17 March 1998 which are contained in the Finance (No. 2) Bill (the
"Finance Bill") currently before the U.K. Parliament. They summarise certain
limited aspects of the U.K. tax consequences of the Scheme, and they relate only
to the position of certain classes of taxpayer and only those Dr Solomon's
Shareholders who hold their Dr Solomon's Ordinary Shares beneficially as an
investment and who are resident in the U.K. for tax purposes. If you are in any
doubt as to your tax position or if you are subject to tax in any jurisdiction
other than the U.K., you should consult an appropriate professional adviser
immediately.
THE SCHEME. A holder of Dr Solomon's Ordinary Shares who is within the
scope of UK tax on capital gains and who, either alone or together with persons
connected with him, does not hold more than 5 per cent., of, or of any class of,
the shares in or debentures of Dr Solomon's should not be treated as having made
a disposal of his/her Dr Solomon's Ordinary Shares for the purposes of U.K. tax
on capital gains to the extent that he receives new Network Associates Common
Stock pursuant to the Scheme. Any such holder of Dr Solomon's Ordinary Shares
who, either alone or together with persons connected with him, holds more than 5
per cent. of, or of any class of, the shares in or debentures of Dr Solomon's is
advised that an application for clearance has been made to the U.K. Inland
Revenue under section 138 of the Taxation of Chargeable Gains Act 1992 in
respect of the Scheme. If such clearance is given, any such shareholder will be
treated in the same manner as a shareholder holding not more than 5 per cent.
of, or of any class of, the shares in or debentures of Dr Solomon's as outlined
above. The obligations of Dr Solomon's to effect the Scheme are subject, inter
alia, to Dr Solomon's having received, in a form reasonably acceptable to the
directors of Dr Solomon's, clearance from the Inland Revenue under Section 138
of the Taxation of Chargeable Gains Act 1992 for transactions involved in the
Scheme. In the event that clearance is not given by the Inland Revenue, Dr
Solomon's has the option to waive this condition to the implementation of the
Scheme.
Such a holder of Dr Solomon's Ordinary Shares will, to the extent that he
or she receives cash from Network Associates under the Scheme in respect of a
fractional entitlement, be treated as making a part disposal of his Dr Solomon's
Ordinary Shares for the purposes of U.K. tax on capital gains and, accordingly,
he or she may be liable to such tax on any chargeable gain arising. For this
purpose, the capital gains tax base of such shareholder's Dr Solomon's Ordinary
Shares will generally be apportioned by reference to market value at the date of
disposal between the part deemed disposed of and the part retained (subject to
indexation allowance and as reduced by any available taper relief).
For the purposes of U.K. tax on capital gains the holder of an ADR is
treated as holding a beneficial interest in the underlying shares and
accordingly, in practice, no liability to U.K. tax on capital gains is likely to
arise on the surrender of ADRs for new Network Associates Common Stock pursuant
to the Scheme.
OWNERSHIP OF NETWORK ASSOCIATES COMMON STOCK
Capital gains. A shareholder who is neither resident nor ordinarily
resident in the U.K. will not be subject to tax in the U.K. on capital gains on
a disposal of Network Associates Common Stock. A shareholder who is
"temporarily" non-resident in the U.K. for a period of fewer than five complete
tax years may, however, be treated as though his gain accrued upon his return to
the U.K.
Shareholders who are either resident or ordinarily resident in the U.K.
will, in general, be subject to U.K. tax on capital gains on a disposal of
Network Associates Common Stock. However, shareholders who are individuals and
who are resident or ordinarily resident in the U.K. but who are not domiciled in
the U.K. will not be subject to U.K. tax on capital gains arising on a disposal
of
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<PAGE> 24
Network Associates Common Stock unless they remit (or, for tax purposes, are
treated as remitting) the proceeds of the disposal to the U.K.
Dividends. A shareholder who is not resident in the U.K. for U.K. tax
purposes will not be liable to income or corporation tax in the U.K. on any
dividends paid on Network Associates Common Stock by Network Associates unless
the shareholder carries on business in the U.K. through a branch or agency to
which the Network Associates Common Stock is attributable.
Shareholders who are resident in the U.K. will, in general, be subject to
U.K. income tax or corporation tax on dividends paid by Network Associates. No
such liability will arise for individual shareholders who, though U.K. resident,
are not domiciled in the U.K., or for Commonwealth citizens or citizens of the
Republic of Ireland who are not ordinarily resident in the U.K., except to the
extent that amounts are remitted to the U.K. (or are treated for tax purposes as
remitted to the U.K.). Credit will be available against U.K. income or
corporation tax for any US tax withheld from the dividends, up to the maximum
amount of withholding permitted by the Treaty.
Where a person in the U.K. in the course of a trade or profession either:
(i) acts as a custodian of the Network Associates Common Stock and
receives dividends thereon, or directs that dividends on the Network
Associates Common Stock be paid to another person, or consents to such
payment;
(ii) collects or secures payment of or receives dividends on the
Network Associates Common Stock for another person (other than by clearing
a cheque or arranging for the clearing of a cheque); or
(iii) otherwise acts for another person in arranging to collect or
secure payment of dividends for such a person;
that person (the "collecting agent") is liable to account for U.K. income tax at
the lower rate (currently 20 per cent.) on such dividends, less any U.S. tax
withheld from the dividends to the extent that it does not exceed 15 per cent.
of the dividends. The collecting agent is entitled to deduct a corresponding
amount from the dividend. Certain exemptions from such liability may be
applicable, including, for example, where:
(i) the Network Associates Common Stock is held in a recognised
clearing system and either the collecting agent is acting as a depositary
for that clearing system (Euroclear, Cedel, Depository Trust Company and
First Chicago Clearing Center are recognised clearing systems for this
purpose) or the collecting agent either pays or accounts for the dividends
directly or indirectly to the recognised clearing system and the collecting
agent has obtained a declaration in a form required by law from the
recognised clearing system or its depositary; or
(ii) the person beneficially entitled to the dividends and who
beneficially owns the Network Associates Common Stock is either not
resident in the U.K. or is specified by regulations; or
(iii) the dividends arise to trustees not resident in the U.K. of
certain discretionary or accumulation trusts (where, inter alia, none of
the beneficiaries of the trust is resident in the U.K.); or
(iv) the person beneficially entitled to the dividends is eligible for
certain relief from tax in respect of the dividends (for example, charities
or pension funds).
In the case of each of the above exceptions (i) to (iv), conditions imposed
by regulations may have to be satisfied for the relevant exception to be
available. Where income tax is deducted it will be paid to the U.K. Inland
Revenue. The tax deducted will be credited against the shareholder's liability
to U.K. income or corporation tax; in appropriate cases, a shareholder will be
liable to a higher rate of income tax in addition to the tax deducted, or will
be entitled to a refund where the amount deducted exceeds his liability to U.K.
taxation.
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Stamp Duty and Stamp Duty Reserve Tax. No U.K. stamp duty will be payable
in connection with a transfer of Network Associates Common Stock (or interests
therein) executed outside the U.K. unless it relates to something done or to be
done in the U.K.
No U.K. stamp duty reserve tax will be payable in respect of an agreement
to transfer interests in Network Associates Common Stock (unless it is
registered in a register kept in the U.K. by or on behalf of Network
Associates).
EACH HOLDER OF DR SOLOMON'S ORDINARY SHARES OR DR SOLOMON'S ADSS IS URGED
TO CONSULT HIS OR HER OWN TAX ADVISER AS TO THE U.S. FEDERAL INCOME AND U.K. TAX
CONSEQUENCES OF THE ACQUISITION BY HIM OR HER, AND ALSO AS TO ANY STATE, LOCAL,
FOREIGN OR OTHER TAX CONSEQUENCES.
IF YOU ARE IN ANY DOUBT ABOUT YOUR OWN TAX POSITION, YOU SHOULD CONSULT
YOUR PROFESSIONAL ADVISER.
12. DR SOLOMON'S SHARE OPTIONS
(A) THE 1996 SCHEMES
Options granted under the 1996 Schemes will become exercisable for a period
of six months commencing on the date optionholders are formally notified about
the Scheme. Any exercise during this period will be conditional on the Scheme
becoming effective. On the expiry of that period, any unexercised options will
lapse.
As alternatives to exercise, holders of options under the 1996 Schemes will
have the opportunity to either:
(i) cancel their options over Dr Solomon's Ordinary Shares in return
for shares of Network Associates Common Stock on the following basis:
An option holder will receive such number of shares of Network
Associates Common Stock as is of a value equal to the number of Dr
Solomon's Ordinary Shares under the cancelled option multiplied by
0.27625 of a share of Network Associates Common Stock less the aggregate
exercise price of the option, rounded down to the nearest whole number
of shares of Network Associates Common Stock. For these purposes, the
value of a share of Network Associates Common Stock will be the value
attributed to it by the terms of the Scheme. Entitlements to fractional
shares of Network Associates Common Stock will be treated as set out in
paragraph 2 above; or
(ii) release their options over Dr Solomon's Ordinary Shares in
consideration for the grant of options of an equivalent value over shares
of Network Associates Common Stock. The basis of the release and grant of
options will be by reference to the values attributed to Dr Solomon's
Ordinary Shares and shares of Network Associates Common Stock by the terms
of the Scheme. Inland Revenue approval will be sought for the terms of the
release and grant of options under the Company Share Option Scheme 1996.
The new options will be governed by the rules of the relevant 1996 Scheme.
Details of all the arrangements referred to above, including any tax
consequences, will be sent to holders of options in due course.
Following the Effective Date, no further options will be granted under the
1996 Schemes.
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(B) THE GROUP SCHEME
Options granted under the Group Scheme which are not already exercisable
will become exercisable for one month from the Effective Date. On the expiry of
that period, any unexercised options will lapse.
As an alternative to exercise, holders of options under the Group Scheme
will have the opportunity to release their options over Dr Solomon's Ordinary
Shares in consideration for the grant of options of an equivalent value over
shares of Network Associates Common Stock. The basis of the release and grant of
options will be by reference to the values attributed to Dr Solomon's Ordinary
Shares and Network Associates Common Stock by the terms of the Scheme.
No further options can be granted under the Group Scheme.
(C) DR SOLOMON'S SAVINGS RELATED SHARE OPTION SCHEME
There are no subsisting options under the Dr Solomon's Savings Related
Share Option Scheme.
(D) GENERAL
It is proposed to amend the Articles of Association of Dr Solomon's at the
Extraordinary General Meeting to provide that if the Scheme becomes effective,
any Dr Solomon's Ordinary Shares allotted and issued or transferred (other than
to Network Associates) after the Record Date must automatically be transferred
to Network Associates on the same terms as under the Scheme.
The effect of this amendment and the rules of the 1996 Schemes on the
exercise of options granted under the 1996 Schemes will be that exercising
option holders receive Network Associates' Common Stock (and cash for any
fractional entitlements) rather than Dr Solomon's Ordinary Shares, on the same
terms as under the Scheme.
Exercise of options granted under the Group Scheme are satisfied by the transfer
of Dr Solomon's Ordinary Shares from the Dr Solomon's Trust. As the Scheme will
extend to the Dr Solomon's Ordinary Shares held in the Dr Solomon's Trust, the
trustee of the Dr Solomon's Trust (the "Trustee") will continue to satisfy the
exercise of options under the Group Scheme from the Effective Date by
transferring new Network Associates Common Stock (and delivering cash in lieu of
any fractional entitlements) on the same basis as under the Scheme. Holders of
options granted under the Group Scheme who exercise their options during the one
month period from the Effective Date will still be entitled to have Dr Solomon's
Ordinary Shares transferred to them, in the first instance, but those shares
would automatically have to be transferred to Network Associates by virtue of
the amendment to the Articles of Association of Dr Solomon's in exchange for
Network Associates' Common Stock (and cash in lieu of any fractional
entitlements) on the same basis as under the Scheme. To give effect to the
exchange, the Trustee has agreed (pursuant to an agreement entered into between
Dr Solomon's, Network Associates and the Trustee referred to in paragraph 3(h)
of Appendix 8 of this document) to deliver to such holders of options new
Network Associates' Common Stock (and cash in lieu of any fractional
entitlements) on the same basis as under the Scheme.
Details of options held by directors of Dr Solomon's under the Dr Solomon's
Share Option Schemes are set out in paragraph 2(a)(i) of Appendix 11.
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13. MEETINGS
The Meetings will be held at the offices of Shandwick Consultants Limited,
Aldermary House, 10-15 Queen Street, London EC4N 1TX on 21 July 1998. The Court
Meeting will commence at 11.00 a.m. (London time). The Extraordinary General
Meeting will commence at 11.15 a.m. (London time) or as soon thereafter as the
Court Meeting has concluded or been adjourned.
Court Meeting
Set out on page 183 of this document is a notice of a meeting of the
holders of Dr Solomon's Ordinary Shares which has been convened by the direction
of the Court for the purpose of considering and, if thought fit, approving the
Scheme. At this meeting, voting will be by way of a poll and holders of Dr
Solomon's Ordinary Shares will be entitled to one vote for each Dr Solomon's
Ordinary Share held. The resolution will be passed if a majority in number
representing not less than 75 per cent. in nominal value of Dr Solomon's
Ordinary Shares represented by those present and voting, either in person or by
proxy, votes in favour of the Scheme. In the case of joint holders, the vote of
the senior who tenders a vote, whether in person or by proxy, will be accepted
to the exclusion of the vote(s) of the other holder(s) and, for this purpose,
seniority will be determined by the order in which the names stand in the
Register of Members of Dr Solomon's.
Extraordinary General Meeting
In addition, an Extraordinary General Meeting of Dr Solomon's, notice of
which is set out on pages 184 to 186 of this document, has been convened for the
purpose of passing the special resolution necessary to enable effect to be given
to the Acquisition, including approving the Transaction Agreement and amending
the Articles of Association of Dr Solomon's. The special resolution will be
passed if approved by a majority of not less than three-fourths of the votes
cast.
Holders of Dr Solomon's ADSs
Holders of Dr Solomon's ADSs of record at 5:30 p.m. (New York City time) on
23 June 1998 will be entitled by means of the WHITE Letter of Instruction to
instruct the Depositary how to vote the Dr Solomon's Ordinary Shares underlying
their Dr Solomon's ADSs at the Court Meeting and the Extraordinary General
Meeting. In addition, the Board of Dr Solomon's has decided that any Dr
Solomon's ADS holders wishing to attend either of the Meetings as
non-participating observers are invited to do so but they may not vote at either
of the Meetings.
Holders of Dr Solomon's ADSs who wish to vote in person at the Meetings
must, on or before 23 June 1998 and in accordance with the Deposit Agreement,
become registered holders of Dr Solomon's Ordinary Shares by arranging for the
surrender of their Dr Solomon's ADRs to the Depositary.
In relation to the Meetings, Network Associates has undertaken not to
instruct the Depositary to vote in respect of any Dr Solomon's ADSs which may be
held by it.
14. SETTLEMENT AND DEALINGS
Certificates for new Network Associates Common Stock, together with cheques
in respect of any fractional entitlements, are expected to be despatched to
former holders of Dr Solomon's Ordinary Shares no later than five Business Days
after the Effective Date. In the case of joint holders, these will be despatched
to the joint holder whose name appears first in the register. All documents and
cheques will be sent by pre-paid post at the risk of the person entitled
thereto.
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As from the Effective Date, Dr Solomon's ADSs will cease to be listed on
both the NASDAQ and the EASDAQ stock exchanges. Existing share certificates
representing Dr Solomon's Ordinary Shares will cease to be of value and
shareholders will be bound on the request of Dr Solomon's to return such
certificates for cancellation.
After the Effective Date, the Depositary will send each holder of Dr
Solomon's ADSs a notice that the Deposit Agreement will terminate after 90 days
of such notice and instructing each such holder to surrender the Dr Solomon's
ADRs evidencing his Dr Solomon's ADSs to the Transfer Agent in exchange for the
transfer of shares of new Network Associates Common Stock. Upon receipt of such
Dr Solomon's ADRs, together with a properly executed Letter of Transmittal, the
Transfer Agent will arrange for the transfer of 0.82875 shares of new Network
Associates Common Stock for each Dr Solomon's ADS, together with a cheque in
respect of any fractional entitlements. Holders of Dr Solomon's ADSs will not be
charged any fees upon such surrender and exchange of Dr Solomon's ADSs for
shares of Network Associates Common Stock. Any such fees will be shared equally
by Network Associates and Dr Solomon's. After the Effective Date, each Dr
Solomon's ADR evidencing Dr Solomon's ADSs will represent only the right to
receive the appropriate numbers of shares of new Network Associates Common Stock
in exchange therefor.
Dealings in shares of new Network Associates Common Stock on NASDAQ are
expected to begin at the commencement of trading (New York City time) on the
Effective Date.
Mandates in force at the Effective Date relating to the payment of
dividends and other instructions given to Dr Solomon's by holders of Dr
Solomon's Shares will, unless specifically revoked or amended, be deemed as from
the Effective Date to relate to corresponding holdings of new Network Associates
Common Stock.
15. ACTION TO BE TAKEN
IN ORDER THAT THE COURT CAN BE SATISFIED THAT THE VOTES CAST AT THE COURT
MEETING CONSTITUTE A FAIR REPRESENTATION OF THE VIEWS OF HOLDERS OF DR SOLOMON'S
ORDINARY SHARES, IT IS IMPORTANT THAT AS MANY VOTES AS POSSIBLE ARE CAST (EITHER
IN PERSON OR BY PROXY) AT THE COURT MEETING.
HOLDERS OF DR SOLOMON'S ORDINARY SHARES
If you are a holder of Dr Solomon's Ordinary Shares you will find enclosed
with this document a reply paid envelope and two Forms of Proxy:
(a) GREEN for use at the Court Meeting; and
(b) BLUE for use at the Extraordinary General Meeting.
WHETHER OR NOT YOU PROPOSE TO ATTEND THE MEETINGS IN PERSON, YOU ARE
REQUESTED TO COMPLETE AND RETURN BOTH FORMS OF PROXY IN ACCORDANCE WITH THE
INSTRUCTIONS PRINTED ON THEM. YOU ARE REQUESTED TO RETURN THEM AS SOON AS
POSSIBLE AND IN ANY EVENT NO LATER THAN 11.00 A.M. (LONDON TIME) IN RESPECT OF
THE COURT MEETING AND 11.15 A.M. (LONDON TIME) IN RESPECT OF THE EXTRAORDINARY
GENERAL MEETING ON 19 JULY 1998.
In the case of the GREEN Form of Proxy only, however, if not delivered by
that time it may also be handed to the Chairman of the Court Meeting at that
Meeting. The return of the Forms of Proxy will not prevent you from attending
the Meetings and voting in person if you so wish.
HOLDERS OF DR SOLOMON'S ADSS
If you are a holder of Dr Solomon's ADSs you will find enclosed with this
document an envelope and a WHITE Letter of Instruction.
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YOU ARE REQUESTED TO COMPLETE AND RETURN THE LETTER OF INSTRUCTION IN
ACCORDANCE WITH THE INSTRUCTIONS PRINTED ON IT AS SOON AS POSSIBLE AND IN ANY
EVENT NO LATER THAN 2.00 P.M. (NEW YORK CITY TIME) ON 16 JULY 1998.
16. FORWARD LOOKING STATEMENTS
This document contains forward-looking statements including with respect to
the consummation of the Acquisition and the integration of products,
opportunities and synergies relating to the Acquisition. Because such statements
apply to future events, they are subject to risks and uncertainties that could
cause the actual results to differ materially, including without limitation,
integration risks relating to the Acquisition, the risk that the Acquisition may
not be consummated, and the risks that the anticipated benefits of the
Acquisition may not be realised.
17. FURTHER INFORMATION
Your attention is drawn to Appendices 1 to 11 of this document, which form
part of this Explanatory Statement and contain full details of the terms and
conditions of the Scheme, further information on each of Network Associates and
Dr Solomon's and certain additional information.
Yours faithfully,
Charles A. W. Bott Andrew Bell
for and on behalf of for and on behalf of
Goldman Sachs International Morgan Stanley & Co. Limited
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APPENDIX I
CONDITIONS OF THE SCHEME AND OTHER TERMS OF THE TRANSACTION AGREEMENT
CONDITIONS
Under the terms of the Transaction Agreement, the obligations of Network
Associates and Dr Solomon's to effect the Scheme are subject to the satisfaction
or waiver on or prior to the Effective Date in the case of the condition set out
in paragraph 2 below, and immediately prior to commencement of the Final Hearing
in the case of each of the other conditions set forth below, of the following
conditions:
1. approval of the Scheme by a majority in number, representing at
least 75 per cent. in value, of the holders of the Scheme Shares present
and voting in person or by proxy at the Court Meeting and the special
resolution to be proposed at the Extraordinary General Meeting being duly
passed (the "Required Shareholders Vote");
2. the Scheme being sanctioned, and the reduction of capital involved
therein being confirmed, by the High Court, with or without modification;
and an office copy of the Final Court Order shall have been duly delivered
to the Registrar for registration and the Registrar shall have issued its
certificate of such registration;
3. the waiting period (and any extension thereof) applicable to the
Acquisition under HSR shall have been terminated or shall have expired; the
U.K. Office of Fair Trading shall have indicated prior to the commencement
of the Final Hearing, in terms satisfactory to Network Associates, that it
is not the intention of the Secretary of State for Trade and Industry to
refer the Acquisition, or any matters arising therefrom, to the Monopolies
and Mergers Commission; and the receipt of such other consents,
authorisations, filings, approvals and registrations as are necessary;
4. no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the
Scheme shall be in effect;
5. there not being any pending or threatened suit, action,
investigation or proceeding by any court, administrative agency or
commission or other governmental or regulatory body or authority or
instrumentality (each being a "Governmental Entity"), (i) seeking to
restrain or prohibit the consummation of the Scheme or any of the other
transactions contemplated by the Transaction Agreement or seeking to obtain
from Network Associates or Dr Solomon's or any of their respective
subsidiaries any damages that are material in relation to Network
Associates and its subsidiaries taken as a whole or Dr Solomon's and its
subsidiaries, taken as a whole, as applicable, (ii) seeking to prohibit or
limit the ownership or operation by Network Associates or Dr Solomon's or
any of their respective subsidiaries of any material portion of the
business or assets of Network Associates and its subsidiaries taken as a
whole or Dr Solomon's and its subsidiaries taken as a whole, or seeking to
require Network Associates or Dr Solomon's or any of their respective
subsidiaries to dispose of or hold separate any material portion of the
business or assets of Network Associates and its subsidiaries, taken as a
whole, or Dr Solomon's and its subsidiaries, taken as a whole, as a result
of the Scheme or any of the other transactions contemplated by the
Transaction Agreement, or (iii) which otherwise is reasonably likely to
have a material adverse effect on either Network Associates or Dr
Solomon's;
6. Network Associates having received letters from each of Coopers &
Lybrand L.L.P. and Deloitte & Touche, respectively, dated within two
Business Days prior to the date of the Final Hearing, regarding that firm's
concurrence with Network Associates' management's and Dr Solomon's
management's conclusions as to the appropriateness of pooling of interest
accounting for the Scheme under U.S. Accounting Principles Board Opinion
No. 16, if the Scheme is consummated.
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The obligations of Dr Solomon's to effect the Scheme are further subject to
satisfaction (or waiver by Dr Solomon's) immediately prior to commencement of
the Final Hearing of the following conditions:
1. The representations and warranties of Network Associates set forth
in the Transaction Agreement that are qualified as to materiality being
true and correct, and the representations and warranties of Network
Associates set forth in the Transaction Agreement that are not so qualified
being true and correct in all material respects, in each case as of the
date of the Transaction Agreement and, except to the extent such
representations and warranties speak as of an earlier date or as could not
reasonably be expected to have a material adverse effect on Network
Associates, as of the date of the Final Hearing as though made on and as of
commencement of the Final Hearing, except as otherwise contemplated by the
Transaction Agreement and Dr Solomon's having received a certificate signed
on behalf of Network Associates by the chief executive officer and the
chief financial officer of Network Associates to that effect;
2. Network Associates having performed in all material respects all
obligations required to be performed by it under the Transaction Agreement
prior to the date of the Final Hearing, and Dr Solomon's having received a
certificate signed on behalf of Network Associates by the chief executive
officer and the chief financial officer of Network Associates to such
effect;
3. Dr Solomon's having received, in a form reasonably acceptable to
the directors of Dr Solomon's, clearance from the Inland Revenue under
Section 138 of the Taxation of Chargeable Gains Act 1992 for transactions
involved in the Scheme;
4. The shares of Network Associates Common Stock to be issued to
effect the Acquisition being approved for listing on NASDAQ;
5. No material adverse effect with respect to Network Associates
having occurred since the date of the Transaction Agreement and continuing;
6. Dr Solomon's having received a legal opinion in the agreed form,
dated as of the date of the Final Hearing, from Wilson Sonsini Goodrich &
Rosati.
The obligations of Network Associates to effect the Acquisition are further
subject to the satisfaction (or waiver by Network Associates) immediately prior
to the commencement of the Final Hearing of the following conditions:
1. The representations and warranties of Dr Solomon's set forth in
the Transaction Agreement that are qualified as to materiality being true
and correct, and the representations and warranties of Dr Solomon's set
forth in the Transaction Agreement that are not so qualified being true and
correct in all material respects, in each case as of the date of the
Transaction Agreement and, except to the extent such representations and
warranties speak as of an earlier date or as could not reasonably be
expected to have a material adverse effect on Dr Solomon's, as of the date
of the Final Hearing as though made on and as of commencement of the Final
Hearing, except as otherwise contemplated by the Transaction Agreement and
Network Associates having received a certificate signed on behalf of Dr
Solomon's by the chief executive officer and the chief financial officer of
Dr Solomon's to that effect;
2. Dr Solomon's having performed in all material respects all
obligations required to be performed by it under the Transaction Agreement
prior to the date of the Final Hearing, and Network Associates having
received a certificate signed on behalf of Dr Solomon's by the chief
executive officer and the chief financial officer of Dr Solomon's to that
effect;
3. No material adverse effect with respect to Dr Solomon's having
occurred since the date of the Transaction Agreement and shall be
continuing;
4. Each of the directors of Dr Solomon's having submitted their
resignation as directors to take effect as of the Effective Date, but
without prejudice to their respective rights as employees and Dr Solomon's
and Network Associates acknowledge that such resignations shall not
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constitute resignations by any director as an employee or breach by the
directors of their terms of employment, or entitle Dr Solomon's to
terminate the employment of any of the directors;
5. Network Associates having received a legal opinion in the agreed
form, dated as of the date of the Final Hearing, from Macfarlanes.
Network Associates and Dr Solomon's will not proceed with the Scheme if,
prior to 5:30 p.m. on the date of the Meetings, the Secretary of State for Trade
and Industry refers the Acquisition, or any matters arising therefrom, to the
Monopolies and Mergers Commission. In such event, neither Network Associates nor
any holder of Dr Solomon's Shares will be bound by any term of the Scheme.
TERMINATION OF THE TRANSACTION AGREEMENT
The Transaction Agreement may be terminated at any time prior to the
commencement of the Final Hearing, whether before or after approval of matters
presented in connection with the Scheme by the shareholders of Dr Solomon's:
1. by mutual written consent of Dr Solomon's and Network Associates;
2. by either Dr Solomon's or Network Associates:
(i) if the Required Shareholders Vote shall not have been obtained
at the duly held Dr Solomon's shareholder meetings or any adjournments
thereof;
(ii) if any Governmental Entity shall have issued an order, decree
or ruling or taken any other action permanently enjoining, restraining
or otherwise prohibiting the Acquisition and such order, decree, ruling
or other action shall have become final and nonappealable;
(iii) in the event of a breach by the other party of any
representation, warranty, covenant or other agreement contained in the
Transaction Agreement which would result in the failure of a condition
to the obligations of such party under the Transaction Agreement and
cannot reasonably be or has not been cured within 20 days after the
giving of written notice to the breaching party of such breach but in
any event prior to the commencement of the Final Hearing (a "Material
Breach") (provided that the terminating party is not then in Material
Breach of any representation, warranty, covenant or other agreement
contained in the Transaction Agreement); or
(iv) if the Effective Date shall not have occurred by 31 October
1998, for any reason; provided, however, that the right to terminate the
Transaction 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 Effective Date to occur on or before such date and such
action or failure to act constitutes a breach of the Transaction
Agreement.
3. by Dr Solomon's: if the Board of Dr Solomon's approves or
recommends a bona fide proposal to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, more than 50 per cent.
of the Dr Solomon's Ordinary Shares then outstanding or all or
substantially all the assets of Dr Solomon's, and otherwise on terms which
the Board of Dr Solomon's determines in its good faith reasonable judgement
to be more favourable to Dr Solomon's stockholders than the Acquisition
(after having received the advice of Dr Solomon's independent financial
adviser as to the value of the consideration provided for in such proposal)
and for which financing, to the extent required, is then committed or
which, in the good faith reasonable judgment of the Dr Solomon's Board, is
reasonably capable of being financed by such third party (a "Dr Solomon's
Superior Proposal") and Dr Solomon's shall have paid to Network Associates
the break up fee referred to below under the heading "Payment on
Termination";
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4. by Network Associates:
(i) if, prior to the Dr Solomon's shareholders meetings, any
proposal for a merger or other business combination, any scheme of
arrangement, exchange offer, liquidation, or takeover offer (within the
meaning of Section 428 of the Companies Act) involving Dr Solomon's or
any of its subsidiaries or any proposal or offer to acquire in any
manner, directly or indirectly, an equity interest of 15 per cent. or
more in any voting securities of or a substantial portion of the assets
of Dr Solomon's or any of its subsidiaries, or any other similar
transactions the consummation of which could reasonably be expected to
prevent or materially impede, interfere with, or delay the Acquisition
(a "Dr Solomon's Acquisition Proposal") is commenced, publicly proposed,
publicly disclosed or communicated to Dr Solomon's (or the willingness
of any person to make a Dr Solomon's Acquisition Proposal is publicly
disclosed or communicated to Dr Solomon's) and the Board of Dr Solomon's
or any committee thereof shall have withdrawn or modified in a manner
adverse to Network Associates its approval or recommendation for the
Required Shareholders Vote, and approved or recommended the Dr Solomon's
Acquisition Proposal, or resolved to do the foregoing actions;
(ii) if Dr Solomon's shall have entered into any agreement with
respect to any Dr Solomon's Superior Proposal; or
(iii) if the Effective Date shall not have occurred on or prior to
31 August 1998 other than as a result of a material breach of the
Transaction Agreement by Network Associates or as a result of the
failure to satisfy the U.S. HSR anti-trust condition in paragraph 3
above (set out in the conditions to be satisfied or waived prior to the
Final Hearing) prior to such date (unless such failure shall be the
result of a material breach by Dr Solomon's of its obligations contained
in the Transaction Agreement).
PAYMENT ON TERMINATION
1. Dr Solomon's shall promptly pay, or cause to be paid, to Network
Associates:
(i) U.S. $3,500,000, if the Transaction Agreement is terminated by Dr
Solomon's in the circumstances set out in 3 above under the heading
"Termination of the Transaction Agreement";
(ii) U.S. $3,500,000, if the Transaction Agreement is terminated by
Network Associates in the circumstances set out in (4)(i) or (ii) above
under the heading "Termination of the Transaction Agreement";
(iii) U.S. $500,000, if the Transaction Agreement is terminated by
either Dr Solomon's or Network Associates in the circumstances set out in
(2)(i) above under the heading "Termination of the Transaction Agreement"
(provided that Network Associates is not in material breach of the
Transaction Agreement and at the time of the Extraordinary General Meeting
there shall have been no material adverse effect on Network Associates) or
U.S.$3,500,000 (less any earlier payment) if the Transaction Agreement is
so terminated and within the nine month period following any such
transaction Dr Solomon's shall consummate a Dr Solomon's Acquisition
Proposal or enter into any agreement, understanding or commitment with
respect to a Dr Solomon's Acquisition Proposal and such transaction is
consummated; or
(iv) U.S. $3,500,000, if the Transaction Agreement is terminated by
Network Associates in the circumstances set out in (4)(iii) above under the
heading "Termination of the Transaction Agreement" (provided that Network
Associates is not in material breach of the Transaction Agreement and at
the time of such termination there shall have been no material adverse
effect on Network Associates) and within the nine month period following
any such termination Dr Solomon's shall consummate a Dr Solomon's
Acquisition Proposal or enter into any agreement, understanding or
commitment with respect to a Dr Solomon's Acquisition Proposal and such
transaction is consummated.
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In no event shall more than $3,500,000 be payable to Network
Associates under the foregoing provisions.
COVENANTS RELATING TO CONDUCT OF BUSINESS
Dr Solomon's
Pursuant to the Transaction Agreement, until the earlier of the termination
of the Transaction Agreement pursuant to its terms or the Effective Date, Dr
Solomon's (and each of its subsidiaries) shall, except to the extent that
Network Associates shall otherwise consent in writing or in connection with the
transactions contemplated in the Transaction Agreement, carry on its business,
in all material respects, in the usual, regular and ordinary course, in
substantially the same manner as conducted prior to the date of the Transaction
Agreement, 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
(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,
directors and employees and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees, and others with which it has
business dealings.
In addition, without the prior written consent of Network Associates,
except in connection with the transactions contemplated by the Transaction
Agreement and except as provided in the Dr Solomon's disclosure schedules, Dr
Solomon's shall not do any of the following and shall not permit its
subsidiaries to do any of the following:
(a) Make an individual capital expenditure or commitment, or series of
related capital expenditures or commitments, exceeding in the aggregate
$250,000, except as committed prior to the date of the Transaction
Agreement in connection with projects disclosed in Dr Solomon's disclosure
schedules;
(b) Except as required by law or pursuant to the terms of the Group
Scheme or 1996 Schemes, waive any stock repurchase rights; accelerate,
amend or change the period of exercisability of options or stock subject to
repurchase rights, reprice options granted under any employee, consultant
or director stock option schemes; or authorize cash payments in exchange
for any options granted under any of such schemes;
(c) Enter into any material partnership arrangements, joint
development agreements or strategic alliances;
(d) Increase the salary, benefits or other compensation (monetary or
otherwise) payable or to become payable to any of its officers, directors
or employees, or make any declaration, payment or commitment or obligation
of any kind for the payment of a bonus or other additional salary or
compensation to any such person, except that (i) on an
individual-by-individual and not broad basis, Dr Solomon's may take any of
the foregoing actions with the prior written consent of Network Associates
(not to be unreasonably withheld) and (ii) Dr Solomon's may declare and pay
retention bonuses payable to certain employees for staying in the employ of
Dr Solomon's so long as such bonuses are announced promptly after the date
of the Transaction Agreement, are paid for the period from the Effective
Date until 30 September 1998 and do not exceed in the aggregate $350,000;
(e) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, requirements of existing law,
or policies existing, on the date hereof and as previously disclosed in
writing to Network Associates; or adopt any new severance plan;
(f) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to intellectual property
rights of Dr Solomon's or enter into grants to
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future patent rights, in each case other than non-exclusive object code
reseller licenses and object code licenses granted to end-users, each in
the ordinary course of business;
(g) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any share
capital, or split, combine or reclassify any share capital or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any share capital, except payment of dividends by Dr
Solomon's subsidiaries to Dr Solomon's;
(h) Repurchase or otherwise acquire, directly or indirectly, any
shares of capital stock except pursuant to rights of repurchase of any such
shares under any employee, consultant or director stock option scheme;
(i) Effect a material change in any of its accounting methods or
practices (including any change in revenue recognition, capitalization,
depreciation or amortization policies or rates), other than any such change
mandated by new or newly effective regulatory or FASB requirements
generally applicable to companies of Dr Solomon's industry or size;
(j) Issue, deliver, sell, authorize or propose the issuance, delivery
or sale of, any share capital or any securities convertible into share
capital, or subscriptions, rights, warrants or options to acquire any share
capital or any securities convertible into share capital, or enter into
other agreements or commitments of any character obligating it to issue any
such shares or convertible securities, or permit any subsidiary to do any
of the foregoing, whether with respect to its own share capital (or
securities convertible into same or rights exercisable therefor or
otherwise obligating the issuance thereof) or the share capital of Dr
Solomon's (or securities convertible into same or rights exercisable
therefor or otherwise obligating the issuance thereof) other than the
issuance of Dr Solomon Ordinary Shares pursuant to the exercise of stock
options therefor outstanding as of the date of the Transaction Agreement;
(k) Cause, permit or propose any amendments to any constitutional
document (or similar governing instruments of any subsidiaries);
(l) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a material portion of the assets
of, or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to do any of the foregoing;
(m) Sell, lease license (except as permitted by paragraph (g) above),
encumber or otherwise dispose of any properties or assets which are
material, individually or in the aggregate, to the business of Dr
Solomon's, except in the ordinary course of business consistent with past
practice;
(n) Make any loan to any person or entity, or incur any indebtedness
for borrowed money (other than ordinary course trade payables or pursuant
to existing credit facilities in the ordinary course of business) or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire debt securities of Dr Solomon's or guarantee
any debt securities of others, except for advances to employees for travel
and business expenses in the ordinary course of business, consistent with
past practices and except for the incurrence of indebtedness (including the
guarantee of subsidiary indebtedness) not in excess of $250,000;
(o) (i) Adopt or (except as specifically contemplated in connection
with the Scheme) amend any employee benefit or stock purchase or option
scheme, or, (ii) except in the ordinary course of business consistent with
past practice, enter into any employment contract, pay any special bonus or
special remuneration to any director or employee, or increase the salaries
or wage rates of its officers or employees, except, with respect to clause
(ii), with Network Associates' prior written consent (not to be
unreasonably withheld), Dr Solomon's may take in
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good faith any of the listed actions with respect to existing Dr Solomon's
employees on an individual-by-individual and not broad basis;
(p) Pay, discharge or satisfy any material claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business;
(q) Amend in any material respect or terminate any material contract
of Dr Solomon's, except in the ordinary course of business consistent with
past practice and subject to the terms of such material contract and other
than non-exclusive object code reseller licences and object code licenses
granted to end users, each in the ordinary course of business;
(r) Waive or release any material right or claim of Dr Solomon's,
including any write-off or other compromise of any account receivable of Dr
Solomon's other than in the ordinary course of business and consistent with
past practices;
(s) Change in any material respect pricing or royalties set or charged
by persons who have licensed intellectual property to Dr Solomon's, in each
case, other than in the ordinary course of business and consistent with
past practices; or
(t) Agree in writing or otherwise to take any of the actions described
in paragraphs (a) through (s) above.
Network Associates
Pursuant to the Transaction Agreement, during the period from the date of
the Transaction Agreement and continuing until the earlier of the termination of
the Transaction Agreement pursuant to its terms or the Effective Time, Network
Associates shall not do any of the following and shall not permit its
subsidiaries to do any of the following without the prior written consent of Dr
Solomon's (such consent not to be unreasonably withheld):
(a) effect a material change in its accounting methods or practices
(including any change in revenue recognition, capitalization, depreciation
or amortization policies or rates), other than any such change mandated by
new or newly effective regulatory or FASB requirements generally applicable
to companies of Network Associates' industry or size;
(b) cause, permit or propose any amendments to its certificate of
incorporation or bylaws;
(c) take any action that would be reasonably likely to interfere with
Network Associates' ability to account for the Acquisition as a pooling of
interests;
(d) declare, set aside or pay any dividends on or make any
distributions in respect of any share capital or cause any split, reverse
stock split, stock dividend (including any dividend or distribution of
securities convertible into shares of Network Associates Common Stock),
reorganization, recapitulation or other like change with respect to Network
Associates Common Stock between the date of the Transaction Agreement and
the Effective Date, except for dividends in respect of the Network
Associates 3-for-2 Stock Split; or
(e) 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 Dr Solomon's), whether by merger,
consolidation, stock tender or otherwise; provided, however, that nothing
herein shall prevent Network Associates from doing any of the foregoing in
this paragraph (e) so long as it does not involve the acquisition of a
company whose businesses include providing anti-virus products and which
has operations, sales or activities in jurisdictions that would be taken
into account in assessing competition issues related to the Acquisition and
otherwise until such time as the consideration paid by Network Associates
(as determined in good faith by the Board of Network Associates as of the
time such acquisition is approved by
36
<PAGE> 37
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 $400,000,000.
REPRESENTATIONS AND WARRANTIES
The Transaction Agreement contains representations and warranties by
Network Associates and Dr Solomon's relating to a number of matters, including:
(i) the due organization of Network Associates, Dr Solomon's and their
respective subsidiaries; (ii) the capital structure of Network Associates and Dr
Solomon's; (iii) the authorization, execution, delivery and enforceability of
the Transaction Agreement and related matters; (iv) the filing of documents and
financial statements by Network Associates and Dr Solomon's with the SEC and the
accuracy of information contained therein; (v) the absence of certain material
changes; (vi) compliance with laws; (vii) the absence of material litigation;
(viii) intellectual property rights; (ix) brokers' and finders' fees; and (x)
the ability to account for the Acquisition as a pooling of interests.
In addition, the Transaction Agreement contains representations and
warranties by Dr Solomon's relating to a number of additional matters,
including: (i) the obligations with respect to capital stock of Dr Solomon's;
(ii) taxes, tax returns and tax deficiencies; (iii) the absence of certain
changes or events; (iv) restrictions on business activities; (v) employees; (vi)
employee benefit plans; (vii) environmental matters and environmental permits;
(viii) delivery of accurate Dr Solomon's source code to be held in escrow; (ix)
certain interests; (x) insurance; (xi) opinion of financial adviser; (xii) the
accuracy of information in this document; and (xiii) the disclosure of certain
other information relating to Network Associates.
The Transaction Agreement also contains representations and warranties by
Network Associates relating to the valid issuance of Network Associates Common
Stock pursuant to the Transaction Agreement.
NO SOLICITATION
Pursuant to the Transaction Agreement, Dr Solomon's 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 of Dr Solomon's or any of its subsidiaries to, (i) solicit,
initiate or encourage the submission of any Dr Solomon's Acquisition Proposal
(as defined in paragraph 4(i) above under the heading "Termination of the
Transaction Agreement"), (ii) enter into any agreement with respect to any Dr
Solomon's Acquisition Proposal (other than a confidentiality agreement to the
extent information is permitted to be furnished to any person as provided
below), or (iii) participate in any discussions or negotiations regarding, or
furnish to any person any 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 Dr Solomon's Acquisition Proposal;
provided that the foregoing is subject to the fiduciary obligations of the Board
of Dr Solomon's and their obligations under the City Code (with all such
obligations being determined in good faith by the Board based on advice of
outside counsel) to the extent that such obligations require the Board to take
any action otherwise prohibited by clause (ii) or (iii) above. Without limiting
the foregoing, it is understood that any violation of the restrictions set forth
in the preceding sentence by any executive officer of Dr Solomon's or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of Dr Solomon's or any of its subsidiaries, acting on behalf of
Dr Solomon or any of its subsidiaries, shall be deemed to be a breach of the
Transaction Agreement by Dr Solomon's.
Pursuant to the Transaction Agreement, the Board of Dr Solomon's shall not
(i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Network Associates, the approval or recommendation by such Board for the
Required Shareholders' Vote (except if, in the exercise of its fiduciary
obligations (with such exercise of fiduciary duties being determined in good
faith by the Dr Solomon's Board based on the advice of outside counsel), it
determines that it can no longer
37
<PAGE> 38
maintain such approval or recommendation), (ii) approve or recommend, or propose
to approve or recommend, any Dr Solomon's Acquisition Proposal or (iii) enter
into any agreement with respect to any Dr Solomon's Acquisition Proposal (other
than a confidentiality agreement to the extent information is permitted to be
furnished to any person as provided below). Notwithstanding the foregoing, in
the event the Board of Dr Solomon's receives a Dr Solomon's Acquisition Proposal
prior to obtaining the Required Shareholders Vote that, in the exercise of its
fiduciary obligations (with such exercise of fiduciary duties being determined
in good faith by the Dr Solomon's Board based on the advice of outside counsel),
it determines to be a Dr Solomon's Superior Proposal, the Dr Solomon's Board may
(subject to the following sentences) withdraw or modify its approval or
recommendation for the Required Shareholders Vote, enter into an agreement with
respect to such Dr Solomon's Superior Proposal or terminate the Transaction
Agreement, in each case at any time after the third business day following
Network Associates' receipt of written notice advising Network Associates that
the Board has received a Dr Solomon's Superior Proposal, summarizing in
reasonable detail the material terms and conditions of such Dr Solomon's
Superior Proposal and identifying the person making such Dr Solomon's Superior
Proposal.
Dr Solomon's promptly shall advise Network Associates orally and in writing
of any Dr Solomon's Acquisition Proposal or any inquiry with respect to which Dr
Solomon's believes could reasonably lead to any Dr. Solomon's Acquisition
Proposal. Dr Solomon's will keep Network Associates informed in all material
respects of the status and details of any such Dr Solomon's Acquisition Proposal
or inquiry.
Notwithstanding anything to the contrary above, Dr Solomon's will not
provide any non-public information to a third party unless: (A)(i)(1) Dr
Solomon's provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information of Dr
Solomon's as restrictive as such terms in the agreement dated 1 May 1998,
between Dr Solomon's and Network Associates or (2) such non-public information
has previously been delivered or made available to Network Associates, and (ii)
as provided upon proper request under Rule 20.2 of the City Code; or (B) the
Panel requires otherwise.
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<PAGE> 39
APPENDIX 2
INFORMATION ON DR SOLOMON'S
A. DESCRIPTION OF BUSINESS OF DR SOLOMON'S
DR SOLOMON'S ANTI-VIRUS TOOLKIT
Dr Solomon's Anti-Virus Toolkit is a family of anti-virus software programs
that detect, identify and eradicate a wide variety of computer viruses, while
minimising false alarms, maximising speed of operation and minimising
obtrusiveness in use of system resources. The Toolkit virus scanners are
available for most PC operating system platforms, including DOS, OS/2, Windows
3.x, Windows 95, Windows NT, NetWare, Apple Macintosh and SCO UNIX. Over the
last year, Dr Solomon's has also developed virus scanners specifically
addressing virus problems in e-mail (MailGuard), Lotus Domino and Microsoft
Exchange.
Toolkit programs are available for use both by individual PC users and by
corporate customers on either servers or workstations. Each program in the
Toolkit can be licensed individually. The Toolkit comprises the following main
programs:
- FINDVIRUS(TM) is an on-demand scanner that searches a computer's memory,
boot sector, partition tables, files and disks for particular pieces of
foreign computer code that are known to be viruses. Using Dr Solomon's
Generic Decryption Engine(TM) and Advanced Heuristic Analyzer(TM),
FindVirus searches for known and new viruses, including complex encrypted
and polymorphic viruses. The most recent version of FindVirus can detect
and identify more than 19,000 known viruses and, using heuristics, an
estimated 80 per cent. of unknown viruses. FindVirus scans recursively
inside compressed and archived files, supporting versions of the most
widely used compression formats, including PKZip, ARJ, ARC, ICE, PKLite,
LZExe, LZH, DIET and CryptCom. FindVirus can also repair, overwrite and
delete infected files and generate reports of its findings. Using the
Toolkit's scheduling facility, users can program FindVirus to execute
periodically without user intervention. FindVirus is available in 32-bit
or 16-bit code.
- VIRUSGUARD(TM) is a terminate-and-stay-resident program for DOS-based
personal computers that provides constant background virus protection.
After scanning a computer system's memory, boot sector, partition tables
and system files for known and unknown viruses, VirusGuard becomes
resident in the system's memory and monitors all program load and file
open requests, checking files as they are copied or executed ("on-access"
scanning), including files being downloaded from the Internet or online
bulletin boards. VirusGuard requires only 9 Kbytes of memory, minimising
its use of scarce system resources and its impact on a user's operations.
- WINGUARD(TM) offers similar functionality to VirusGuard for PCs using the
Windows 3.x or Windows 95 operating systems and operates using virtual
device driver technology. Dr Solomon's also offers similar programs for
other operating systems platforms, including WinGuard for Windows NT,
File Access Monitor in the Toolkit for NetWare, and MacGuard(TM) for the
Apple Macintosh.
- VIVERIFY(TM) is a checksummer that detects changes in executable files
that may have been caused by viruses.
The Toolkit virus scanning drivers are updated monthly to provide for the
detection and eradication of recently discovered viruses. Toolkit customers are
provided with monthly or quarterly update disks, either directly from Dr
Solomon's or from Dr Solomon's distributors and resellers. Dr Solomon's
currently provides updates electronically to retail product users in the United
States and is currently testing software to extend this capability to corporate
users in its major geographical markets.
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<PAGE> 40
The Toolkit is available in seven European languages and variations of some
of the Toolkit programs are available in Japanese. The Toolkit comes complete
with both on-line and paperback versions of Dr Solomon's Virus Encyclopaedia,
which describes in detail hundreds of viruses. New versions of the Toolkit
programs are released on a regular basis to provide new features and product
enhancements.
The Toolkit programs may be licensed for periods of one, two or three
years, with a choice of receiving updates either on CD or on disk on a quarterly
or monthly basis. License fees are based upon the number of users and servers
and are generally paid in full upon the execution of each license. Updates and
technical support are offered over the term of each license at no additional
charge to the initial license fee.
Dr Solomon's also sells "boxed product" versions of the Toolkit, both for
single-users and as boxed licenses. Purchasers of boxed-products can elect to
receive monthly or quarterly updates and have access to technical support
personnel.
In 1997 Dr Solomon's introduced versions of its products aimed specifically
at the single user for purchase through retail outlets. HomeGuard(TM) is sold in
the United Kingdom, and in certain other international markets. In the United
States, Dr Solomon's Anti-Virus was introduced in March 1997 and a Deluxe
version has recently been launched.
In October 1997 Dr Solomon's acquired the rights to the Virex(TM) product,
the technology leader in Macintosh virus protection, incorporating patented
Speedscan and Scan-at-Download technology.
RESEARCH AND PRODUCT DEVELOPMENT
Since its inception, Dr Solomon's has made substantial investments in
research and product development. Dr Solomon's research and product development
efforts are focused on (i) updating its products to respond to the development
and proliferation of new computer viruses, (ii) updating its products to respond
to changes in operating systems platforms, (iii) improving the performance of
its products and developing new product features and enhancements and (iv)
developing new products.
To respond to the discovery of new viruses, Dr Solomon's releases new
versions of its anti-virus software programs on a monthly basis. Some types of
new viruses can be accommodated simply by including the "signature" or
"fingerprint" of the new virus within the Toolkit's virus scanning drivers,
while other types of new viruses require the development of new methods to
search for the virus. The latter process requires Dr Solomon's to modify all the
virus scanning and repair programs in the various versions of the Toolkit, test
them, master the CD and disk sets and conduct final quality control testing of
the master disks prior to duplication of customer update disks and CDs.
Dr Solomon's also frequently updates its products to respond to changes in
operating system platforms. Since anti-virus software products interact with
operating systems at a very low level, Dr Solomon's must carefully monitor
changes to operating system platforms and respond quickly to such changes. Many
viruses operate at the very heart of computer operating systems and invoke very
low-level controls of computer hardware components. In order to combat viruses,
anti-virus technologists must similarly function at very low levels. Such
specialised expertise differs from that required to write typical PC application
programs.
40
<PAGE> 41
Some recent developments in the products include:-
Trojan Horse detection and repair
FindVirus now detects and disinfects more than 500 Trojan Horse programs.
These programs can steal passwords, screen names and other personal information
from online users.
Management Edition
The installation and management of anti-virus software across networks has
been improved by Dr Solomon's introduction of Management Edition. The latest
version allows management of Windows 3.x, Windows 95 and NT computers and
NetWare servers.
OTHER PRODUCTS AND SERVICES
During the course of its development, Dr Solomon's has been involved in
various sectors of the PC security market. In recent years, it has focused more
closely on its anti-virus products and services. The other products and
services, some of which are complementary to the anti-virus products,
represented less than 5 per cent. of Dr Solomon's revenue for the year ended 31
May 1997. Dr Solomon's believes that increased profitability can be achieved
through growth in sales of the Audit, netOctopus and Support Software products.
Dr Solomon's will continue to investigate new product opportunities.
Audit
Dr Solomon's Audit is a software and hardware management system that
permits system administrators to monitor software packages installed on
individual PCs, and the hardware configuration of those PCs, throughout an
organisation, thereby recording where hardware is installed and helping systems
administrators ensure that software is correctly and efficiently licensed.
Audit's Software Package Library(TM), which is updated quarterly, enables Audit
to identify many common software packages and is customisable by users. Audit is
marketed in Europe and Chile. The rights for Audit were acquired from
Performance Publishing Limited in November 1997, Dr Solomon's having previously
marketed the product under exclusive license.
Support Software
Dr Solomon's Support Software is an automated helpdesk system that enables
a customer's support staff to log and track telephone enquiries more
effectively. Support Software permits users to store and retrieve solutions to
frequently asked questions and to generate flexible reports on service
department operations. Users can customise Support Software to particular
applications in various industries.
netOctopus
Dr Solomon's netOctopus is a network and system administration solution for
Apple Macintosh. It enables administrators to install, configure and update a
wide variety of software and to conduct both hardware and software audits on
Apple Macintosh computers from a central desktop.
Consultancy Services and Seminars
Dr Solomon's assists certain corporate customers in installing and updating
their anti-virus products and in formulating and implementing general security
and anti-virus strategies plus dealing with virus outbreaks. Dr Solomon's also
sponsors a Live Virus Workshop, which gives users hands-on experience in dealing
with virus outbreaks.
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<PAGE> 42
CUSTOMERS
Dr Solomon's sales and marketing efforts are targeted primarily at medium
and large corporate customers, although Dr Solomon's also sells and markets its
products to small businesses and individual PC users. Dr Solomon's currently
licenses the Toolkit to more than 100,000 customers across all sectors of
business.
EMPLOYEES
As at 30 April 1998, Dr Solomon's had 550 employees, of whom 374 were
located in Aylesbury, Buckinghamshire, England, 110 were located in Burlington,
Massachusetts and in Raleigh, North Carolina, 58 were located in Hamburg and
Munich, Germany and 8 were located in Melbourne and Sydney, Australia. As at
that date, 184 of Dr Solomon's employees were engaged in sales and marketing
activities, 134 in product development and testing, 105 in technical support, 50
in operations and 77 in administration, management information systems and
finance.
Dr Solomon's employees are not party to any collective bargaining
agreements and Dr Solomon's believes that its relations with its employees are
generally good. Most of Dr Solomon's employees are participants in one or more
of Dr Solomon's Share Option Schemes and many of Dr Solomon's managers, sales
staff and software developers are eligible to receive bonuses under performance
bonus schemes. Dr Solomon's believes that its future success will depend in part
upon its ability to continue to attract, retain and motivate qualified
technical, sales and managerial personnel. Although the competition for such
personnel in the software industry is intense, the geographic location of the
main development team in Aylesbury mitigates the risk of direct competition for
such staff.
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<PAGE> 43
B. FINANCIAL INFORMATION ON DR SOLOMON'S
NATURE OF THE FINANCIAL INFORMATION
The financial information contained in this Part B, and in Part B of
Appendix 4 of this document, does not constitute statutory accounts within the
meaning of Section 240 of the Companies Act.
Such financial information relating to S&S International (the former
holding company of Dr Solomon's businesses) for the two financial years ended 31
May 1995 has been extracted without audit from the published reports and audited
consolidated financial statements of S&S International for the two financial
years ended 31 May 1995. The financial information relating to S&S International
for the period 1 June 1995 to 6 February 1996 (the date of the management
buyout) and the financial information relating to Dr Solomon's for the period 7
February 1996 to 31 May 1996 and the financial year ended 31 May 1997 has been
extracted without audit from the published reports and audited consolidated
financial statements of S&S International and Dr Solomon's respectively for such
periods. S&S International's auditors and Dr Solomon's auditors, respectively,
have made a report under Section 235 of the Companies Act 1985 on the financial
statements for the two periods ended 31 May 1995 and the period 1 June 1995 to 6
February 1996 (in respect of S&S International) and 7 February 1996 to 31 May
1996 and the financial year ended 31 May 1997 (in respect of Dr Solomon's) and
statutory accounts have been delivered to the Registrar in respect of each of
those periods. Each such report was unqualified and did not contain a statement
under Section 237(2) to (4) of the Companies Act 1985.
Such financial information relating to Dr Solomon's for the three quarterly
periods ended 31 August 1997, 30 November 1997 and 28 February 1998 has been
extracted without audit from Dr Solomon's filings with the Commission on Forms
6-K for those periods.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
U.K. GAAP, which differs in certain significant respects from U.S. GAAP. See
Note 22 to the audited consolidated financial statements. The consolidated
financial statements include the accounts of Dr Solomon's and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments considered necessary for a fair presentation, have
been included. The results of operations for the nine months ended 28 February
1998 are not necessarily indicative of the results to be expected for the full
year or for any future periods. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements contained in Dr Solomon's Annual Report on Form 20-F for the year
ended 31 May 1997 filed with the Commission on 6 October 1997. The balance sheet
information contained in this Part B does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
PUBLICLY AVAILABLE INFORMATION
Additional financial and other information for Dr Solomon's can be obtained
from Dr Solomon's reports filed pursuant to the Exchange Act. The information
contained herein is qualified in its entirety by reference to Dr Solomon's
Annual Report on Form 20-F for the year ended 31 May 1997 and Dr Solomon's
Quarterly Reports on Forms 6-K for the three quarters ended 28 February 1998.
Dr. Solomon's reports and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission, 7 World Trade Center, Suite 1300, New York, NY 10048; and 500
West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such material can
also be obtained by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains
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<PAGE> 44
a Website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov.
UNAUDITED INTERIM CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE NINE MONTHS ENDED 28 FEBRUARY 1997 AND 28 FEBRUARY 1998
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
28 FEBRUARY 28 FEBRUARY
1997 1998
------------ ------------
(UNAUDITED)
POUNDS STERLING IN THOUSANDS
(EXCEPT PER SHARE DATA)
<S> <C> <C>
TURNOVER.................................................. 25,432 41,535
Cost of sales............................................. (5,230) (9,481)
--------- ----------
Gross profit.............................................. 20,202 32,054
Distribution costs........................................ (2,749) (4,863)
Administrative expenses................................... (11,402) (17,589)
--------- ----------
OPERATING PROFIT.......................................... 6,051 9,602
Interest receivable....................................... 396 1,118
Interest payable.......................................... (925) --
--------- ----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............. 5,522 10,720
Tax on profit on ordinary activities...................... (2,436) (3,796)
--------- ----------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION.............. 3,086 6,924
--------- ----------
Other finance charges in respect of non-equity shares..... (700) --
--------- ----------
RETAINED PROFIT FOR THE FINANCIAL PERIOD.................. 2,386 6,924
========= ==========
Profit per ordinary share based on 55,310,000 ordinary
shares.................................................. 12.5 pence
Profit per ordinary share based on 43,367,454 ordinary
shares.................................................. 5.5 pence
========= ==========
</TABLE>
All amounts derive from continuing operations
The accompanying notes are an integral part of these interim consolidated profit
and loss accounts.
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<PAGE> 45
DR SOLOMON'S GROUP PLC
NOTES TO UNAUDITED INTERIM CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE NINE MONTHS ENDED 28 FEBRUARY 1997 AND 28 FEBRUARY 1998
1. BASIS OF PREPARATION
In the opinion of management, the unaudited interim consolidated financial
statements contain all adjustments, consisting solely of adjustments of a normal
recurring nature, necessary to present fairly the results of operations for the
periods presented.
References to "Company" throughout the unaudited interim consolidated
financial statements are references to Dr Solomon's Group PLC and its
subsidiaries.
2. SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP") IN THE UNITED KINGDOM AND THE UNITED STATES
The approximate effects of the differences between U.K. GAAP and U.S. GAAP
on net income, shareholders' equity and total assets are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
28 FEBRUARY 28 FEBRUARY
1997 1998
----------- -----------
(UNAUDITED)
POUNDS STERLING IN THOUSANDS
(EXCEPT PER SHARE DATA)
<S> <C> <C>
NET INCOME/(LOSS)
Profit on ordinary activities after taxation (U.K. GAAP).... 3,086 6,924
Items (decreasing)/increasing net income:
Amortisation of goodwill and intangible assets.............. (8,069) (7,706)
Amortisation of preference share redemption premium......... (700) --
Recognition of deferred tax asset........................... 182 931
Compensation expense........................................ (19,808) --
------------ ---------
Net (loss)/income (U.S. GAAP)............................... (25,309) 149
------------ ---------
Net income per ordinary share based on 55,310,000 ordinary
shares.................................................... 0.3 pence
=========
Net loss per ordinary share based on 47,549,231 ordinary
shares.................................................... (53.2) pence
============
</TABLE>
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DR SOLOMON'S GROUP PLC
AUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
S & S INTERNATIONAL COMPANY
--------------------------- ------------------------------
1 JUNE 7 FEBRUARY
YEAR ENDED 1995 UNTIL 1996 UNTIL YEAR ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
NOTE 1995 1996 1996 1997
---- ------------ ------------ ------------ ------------
POUNDS STERLING IN THOUSANDS
(EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
TURNOVER.................... 2.. 11,308 12,267 8,631 37,217
Cost of sales............... (2,324) (2,547) (1,873) (7,976)
------ ------ ---------- ----------
Gross Profit................ 8,984 9,720 6,758 29,241
Distribution costs.......... (1,109) (1,283) (493) (4,028)
Administration expenses
(including an exceptional
charge of L125,000 in
1995)..................... (6,768) (6,790) (4,553) (16,100)
Other operating income...... 27 12 8 --
------ ------ ---------- ----------
OPERATING PROFIT............ 2, 4 1,134 1,659 1,720 9,113
Interest receivable......... 118 124 44 724
Interest payable............ 5 -- -- (688) (929)
------ ------ ---------- ----------
PROFIT ON ORDINARY
ACTIVITIES BEFORE
TAXATION.................. 1,252 1,783 1,076 8,908
Tax on profit on ordinary
activities................ 6 (600) (798) (555) (3,650)
------ ------ ---------- ----------
PROFIT ON ORDINARY
ACTIVITIES AFTER
TAXATION.................. 652 985 521 5,258
Equity dividends............ 7.. (955) (950) -- --
Other finance charges in
respect of non-equity
shares.................... -- -- (467) (700)
------ ------ ---------- ----------
RETAINED (LOSS)/PROFIT FOR
THE FINANCIAL PERIOD...... 16 (303) 35 54 4,558
====== ====== ========== ==========
Earnings per ordinary share
based on 32,400,000
ordinary shares........... 0.17 pence
==========
Earnings per ordinary share
based on 46,353,091
ordinary shares........... 9.83 pence
==========
</TABLE>
All amounts derive from continuing operations
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 47
DR SOLOMON'S GROUP PLC
AUDITED CONSOLIDATED BALANCE SHEET
AS AT 31 MAY 1997
<TABLE>
<CAPTION>
31 MAY
NOTE 1997
---- ---------------
POUNDS STERLING
IN THOUSANDS
<S> <C> <C>
FIXED ASSETS
Tangible assets............................................. 8 2,676
-------
CURRENT ASSETS
Stocks...................................................... 9 613
Debtors..................................................... 10 12,264
Investments................................................. 7
Cash at bank and in hand.................................... 25,437
-------
38,321
Creditors: amounts falling due within one year.............. 11 (25,707)
-------
Net current assets.......................................... 12,614
-------
Total assets less current liabilities....................... 15,290
Creditors: amounts falling due after more than one year..... 11 (3,584)
Provisions for liabilities and charges...................... 12 (42)
-------
11,664
=======
CAPITAL AND RESERVES
Call up share capital....................................... 13 553
Share premium account....................................... 14 35,855
Other reserves.............................................. 15 (29,356)
Profit and loss account..................................... 16 4,612
-------
Equity shareholders' funds.................................. 11,664
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 48
DR SOLOMON'S GROUP PLC
AUDITED CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY 1997
<TABLE>
<CAPTION>
YEAR ENDED
31 MAY
NOTE 1997
---- ---------------
POUNDS STERLING
IN THOUSANDS
<S> <C> <C>
Net cash inflow from operating activities................... 17 14,028
-------
Returns on investments and servicing of finance
Interest received........................................... 724
Interest paid............................................... (929)
-------
Net cash outflow from returns on investments and servicing
of finance................................................ (205)
-------
Taxation
Corporation tax paid (including advance corporation tax).... (1,904)
-------
Capital expenditure and financial investment
Payments to acquire tangible fixed assets................... (2,466)
Receipt from sale of tangible fixed assets.................. 19
-------
Net cash outflow from capital expenditure and financial
investment................................................ (2,447)
-------
Net cash inflow before use of liquid resources and
financing................................................. 9,472
Management of liquid resources
Cash on deposit............................................. 18 (17,000)
-------
Financing
Issue of ordinary share capital............................. 36,084
Repayment of preference share capital....................... (7,293)
Payment of preference share premium......................... (1,167)
Repayment of borrowings..................................... 18 (16,943)
-------
Net cash inflow from financing.............................. 10,681
-------
Increase in cash............................................ 18 3,153
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 49
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles in the United Kingdom ("U.K. GAAP").
References to "Company" throughout the consolidated financial statements
are to Dr Solomon's Group PLC and its subsidiaries. References to "S&S
International" are to its predecessors S&S International Limited, and its
subsidiaries.
BUSINESS
The Company develops, markets and supports anti-virus software programs for
personal computers and PC networks. The Company's products provide effective and
easy to use software solutions to the risks posed by the proliferation of new
and increasingly sophisticated types of computer viruses. The Company's
principal product line is the "Dr Solomon's Anti-Virus Toolkit" family of
software programs (the "Toolkit").
CONSOLIDATION AND GOODWILL
The consolidated financial statements include the accounts of both the
Company and S&S International for the periods specified. The difference between
consideration payable for the acquisition of interests in subsidiary companies
and the fair value of the assets acquired is written off directly to reserves in
the year of acquisition.
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost convention.
FIXED ASSETS
The cost of acquired fixed assets includes the purchase cost, together with
any incidental expenses of acquisition. The cost of purchased software is
capitalized and amortized from the implementation date over its estimated useful
economic life. The cost of software developed for internal use is expensed in
the period in which the cost is incurred.
Depreciation of fixed assets is provided on a straight line basis over the
estimated useful lives of the respective assets, as follows:
<TABLE>
<S> <C>
Short leasehold property and Over the remaining term of the lease
improvements
Motor vehicles Over 4 years
Fixtures, fittings and equipment Between 2 and 5 years
Software Between 2 and 3 years
</TABLE>
DEFERRED TAXATION
Deferred taxation is provided on timing differences, arising from the
different treatment of items for accounts and taxation purposes, which are
expected to reverse in the future, calculated at rates at which it is estimated
that tax will arise.
49
<PAGE> 50
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN EXCHANGE
Profit and loss accounts in foreign currencies are translated into sterling
at the average rates of exchange prevailing for the relevant financial period.
Monetary assets and liabilities denominated in foreign currencies at the period
end are translated into sterling at the rate prevailing at the balance sheet
date. These differences are dealt with in the profit and loss account. Exchange
differences arising on the translation of the net investment in foreign
subsidiaries are dealt with as adjustments to reserves.
ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reported period. Accounting estimates have been employed
in these consolidated financial statements to determine reported amounts,
including realizability of debtors and other assets and the useful lives of
fixed assets. Actual results could differ from those estimated.
REVENUE RECOGNITION
The Company recognizes revenues from product licenses and update services
(both of which include post-contract support) on a straight-line basis over the
term of the contracted service (usually one, two or three years in the case of
product licenses and one year in the case of update services).
The Company recognizes 50 per cent. of the revenues from the sale of boxed
products which include an update service at the time of sale and the remaining
50 per cent. evenly over the term of the update service (including post-contract
support) included in a sale (normally one year). For those boxed products not
including an update service, revenue is recognised at time of sale.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development expenditure and software development costs are
charged to the profit and loss account as incurred. Based on the Company's
product development process, technological feasibility is established upon
completion of a working model. Subsequent costs to the point at which the
product is ready for general release have not been significant and none of these
costs have been capitalized.
EARNINGS PER SHARE
Earnings per share have not been computed for periods which relate to S&S
International, as such information is not considered meaningful for a period
over period comparison due to the different capital structure of S&S
International as compared to the Company.
Earnings per share are based upon the weighted average number of ordinary
shares in issue throughout the period and are calculated on the profit on
ordinary activities, after taxation and after other finance charges in respect
of non-equity shares, but before equity dividends.
2. ANALYSIS OF TURNOVER, OPERATING PROFIT/(LOSS) AND NET ASSETS/(LIABILITIES)
Turnover represents amounts derived from product licenses, sales of
boxed-products and providing updates to boxed-products, and royalty income.
50
<PAGE> 51
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The geographical analysis of turnover by destination of sales is as
follows:-
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
------------------- -------------------
YEAR 1 JUNE 7 FEBRUARY YEAR
ENDED 1995 UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
------ ---------- ---------- ------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom................................. 8,570 7,799 5,662 22,404
United States.................................. 228 953 295 4,434
Germany........................................ 768 1,148 795 3,237
Rest of the World.............................. 1,742 2,367 1,879 7,142
------ ------ ----- ------
11,308 12,267 8,631 37,217
====== ====== ===== ======
</TABLE>
The geographical analysis of turnover, operating profit/(loss) and net
assets/(liabilities) by origin of sales is as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
------------------- -------------------
YEAR 1 JUNE 7 FEBRUARY YEAR
ENDED 1995 UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
------ ---------- ---------- ------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
TURNOVER
United Kingdom................................. 10,876 10,992 7,520 29,546
United States.................................. 18 376 459 4,434
Germany........................................ 414 899 652 3,237
------ ------ ----- ------
11,308 12,267 8,631 37,217
====== ====== ===== ======
OPERATING PROFIT/(LOSS)
United Kingdom................................. 1,647 2,478 2,071 10,099
United States.................................. (215) (839) (447) (1,546)
Germany........................................ (298) 20 96 560
------ ------ ----- ------
1,134 1,659 1,720 9,113
====== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
COMPANY
---------------
31 MAY
1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
NET ASSETS/(LIABILITIES)
United Kingdom........................................ 43,984
United States......................................... (3,032)
Germany............................................... 79
-------
41,031
Less goodwill arising on acquisitions................. (29,367)
-------
11,664
=======
</TABLE>
51
<PAGE> 52
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COMPANY
---------------
31 MAY
1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
IDENTIFIABLE NET ASSETS/(LIABILITIES)
United Kingdom........................................ 14,617
United States......................................... (3,032)
Germany............................................... 79
------
11,664
======
</TABLE>
3. INFORMATION REGARDING EMPLOYEES
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
------------------- -------------------
YEAR 1 JUNE 7 FEBRUARY YEAR
ENDED 1995 UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
------ ---------- ---------- ------
NO. NO. NO. NO.
<S> <C> <C> <C> <C>
AVERAGE NUMBER OF PERSONS EMPLOYED
United Kingdom.................................. 136 175 198 250
United States................................... 1 11 13 38
Germany......................................... 8 10 11 20
------ ----- ----- -----
145 196 222 308
====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
STAFF COSTS DURING THE YEAR (INCLUDING
DIRECTORS)
Wages and salaries.............................. 3,337 3,276 2,147 8,620
Social security costs........................... 415 343 200 856
Pension costs................................... 250 66 64 195
------ ----- ----- -----
4,002 3,685 2,411 9,671
====== ===== ===== =====
</TABLE>
4. OPERATING PROFIT
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
------------------- -------------------
YEAR 1 JUNE 7 FEBRUARY YEAR
ENDED 1995 UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
------ ---------- ---------- ------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
OPERATING PROFIT IS AFTER CHARGING:
Depreciation of owned assets.................... 916 898 470 1,705
Rentals under operating leases
Land and buildings............................ 356 207 140 464
Cars.......................................... 14 46 25 166
Equipment..................................... 11 22 8 25
Auditors' remuneration
Audit fees.................................... 20 26 10 42
Other services (U.K.)......................... 19 19 8 47
Hire of equipment............................... 23 20 7 30
Research & Development.......................... 660 539 432 4,014
===== === === =====
</TABLE>
52
<PAGE> 53
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTEREST PAYABLE
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
----------------------- -------------------
1 JUNE
1995 7 FEBRUARY YEAR
YEAR ENDED UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
---------- ---------- ---------- ------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
Investor loan stock.......................... -- -- 462 487
Bank loans................................... -- -- 156 336
Vendor loan notes............................ -- -- 70 106
--- --- --- ---
-- -- 688 929
=== === === ===
</TABLE>
6. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
----------------------- -------------------
1 JUNE
1995 7 FEBRUARY YEAR
YEAR ENDED UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
---------- ---------- ---------- ------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom corporation tax at 33%........ 600 835 555 3,465
Overseas tax................................. -- -- -- 250
Adjustments in respect of prior periods...... -- (37) -- (65)
--- --- --- -----
600 798 555 3,650
=== === === =====
</TABLE>
The high rates of effective taxation are due primarily to the losses
incurred in the US which could not be offset against U.K. profits for
taxation purposes and to the accelerated depreciation policy relating to
fixed assets compared to allowances for taxation purposes, for which no
deferred tax asset is recognised in accordance with U.K. GAAP.
There are no deferred tax liabilities, provided or unprovided at 31 May
1997.
7. EQUITY DIVIDENDS
The total equity dividends during the period 1 June 1995 until 6 February
1996 in S&S International was L950,000, by way of a scrip issue of 948,353
L1 deferred ordinary shares and 50,000 $0.05 ordinary shares
(1995 -- L955,000 cash dividend).
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
----------------------- -------------------
1 JUNE
1995 7 FEBRUARY YEAR
YEAR ENDED UNTIL 1996 UNTIL ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
---------- ---------- ---------- ------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
Equity dividends............................. 955 950 -- --
=== === === ===
</TABLE>
53
<PAGE> 54
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
SHORT
LEASEHOLD FIXTURES,
PROPERTY & MOTOR FITTINGS &
IMPROVEMENTS VEHICLES EQUIPMENT TOTAL
------------ -------- ---------- -----
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
COST
At 1 June 1996................................ 683 125 3,923 4,731
Effect of exchange rate movements............. -- -- (63) (63)
Additions..................................... 82 -- 2,384 2,466
Disposals..................................... -- (36) (12) (48)
--- --- ----- -----
At 31 May 1997................................ 765 89 6,232 7,086
--- --- ----- -----
ACCUMULATED DEPRECIATION
At 1 June 1996................................ 227 65 2,472 2,764
Effect of exchange rate movements............. -- -- (26) (26)
Charge for the year........................... 174 23 1,508 1,705
Disposals..................................... -- (23) (10) (33)
--- --- ----- -----
At 31 May 1997................................ 401 65 3,944 4,410
--- --- ----- -----
NET BOOK VALUE
At 31 May 1997................................ 364 24 2,288 2,676
=== === ===== =====
</TABLE>
9. STOCKS
<TABLE>
<CAPTION>
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
Raw materials......................................... 4
Goods for resale...................................... 609
---
613
===
</TABLE>
10. DEBTORS
<TABLE>
<CAPTION>
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
Trade debtors......................................... 11,086
Other debtors......................................... 111
Prepayments and accrued income........................ 1,067
------
12,264
======
</TABLE>
All amounts are due within one year
54
<PAGE> 55
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CREDITORS
<TABLE>
<CAPTION>
AMOUNTS FALLING DUE AMOUNTS FALLING DUE
WITHIN ONE YEAR AFTER ONE YEAR
31 MAY 1997 31 MAY 1997
------------------- -------------------
POUNDS STERLING IN THOUSANDS
<S> <C> <C>
Trade creditors.......................... 1,843 --
Current corporation tax.................. 3,142 --
Other taxes and social security.......... 1,133 --
Other creditors.......................... 342 --
Accruals................................. 2,232 --
Deferred revenue......................... 17,015 3,584
------ -----
25,707 3,584
====== =====
</TABLE>
12. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
VACANT PROPERTY
At the beginning of the year.......................... 49
Transfer to Creditors: amounts falling due within one
year................................................ (7)
--
At the end of the year................................ 42
==
</TABLE>
13. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
31 MAY 1997
TOTAL VALUE
----------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
55,310,000 Ordinary shares of 1 pence each, issued
and fully paid..................................... 553
===
</TABLE>
14. SHARE PREMIUM ACCOUNT
<TABLE>
<CAPTION>
POUNDS STERLING
IN THOUSANDS
<S> <C>
At 31 May 1996........................................ 6,564
Redemption of preference shares....................... (6,564)
Issue of Ordinary shares (net of issue costs)......... 35,855
------
At 31 May 1997........................................ 35,855
======
</TABLE>
15. OTHER RESERVES
<TABLE>
<CAPTION>
PREFERENCE
SHARE FOREIGN
REDEMPTION EXCHANGE
RESERVE GOODWILL TRANSLATION TOTAL
---------- -------- ----------- -------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
<S> <C> <C> <C> <C>
At 31 May 1996............................... 467 (29,367) (13) (28,913)
Movements (net).............................. (467) -- 24 (443)
---- ------- --- -------
At 31 May 1997............................... -- (29,367) 11 (29,356)
==== ======= === =======
55
</TABLE>
<PAGE> 56
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
POUNDS STERLING
IN THOUSANDS
<S> <C>
At 31 May 1996........................................ 54
Profit retained for the period........................ 4,558
-----
At 31 May 1997........................................ 4,612
=====
</TABLE>
17. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED
31 MAY 1997
---------------
IN THOUSANDS
<S> <C>
Operating profit...................................... 9,113
Depreciation of owned assets.......................... 1,705
Profit on disposal of tangible fixed assets and investments... (4)
Increase in stocks.................................... (348)
Increase in debtors................................... (5,928)
Increase in creditors................................. 9,497
Decrease in provisions................................ (7)
------
14,028
======
</TABLE>
18. ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
YEAR ENDED
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
CASH AT BANK AND IN HAND
At beginning of the year.............................. 5,223
Cash flow............................................. 3,153
Exchange movement..................................... 61
-------
8,437
Deposits at end of the year........................... 17,000
-------
At end of the year.................................... 25,437
=======
BORROWINGS
Bank and other loans at beginning of the year......... 16,943
Cash flow............................................. (16,943)
-------
Bank and other loans at end of the year............... --
=======
SHARE CAPITAL (INCLUDING SHARE PREMIUM AND PREFERENCE
SHARE REDEMPTION RESERVE)
At beginning of the year.............................. 8,084
Cash flow............................................. 27,624
Increase in preference share redemption reserve....... 700
-------
At end of the year.................................... 36,408
=======
</TABLE>
56
<PAGE> 57
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. FINANCIAL COMMITMENTS
The Company leases all of its facilities and certain of its equipment and
motor vehicles under operating leases that expire at various dates through 2009.
The future fiscal years' minimum operating lease commitments as of 31 May 1997
are as follows:
<TABLE>
<CAPTION>
POUNDS STERLING
IN THOUSANDS
<S> <C>
Year Ending 31 May
1998.................................................. 703
1999.................................................. 705
2000.................................................. 577
2001.................................................. 543
2002.................................................. 396
Thereafter............................................ 1,534
-----
Total................................................. 4,458
=====
</TABLE>
At 31 May 1997, the Company was committed to making the following payments
during the next year in respect of operating leases:
<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHER TOTAL
1997 1997 1997
--------- ----- -----
POUNDS STERLING
IN THOUSANDS
<S> <C> <C> <C>
Leases which expire within:
1 year...................................................... -- 34 34
2 - 5 years................................................. 173 195 368
after 5 years............................................... 301 -- 301
=== === ===
</TABLE>
To the extent that provisions have already been made in the accounts for
operating lease commitments relating to vacant properties, these have not been
included in the above analysis.
20. PENSIONS
The Company operates defined contribution pension schemes for the directors
and employees. The costs recognised by the Company with respect to its defined
contribution plans are as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
----------------------------- -----------------------------
1 JUNE 1995 7 FEBRUARY 1996
YEAR ENDED UNTIL UNTIL YEAR ENDED
31 MAY 1995 6 FEBRUARY 1996 31 MAY 1996 31 MAY 1997
----------- --------------- --------------- -----------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom.................. 250 48 43 183
United States................... -- 19 20 12
--- -- -- ---
250 67 63 195
=== == == ===
</TABLE>
57
<PAGE> 58
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ALLOWANCE FOR CO-OPERATIVE
BAD AND DOUBTFUL MARKETING
ACCOUNTS PROVISION
---------------- ------------
POUNDS STERLING IN THOUSANDS
<S> <C> <C>
At 31 May 1996................................... 392 619
Provided......................................... 85 1,371
Utilised......................................... (10) (1,095)
--- ------
At 31 May 1997................................... 467 895
=== ======
</TABLE>
22. SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
IN THE UNITED KINGDOM AND THE UNITED STATES
The Consolidated Financial Statements are prepared in accordance with
generally accepted accounting principles in the United Kingdom ("U.K. GAAP"),
which differ in certain significant respects from those generally accepted in
the United States ("US GAAP"). The differences that are significant to Dr
Solomon's Group PLC relate to the following items:
GOODWILL AND INTANGIBLE ASSETS
Under U.K. GAAP, costs of acquisitions in excess of the fair value of the
attributable net assets of acquired businesses at the date of acquisition may be
capitalised or may be written off against shareholders' equity, either in the
financial year of acquisition or in a subsequent financial year. Dr Solomon's
Group PLC has written off such goodwill against shareholders' equity in the
financial year of acquisition.
Under US GAAP, the excess of the purchase price over the net assets
acquired is allocated to goodwill and other intangible assets based on the
requirements of Accounting Principles Board Opinion No.16 "Business
Combinations" (APB 16). The assets are capitalized and then amortized over a
term not to exceed 40 years.
DEFERRED TAXATION
Under U.K. GAAP, deferred taxation is provided at the same rates at which
the taxation is expected to become payable. No provision is made for amounts
which are not expected to become payable in the foreseeable future and no
account is taken of deferred tax assets in accordance with Statement of Standard
Accounting Practice 15.
Under US GAAP, deferred taxation is provided on all temporary differences
under the liability method at rates which the taxation would be payable in the
relevant future year as prescribed by Statement of Financial Accounting Standard
("SFAS") No. 109 - "Accounting for Income Taxes".
DIVIDENDS
Under U.K. GAAP dividends are included in the financial statements when
recommended by the Board of Directors to the shareholders.
Under US GAAP, dividends are not included in the financial statements until
declared by the Board of Directors.
58
<PAGE> 59
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE
Under U.K. GAAP earnings per share are based on the weighted average number
of ordinary shares in issue throughout the period and are calculated on the
profit on ordinary activities after taxation and after other finance charges in
respect of non-equity shares, but before equity dividends.
Under US GAAP income per share is based on the weighted average number of
ordinary shares in issue throughout the period and is calculated on the net
income for the period.
CASH AND CASH EQUIVALENTS
Under U.K. GAAP, cash is defined as cash in hand and deposits repayable on
demand, less overdrafts repayable on demand. Cash equivalents are no longer
defined. Deposits are classified as liquid investments.
Under US GAAP, cash equivalents consist of all deposits with an original
maturity of three months or less. Cash is not stated net of overdrafts, instead
these are presented within the financing section of the cash flow statement.
COMPENSATION EXPENSE
Under US GAAP, the Company follows the provisions of Accounting Principles
Board Opinion no. 25, "Accounting for stock issued to employees" and is required
to recognize a non-cash compensation expense equal to the difference between the
exercise price of options granted under the Dr Solomon's Group Share Option
Scheme and the fair market value of the options at the time they were granted.
This amounted to L17.808 million in the quarter ended 30 November 1996. Under US
GAAP, the Company is also required to recognize a non-cash compensation expense
of L2.0 million on the transfer of Investor Loan Stock to the executive
directors in the first quarter of the 1997 financial year.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Consolidated Statement of Cash Flows prepared under U.K. GAAP differs
in certain presentational respects from the format required under SFAS
95 -- "Statement of Cash Flows". Under U.K. GAAP, a reconciliation of profits
from operations to cash flows from operating activities is presented in a note,
and cash paid for interest and income taxes is presented separately from cash
flows from operating activities. Under SFAS 95, cash flows from operating
activities are based on net profit, include interest and income taxes and are
presented on the face of the statement. U.K. GAAP requires cash to be presented
net of overdrafts; SFAS 95 treats overdrafts within financing activities.
59
<PAGE> 60
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the consolidated statements of cash flows
presented in accordance with U.K. GAAP and US GAAP is set out below:
<TABLE>
<CAPTION>
YEAR ENDED
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
OPERATING ACTIVITIES
Net cash inflow from operating activities (U.K.
GAAP)............................................... 14,028
Tax paid.............................................. (1,904)
Interest received..................................... 724
Interest paid......................................... (929)
------
Net cash provided by operating activities (US GAAP)... 11,919
======
INVESTING ACTIVITIES
Net cash outflow from capital expenditure and
financial investment (U.K. GAAP).................... (2,447)
Net cash used in investing activities (US GAAP)....... (2,447)
======
FINANCING ACTIVITIES
Net cash inflow from financing activities (U.K.
GAAP)............................................... 10,681
Net cash provided by financing activities (US GAAP)... 10,681
======
</TABLE>
The approximate effects of the differences between U.K. GAAP and US GAAP on
net income, shareholders' equity and total assets are as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
--------------------------- ---------------------------
1 JUNE 1995 7 FEBRUARY
YEAR ENDED UNTIL 1996 UNTIL YEAR ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
------------ ------------ ------------ ------------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
NET INCOME/(LOSS)
Profit on ordinary activities
after taxation (U.K. GAAP)...... 652 985 521 5,258
Items (decreasing)/increasing net
income:
Amortization of goodwill and
intangible assets............... -- -- (11,941) (8,512)
Amortization of preference share
redemption premium.............. -- -- (467) (700)
Compensation expense.............. -- -- -- (19,808)
Recognition of deferred tax
asset........................... (8) (26) 28 174
--- --- ------- -------
Net income/(loss) (US GAAP)....... 644 959 (11,859) (23,588)
=== === ======= =======
Net loss per ordinary share based
on 43,340,000 ordinary shares... (27.4) pence
================
Net loss per ordinary share based
on 49,489,423 ordinary shares... (47.7) pence
========
</TABLE>
60
<PAGE> 61
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
SHAREHOLDERS' EQUITY
Shareholders' equity (U.K. GAAP)...................... 11,664
Items increasing shareholders' equity:
Goodwill and intangible assets -- net of
amortization........................................ 8,914
Recognition of deferred tax asset..................... 591
------
Shareholders' equity (US GAAP)........................ 21,169
======
</TABLE>
<TABLE>
<CAPTION>
COMPANY
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
TOTAL ASSETS
Total assets (U.K. GAAP).............................. 40,997
Goodwill and intangible assets -- net of
amortization........................................ 8,914
Recognition of deferred tax asset..................... 591
------
Total assets (US GAAP)................................ 50,502
======
</TABLE>
61
<PAGE> 62
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of the accounting treatment for income taxes and business
acquisitions under US GAAP are provided below:
INCOME TAXES
The components of income before taxes and income tax expense under US GAAP
are as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
----------------------- -----------------------
1 JUNE 7 FEBRUARY
1995 1996
YEAR ENDED UNTIL UNTIL YEAR ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
---------- ---------- ---------- ----------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C> <C>
INCOME/(LOSS) BEFORE INCOME TAXES:
United Kingdom........................... 1,765 2,573 (11,012) (19,160)
United States............................ (215) (810) (423) (1,547)
Germany.................................. (298) 20 103 595
----- ----- ------- -------
Income before taxes...................... 1,252 1,783 (11,332) (20,112)
===== ===== ======= =======
CURRENT TAX:
United Kingdom........................... 600 798 555 3,400
Germany.................................. -- -- -- 250
----- ----- ------- -------
600 798 555 3,650
===== ===== ======= =======
DEFERRED TAX:
United Kingdom........................... 98 20 (59) (159)
United States............................ (86) (344) (191) (732)
Germany.................................. (90) 6 31 (15)
----- ----- ------- -------
(78) (318) (219) (906)
Valuation allowance...................... 86 344 191 732
----- ----- ------- -------
Total deferred tax movement.............. 8 26 (28) (174)
----- ----- ------- -------
Total tax provision...................... 608 824 527 3,476
===== ===== ======= =======
</TABLE>
62
<PAGE> 63
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of the statutory tax rate to the effective corporate tax
rate in the United Kingdom is as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
------------------------ ------------------------
1 JUNE 7 FEBRUARY
1995 1996
YEAR ENDED UNTIL UNTIL YEAR ENDED
31 MAY 6 FEBRUARY 31 MAY 31 MAY
1995 1996 1996 1997
---------- ----------- ----------- ----------
% % % %
<S> <C> <C> <C> <C>
Statutory tax rate (U.K.)................ 33.0 33.0 33.0 32.7
Tax rate differences:
United States.......................... (1.0) (3.0) -- --
Germany................................ 1.0 -- -- 0.1
FASB 109 valuation allowance............. 7.0 19.0 (3.0) (3.2)
Amortisation of goodwill and intangible
assets................................. -- -- (35.0) (14.7)
Compensation expense..................... -- -- -- (32.5)
Other differences........................ 8.6 (2.8) 0.3 0.3
---- ---- ----- -----
Effective tax rate (US).................. 48.6 46.2 (4.7) (17.3)
==== ==== ===== =====
</TABLE>
For the period 7 February 1996 until 31 May 1997 a tax charge has arisen on
the loss for the periods due mainly to the non-deductibility for US tax purposes
of the amortisation of goodwill and intangible assets.
Deferred income tax assets are attributable to the following:
<TABLE>
<CAPTION>
COMPANY
---------------
31 MAY 1997
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
CURRENT DEFERRED TAX ASSET
Short term provisions................................. (122)
US temporary differences.............................. (705)
German temporary differences.......................... (117)
------
Total net current deferred tax asset.................. (944)
------
NON-CURRENT DEFERRED TAX ASSET
Loss carry forwards
United States......................................... (103)
Germany............................................... --
Other US temporary differences........................ (514)
Depreciation.......................................... (382)
------
Total non-current deferred tax asset.................. (999)
------
TOTAL DEFERRED TAX ASSET:............................. (1,943)
Valuation allowance................................... 1,352
------
(591)
======
</TABLE>
A valuation allowance is provided against the temporary deductible
differences and net operating loss carry-forwards which are not likely to be
realized. During the period from 7 February 1996 until 31 May 1996 and during
the year ended 31 May 1997, the net valuation allowance was increased to provide
for the gross deferred tax assets arising in the US.
63
<PAGE> 64
DR SOLOMON'S GROUP PLC
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUISITIONS
On 6 February 1996 the Company acquired the whole of the share capital of
S&S International for a consideration of L30,035,000 plus expenses:
The allocation of purchase price is summarised as follows:
<TABLE>
<CAPTION>
BOOK AND
FAIR VALUE
---------------
POUNDS STERLING
IN THOUSANDS
<S> <C>
Net assets acquired at cost (including cash of
L5,707)............................................. 1,459
------
Purchase price:
Cash paid, including acquisition expenses............. 27,791
Loan notes issued..................................... 3,000
Assets transferred to vendors at book value........... 35
------
Total purchase price.................................. 30,826
------
Excess of purchase price over net assets acquired
allocated to other intangibles and goodwill
(amortised over 0 to 8 years -- see below).......... 29,367
======
</TABLE>
The allocation of the purchase price has been determined by independent
appraisers on the requirements of Accounting Principles Board Opinion No. 16
"Business Combinations" (APB 16). The specific allocation of the purchase price
to identifiable intangible assets was made based on separate discounted cash
flow models. The type of intangible asset, the amounts allocated to each and the
term over which they are to be amortised are summarised below:
<TABLE>
<CAPTION>
AMOUNT AMORTISATION
ALLOCATED PERIOD
--------------- ------------
POUNDS STERLING
IN THOUSANDS
<S> <C> <C>
ASSET
Software........................................ 10,600 11 months
In process research and development............. 7,500 0 months
Tradename....................................... 1,900 8 years
Workforce in place.............................. 740 7 years
Covenant not to compete......................... 2,700 4 years
Goodwill........................................ 5,927 8 years
------
29,367
======
</TABLE>
As at 31 May 1997 the accumulated amortisation of goodwill and other
intangibles was L20,453,000.
64
<PAGE> 65
APPENDIX 3
INFORMATION ON NETWORK ASSOCIATES
A. DESCRIPTION OF BUSINESS OF NETWORK ASSOCIATES
OVERVIEW
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".
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 part of smaller product suites
or as stand-alone products. 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.
The following table depicts Network Associates' product suites:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NET TOOLS
- ------------------------------------------------------------------------------------------
NET TOOLS SECURE NET TOOLS MANAGER
- ------------------------------------------------------------------------------------------
MCAFEE TOTAL PGP TOTAL SNIFFER TOTAL MCAFEE TOTAL
VIRUS DEFENSE(TVD) NETWORK SECURITY NETWORK VISIBILITY SERVICE DESK (TSD)
(TNS) (TNV)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- Virus Scan Security - PGP Desktop - Sniffer Portable - McAfee Help Desk
Suite Suite Analysis Suite Suite
- Net Shield Security - PGP Server - Sniffer Distributed - Zero Administration
Suite Suite Analysis Suite Client Suite
- Internet - CyberCop - Sniffer Service - Self Service Desk
Security Suite - Gauntlet Desk Suite Suite
- ------------------------------------------------------------------------------------------
</TABLE>
NET TOOLS
Net Tools is being designed as an integrated solution to protect the
enterprise from network security threats and to reduce the cost of managing an
enterprise network. While supporting other operating systems, Net Tools is being
optimized for Microsoft Windows NT technology ("NT"), employing an Explorer
Interface, Distributed OLE, ActiveX and the DCOM object model. Net Tools is
being designed to leverage NT to bridge the gap between the disparate network
management universes of NetWare and Unix servers. In addition, Net Tools is
being engineered to employ a common graphical user interface ("GUI"), together
with common reporting, alerting and scripting functionalities. Network
Associates is currently developing its pricing model for the licensing of its
Net Tools suite of products. Among other things, Network Associates is currently
developing a centralized console for its Net Tools product suite; developing its
pricing model for the Net Tools
65
<PAGE> 66
product suite; and integrating various recently acquired products (including
certain PGP encryption products and TIS firewall products) into smaller suites
sold under the Net Tools umbrella.
NET TOOLS SECURE: MCAFEE TOTAL VIRUS DEFENSE AND PGP TOTAL NETWORK SECURITY
The Net Tools Secure product suite is comprised of McAfee Total Virus
Defense and PGP Total Network Security. A number of the products incorporated in
the Net Tools Secure product suite may be purchased as stand-alone products or
as part of smaller product suites.
McAfee Total Virus Defense. McAfee Total Virus Defense ("McAfee TVD") is
designed to provide a single integrated defense against computer viruses at the
desktop, server and Internet gateway. McAfee TVD is comprised of three security
product suites: VirusScan Security Suite (providing multi-platform protection
for desktop clients); NetShield Security Suite (protects file, application and
groupware servers); and Internet Security Suite (locks out viruses and hostile
applets at the Internet gateway).
PGP Total Network Security. PGP Total Network Security ("PGP TNS") is being
designed as an integrated suite of desktop and server solutions designed to
protect the digital assets of an enterprise through encryption and
authentication. All encryption algorithms used in PGP TNS provide "strong"
encryption with a minimum 128 bit key length for symmetric encryption, plus the
use of a public/private key scheme with larger keys. To Network Associates'
knowledge, no techniques currently exist that can "crack" these strong
encryption algorithms so they are usable even in demanding commercial and
military applications. PGP TNS is being designed as a comprehensive, scalable
security solution with central manageability and policy-based administration.
PGP TNS will comprise two network security product suites: the PGP Desktop Suite
(protects e-mails, files, disks and network communication); and the PGP Server
Suite (which is being developed to manage certificates, control encryption
policies and replicate certificate servers). Both PGP Desktop and Server suites
also include the PGPsdk which allows corporate or application developers to
create custom encryption using PGP's strong encryption algorithms. Complementing
PGP TNS is intrusion protection through the CyberCop product which is sold
separately and not as part of a suite and the Gauntlet firewall products
acquired by Network Associates' recent acquisition of TIS.
The CyberCop intrusion detection system is designed to safeguard networks
from external and internal attacks by performing real-time surveillance of
network traffic and sending out an alarm when intrusion is detected. The
CyberCop product's sensors are placed at key locations throughout a network,
from LAN segments and dial-up modem servers to connection to the internet or
other wide area networks.
The Gauntlet family of firewall products allow customers to create
"trusted" networks that are protected from access, theft and damage by
unauthorised 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.
NET TOOLS MANAGER: SNIFFER TOTAL NETWORK VISIBILITY AND MCAFEE TOTAL SERVICE
DESK
Net Tools Manager is a network management and service desk solution
designed to make networks more efficient and network users more productive. The
Net Tools Manager product suite is comprised of Sniffer Total Network
Visibility, a comprehensive set of products and services for network fault and
performance management; and McAfee Total Service Desk, which integrates help
desk applications with desktop management software. McAfee Total Service Desk is
licensed on a two-year subscription basis. A number of the products incorporated
in the Net Tools Manager product suite may be purchased as part of smaller
product suites or as stand-alone products.
Sniffer Total Network Visibility. Sniffer is one of Network Associates'
flagship products. Sniffer Total Network Visibility ("Sniffer TNV") offers
comprehensive network fault and performance
66
<PAGE> 67
solutions to provide optimum network performance. Sniffer TNV is comprised of
three product suites: Sniffer Portable Analysis Suites which consist of portable
tools which analyze network traffic to pinpoint and help resolve performance
problems on a variety of multi-topology, multi-protocol networks; Sniffer
Distributed Analysis Suites which perform automatic network monitoring, protocol
decodes and problem analysis for identifying and resolving network problems from
a central single-fault and performance-management console; and Sniffer Service
Desk Suite which offers proactive management, reporting and service desk tools
for better supporting business objectives and delivering a higher quality of
service to end users.
McAfee Total Service Desk. McAfee Total Service Desk ("McAfee TSD")
provides proactive network management and help desk technology in one integrated
service desk solution. McAfee TSD comprises three suites: (i) the McAfee
HelpDesk Suite which is designed to provide complete call management, problem
resolution, crisis management, change management and reporting for mid-range and
departmental help desks; (ii) the Zero Administration Client Suite which is
designed to provide enterprise wide control of network software with integrated
software distribution, software and hardware inventory, desktop
management/menuing, license metering and remote control features; and (iii) the
Self ServiceDesk Suite which is designed to provide information services
organizations with self service oriented applications designed to make all
supported PCs help desk ready.
TOTAL SERVICE SOLUTIONS
As Network Associates' products and computer networks become more complex,
customers increasingly require greater professional assistance in the design,
installation, configuration and implementation of their networks and acquired
products. To meet these evolving customer needs, Network Associates has
established Total Service Solutions. Total Service Solutions is focused on three
services segments: Consulting Services, Total Education Service and Product
Support to complete the customer's product license relationship with Network
Associates.
Consulting Services supports product integrations, customization and
deployment with an array of standardized and custom offerings. Consulting
Services also offers other services ranging from proactive and emergency
troubleshooting to network design, planning and simulation.
Total Education Service offers an extensive curriculum of computer network
technology courses, from product training to advanced network troubleshooting
and performance management.
Product Support technical representatives respond to customer calls and
electronic messages, resolve product issues and answer detailed questions.
CUSTOMERS
Network Associates primarily markets its products directly to large
corporate and government customers as well as to resellers and distributors. No
customer accounted for more than 10 per cent. of Network Associates' net revenue
during the financial years ended 31 December 1997, 1996 or 1995.
EMPLOYEES
As at 31 December 1997, Network Associates employed over 1,600 individuals
worldwide. Competition for qualified management and technical personnel is
intense in the software industry. Network Associates' continued success will
depend in part upon its ability to attract and retain qualified personnel. None
of Network Associates' employees is represented by a labor union and Network
Associates believes that its employee relations are good.
67
<PAGE> 68
RECENT DEVELOPMENTS
3-for-2 Common Stock Split
On 29 May, 1998, Network Associates consummated the Network Associates
3-for-2 Stock Split by means of a stock dividend.
Magic Solutions Acquisition
On 1 April 1998 Network Associates acquired Magic Solutions, a privately
held provider of internal help desk and asset management solutions. In the
acquisition, a wholly owned subsidiary of Network Associates merged with and
into Magic Solutions; Magic Solutions became a wholly owned subsidiary of
Network Associates; and the existing Magic Solutions stock and option holders
received approximately $110,000,000 in cash. The Magic Solutions acquisition
broadened Network Associates' suite of service desk product offerings. The Magic
Solutions acquisition is accounted for as a purchase and Network Associates
currently expects that a substantial portion of this price will be expensed as
purchased in-process research and development in the quarter ended 30 June 1998.
TIS Acquisition
On 28 April 1998 Network Associates acquired TIS, a publicly held provider
of comprehensive security solutions for the protection of computer networks,
including global Internet-based systems, internal networks and individual
workstations and laptops, as well as firewall and intrusion detection products.
In the acquisition, a wholly owned subsidiary of Network Associates merged with
and into TIS; TIS became a wholly owned subsidiary of Network Associates; each
outstanding share of TIS Common Stock converted into the right to receive 0.4845
of a share of Network Associates Common Stock (after giving effect to the
Network Associates' 3-for-2 Stock Split). The TIS acquisition broadened Network
Associates' suite of network security products. The TIS acquisition was
qualified as a pooling of interests for U.S. financial reporting purposes in
accordance with U.S. GAAP.
Zero Coupon Debentures
On 13 February 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 Debentures of 4.75 per cent. on a
semi-annual bond equivalent basis). The Debentures are convertible into Network
Associates Common Stock at the rate of 8.538 shares (after giving effect to the
Network Associates 3-for-2 Stock Split) per $1,000 of face amount at maturity,
which equates to an initial conversion price of $45.80 per share (after giving
effect to the Network Associates 3-for-2 Stock Split). The Debentures are
subordinated in right of payment to all existing and future senior indebtedness
and effectively subordinated in right of payment to all indebtedness and other
liabilities of Network Associates' subsidiaries. The Debentures may be redeemed
for cash at the option of Network Associates beginning on 13 February 2003. At
the option of the holder, Network Associates will purchase the Debentures as of
13 February 2003, 13 February 2008 and 13 February 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 an
event that is deemed to constitute a "fundamental change" at a price equal to
the issue price plus accrued original issue discount to the date of redemption,
subject to adjustment.
68
<PAGE> 69
B. FINANCIAL INFORMATION ON NETWORK ASSOCIATES
FINANCIAL STATEMENTS; PUBLICLY AVAILABLE INFORMATION
The financial information for each of the three years ended 31 December
1995, 1996 and 1997, respectively, relating to Network Associates contained in
this section of the document has been extracted from the published audited
financial statements of Network Associates for each of these years. Share and
per share information for these years have not been restated to reflect the
Network Associates 3-for-2 stock split paid on 29 May 1998. The financial
information for the three months ended 31 March 1998 has been extracted from the
unaudited published financial statements of Network Associates for that period.
Network Associates' accounting policies conform to U.S. GAAP and all amounts are
presented in U.S. dollars. Additional financial and other information for
Network Associates can be obtained from Network Associates' reports filed
pursuant to the Exchange Act. The information contained herein is qualified in
its entirety by reference to Network Associates' Annual Report of Form 10-K for
the year ended 31 December 1997 and Network Associates' Quarterly Report on Form
10-Q for the quarter ended 31 March 1998. Network Associates' reports, proxies
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following Regional Offices of the SEC: 7 World
Trade Center, Suite 1300, New York, NY 10048; and 500 West Madison Street, Suite
1400, Chicago, IL 60661. Copies of such material can also be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
Website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov.
UNAUDITED FIRST QUARTER RESULTS FOR THE PERIOD ENDED 31 MARCH 1998
The following sets forth the unaudited quarterly results of Network
Associates for the three months ended 31 March 1998:
69
<PAGE> 70
NETWORKS ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
31 MARCH 31 DECEMBER
1998 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 190,983 $123,494
Marketable securities..................................... 436,474 123,882
Accounts receivable, net of allowances for doubtful
accounts and returns of $4,129 and $3,662 at March 31,
1998 and December 31, 1997............................. 139,624 125,284
Prepaid expenses, taxes and other......................... 74,555 57,612
---------- --------
Total current assets.............................. 841,636 430,272
Marketable securities....................................... 155,001 109,184
Fixed assets, net........................................... 37,241 28,570
Deferred taxes.............................................. 12,633 16,173
Intangibles and other assets................................ 16,925 17,732
---------- --------
Total assets...................................... $1,063,436 $601,931
========== ========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 22,682 $ 18,439
Accrued liabilities....................................... 129,374 141,083
Deferred revenue.......................................... 77,420 69,464
---------- --------
Total current liabilities......................... 229,476 228,986
Deferred revenue and taxes, less current portion.......... 14,512 13,186
Long term debt and other liabilities...................... 354,663 --
---------- --------
Total liabilities................................. 598,651 242,172
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized: 5,000,000 shares
Common stock, $.01 par value; authorized: 300,000,000
shares; issued and outstanding: 107,504,225 shares at
March 31, 1998 and 104,881,325 shares at December 31,
1997...................................................... 1,075 1,049
Additional paid-in capital.................................. 253,396 190,643
Retained earnings........................................... 210,314 168,067
---------- --------
Total stockholders' equity........................ 464,785 359,759
---------- --------
Total liabilities and stockholders' equity........ $1,063,436 $601,931
========== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
70
<PAGE> 71
NETWORKS ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
31 MARCH
--------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Net revenue................................................. $188,415 $141,362
Operating costs and expenses:
Cost of net revenue....................................... 34,163 25,514
Research and development.................................. 25,525 17,908
Marketing and sales....................................... 56,556 40,613
General and administrative................................ 11,172 9,534
Amortization of intangibles............................... 792 104
Acquisition and other related costs....................... -- 19,504
-------- --------
Total operating costs and expenses................ 128,208 113,177
-------- --------
Income from operations............................ 60,207 28,185
Interest and other income and expense, net.................. 4,765 2,897
-------- --------
Income before provision for income taxes.................. 64,972 31,082
Provision for income taxes.................................. 23,390 17,811
-------- --------
Net income........................................ $ 41,582 $ 13,271
======== ========
Net income per share -- basic............................... $ 0.39 $ 0.13
-------- --------
Shares used in per share calculation -- basic............... 106,952 101,450
======== ========
Net income per share -- diluted............................. $ 0.37 $ 0.12
======== ========
Shares used in per share calculation -- diluted............. 116,084 108,899
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
71
<PAGE> 72
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
31 MARCH
--------------------
1998 1997
--------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 41,582 $ 13,271
Adjustments to reconcile net income to net cash provided
from operating activities:
Acquired in-process research and development.............. -- 19,504
Depreciation and amortization............................. 3,958 4,602
Interest on convertible notes............................. 2,498 --
Unrealized gain on investments............................ -- (242)
Deferred taxes............................................ 1,457 (3,307)
Changes in assets and liabilities:
Accounts receivable.................................... (14,340) (11,187)
Prepaid expenses, taxes and other...................... (13,268) 5,415
Accounts payable and accrued liabilities............... (7,384) 4,425
Deferred revenue....................................... 13,623 8,604
Other.................................................. 730 (197)
--------- --------
Net cash provided by operating activities......... 28,856 40,888
--------- --------
Cash flows from investing activities:
Purchase of intangibles..................................... 371 (9)
Purchases of investment securities, net..................... (358,408) (17,587)
Additions to fixed assets................................... (12,328) (9,740)
--------- --------
Net cash used in investing activities............. (370,365) (27,336)
--------- --------
Cash flows from financing activities:
Effect of exchange rate fluctuations...................... (1,045) (250)
Sale of convertible debentures............................ 346,284 --
Stock option exercises.................................... 42,761 14,839
Tax benefit from exercise of nonqualified stock options... 20,998 13,825
Repurchase of common stock................................ -- (16,378)
--------- --------
Net cash provided by financing activities......... 408,998 12,036
--------- --------
Net increase in cash and cash equivalents................... 67,489 25,588
Cash and cash equivalents at beginning of period............ 123,494 118,528
--------- --------
Cash and cash equivalents at end of period.................. $ 190,983 $144,116
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
72
<PAGE> 73
NETWORKS ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared by
Network Associates without audit. The consolidated financial statements include
the accounts of Network Associates and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments considered necessary for a fair presentation, have been included.
The results of operations for the three months ended 31 March 1998 are not
necessarily indicative of the results to be expected for the full year or for
any future periods. On 30 April 1998, Network Associates declared a 3-for-2
stock split effected through a stock dividend paid on 29 May 1998, as one share
of Network Associates Common Stock for every two shares of Network Associates
Common Stock outstanding. All per share data contained herein have been restated
to reflect the increased number of shares outstanding.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the AICPA issued Statement of Position No. 97-2 (SOP
97-2)"Software Revenue Recognition", which Network Associates has adopted for
transactions entered into during the year beginning 1 January 1998. SOP 97-2
provides guidance for recognizing revenue on software transactions and
supersedes previous guidance provided by SOP91-1, "Software Revenue
Recognition." Under SOP 97-2, revenue from product licenses is recognized when a
signed agreement or other persuasive evidence of an arrangement exists, the
software or system has been shipped (or software has been electronically
delivered), the license fee is fixed and determinable, and collection of the
resulting receivable is probable. For contracts with multiple
elements/obligations, (e.g. software products, upgrades/enhancements,
maintenance and services), revenue is allocated to each element of the
arrangement based on Network Associates' evidence of fair value as determined by
the amount charged when the element is sold separately. Maintenance revenue for
providing product updates and customer support is deferred and recognized
ratably over the service period. Revenue on rental units under operating leases
and service agreements is recognized over the term of the rental agreement or
the period during which services are expected to be performed. Revenue generated
from products sold through traditional channels where the right of return exists
is reduced by reserves for estimated sales returns.
In March 1998, the AICPA issued Statement of Position No. 98-4 (SOP 98-4),
"Deferral of the Effective Date a Provision of SOP 97-2, Software Revenue
Recognition." SOP 98-4 defers, for one year, the application of certain passages
in SOP 97-2, which limit what is considered vendor-specific objective evidence
(VSOE) necessary to recognize revenue for software licenses in multiple-element
arrangements when undelivered elements exist. Additional guidance is expected to
be provided prior to adoption of any resulting final amendments related to the
deferred provisions of SOP 97-2. Because of the uncertainties related to the
outcome of these proceedings, the impact, if any, on future financial results of
Network Associates is not currently determinable. Adoption of the remaining
provisions of SOP 97-2 as amended, did not have a material impact on revenue
recognition during the first quarter of 1998.
Network Associates has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective 1
January, 1998. This statement requires the disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as net income plus revenues, expenses, gains and
losses that, under generally accepted accounting principles, are excluded from
net income. The components of comprehensive income, which are excluded from net
income, are
73
<PAGE> 74
NETWORKS ASSOCIATES, INC.
NOTICE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(UNAUDITED)
not significant individually or in aggregate, and therefore, no separate
statement of comprehensive income has been presented.
In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information", which requires companies to report certain
information about operating segments, including certain information about their
products, services, the geographic areas in which they operate and their major
customers. This statement supersedes FASB Statements Nos. 14, 18, 24 and 30.
SFAS 131 is effective for financial statements for fiscal years beginning after
15 December 1997. Network Associates is evaluating the requirements of SFAS 131
and the effects, if any, on Network Associates' current reporting and
disclosures.
3. NET INCOME PER SHARE
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net income
per share calculations is provided as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
31 MARCH
------------------
1998 1997
------- -------
<S> <C> <C>
Numerator -- basic
Net income............................................. $41,582 $13,271
------- -------
Numerator -- diluted
Net income............................................. $41,582 $13,271
Interest on convertible debentures, net of tax......... 1,594 --
------- -------
Net income available to common stockholders............ $43,176 $13,271
======= =======
Denominator -- basic
Basic weighted average common shares outstanding....... 106,952 101,450
======= =======
Denominator -- diluted
Basic weighted average common shares outstanding....... 106,952 101,450
Effect of dilutive securities:
Common stock options................................... 9,132 7,449
------- -------
Diluted weighted average shares........................ 116,084 108,899
======= =======
Net income per share -- basic.......................... $ 0.39 $ 0.13
======= =======
Net income per share -- diluted........................ $ 0.37 $ 0.12
======= =======
</TABLE>
74
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
AUDITED FINANCIAL STATEMENTS
To the Stockholders
Networks Associates, Inc.
Santa Clara, California
We have audited the accompanying consolidated balance sheets of Networks
Associates Inc., (formerly McAfee Associates, Inc.) and subsidiaries as of 31
December 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended 31 December 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Network
Associates Inc. and subsidiaries as of 31 December 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended 31 December 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
20 January 1998, except for the matters discussed in Notes 14 and 16 as to which
the date is 13 February 1998.
75
<PAGE> 76
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
31 DECEMBER
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $123,494 $125,141
Marketable securities..................................... 123,882 134,029
Accounts receivable, net of allowance for doubtful
accounts and returns of $3,662 in 1997, $4,077 in
1996................................................... 125,284 77,391
Prepaid expenses, taxes and other......................... 57,612 31,420
-------- --------
Total current assets.............................. 430,272 367,981
Marketable securities....................................... 109,184 46,483
Fixed assets, net........................................... 28,570 28,363
Deferred taxes.............................................. 16,173 12,088
Intangible and other assets................................. 17,732 2,841
-------- --------
Total assets...................................... $601,931 $457,756
======== ========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 18,439 $ 33,552
Accrued liabilities....................................... 141,083 36,360
Deferred revenue.......................................... 69,464 51,398
-------- --------
Total current liabilities......................... 228,986 121,310
Deferred revenue and taxes, less current portion............ 13,186 7,523
-------- --------
Total liabilities................................. 242,172 128,833
-------- --------
Commitments and contingencies (Notes 7 and 14)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized; 5,000,000
shares; issued and outstanding; one share
Common stock, $.01 par value; authorized; 300,000,000
shares; issued and outstanding; 69,920,883 shares in 1997
and 66,684,176 shares in 1996............................. 699 666
Additional paid-in capital.................................. 191,047 139,263
Other....................................................... (54) 514
Retained earnings........................................... 168,067 188,480
-------- --------
Total stockholders' equity........................ 359,759 328,923
-------- --------
Total liabilities and stockholders' equity........ $601,931 $457,756
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
76
<PAGE> 77
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenue:
Product............................................... $510,770 $343,940 $252,231
Services and support.................................. 101,423 77,854 26,679
-------- -------- --------
Total revenue................................. 612,193 421,794 278,910
-------- -------- --------
Cost of revenue:
Product............................................... 77,669 57,550 37,873
Services and support.................................. 30,547 19,363 10,849
-------- -------- --------
Total cost of revenue......................... 108,216 76,913 48,722
-------- -------- --------
Operating costs and expenses:
Research and development.............................. 85,021 52,244 36,771
Marketing and sales................................... 181,017 122,638 92,295
General and administrative............................ 43,060 30,315 20,134
Amortization of intangibles........................... 858 3,169 1,356
Acquisition and other related costs................... 175,800 30,669 19,936
-------- -------- --------
Total operating costs and expenses............ 485,756 239,035 170,492
-------- -------- --------
Income from operations........................ 18,221 105,846 59,696
Interest and other income, net.......................... 14,743 9,548 8,799
-------- -------- --------
Income before provision for income taxes...... 32,964 115,394 68,495
Provision for income taxes.............................. 61,320 51,284 26,154
-------- -------- --------
Net income (loss)............................. $(28,356) $ 64,110 $ 42,341
======== ======== ========
Net income (loss) per share -- basic.................... $ (0.41) $ 0.97 $ 0.67
======== ======== ========
Shares used in per share calculation -- basic........... 68,748 65,835 63,651
======== ======== ========
Net income (loss) per share -- diluted.................. $ (0.41) $ 0.89 $ 0.62
======== ======== ========
Shares used in per share calculation -- diluted......... 68,748 72,221 68,693
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
77
<PAGE> 78
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL OTHER EARNINGS STOCK TOTAL
------- ------ ---------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, 31 December 1994............................. 62,566 $625 $ 128,896 $ 90 $ 81,642 ($ 8,755) $202,498
Issuance of common stock upon exercise of stock
options............................................ 2,587 26 13,035 -- -- -- 13,061
Issuance of common stock from Employee Stock Purchase
Plan............................................... 174 2 2,386 -- -- -- 2,388
Tax benefit from exercise of nonqualified stock
options............................................ -- -- 14,731 -- -- -- 14,731
Secondary offering costs............................. -- -- (445) -- -- -- (445)
Repurchase of common stock........................... -- -- -- -- -- (30,870) (30,870)
Foreign currency translation......................... -- -- -- (45) -- -- (45)
Net income........................................... -- -- -- -- 42,341 -- 42,341
------- ---- --------- ------- -------- -------- --------
Balances, 31 December 1995............................. 65,327 653 158,603 45 123,983 (39,625) 243,659
Net book value of assets of FSA acquired in issuance
of common stock upon pooling transaction........... -- -- -- -- 387 -- 387
------- ---- --------- ------- -------- -------- --------
Restated balances, 31 December 1995.................... 65,327 653 158,603 45 124,370 (39,625) 244,046
Issuance of common stock upon exercise of stock
options ........................................... 3,329 33 28,534 -- -- -- 28,567
Issuance of common stock from Employee Stock Purchase
Plan............................................... 157 2 3,697 -- -- -- 3,699
Fractional shares returned upon stock split.......... (175) (2) 2 -- -- -- --
Tax benefit from exercise of nonqualified stock
options............................................ -- -- 40,981 -- -- -- 40,981
Foreign currency translation......................... -- -- -- (113) -- -- (113)
Unrealized gain on marketable securities............. -- -- -- 582 -- -- 582
Repurchase of common stock........................... -- -- -- -- -- (52,949) (52,949)
Retirement of treasury stock......................... (1,954) (20) (92,554) -- -- 92,574 --
Net income........................................... -- -- -- -- 64,110 -- 64,110
------- ---- --------- ------- -------- -------- --------
Balances, 31 December 1996............................. 66,684 666 139,263 514 188,480 -- 328,923
Net book value of liabilities of Jade K.K acquired in
issuance of common stock upon pooling
transaction........................................ 336 3 -- -- (1,126) -- (1,123)
Net book value of assets of SHBV acquired in issuance
of common stock upon pooling transaction........... 64 1 -- -- 924 -- 925
Net book value of assets of Helix acquired in
issuance of common stock upon pooling
transaction........................................ 550 6 883 -- 1,720 -- 2,609
------- ---- --------- ------- -------- -------- --------
Restated balances, 31 December 1996.................... 67,634 676 140,146 514 189,998 -- 331,334
Elimination of net loss for Network General for the
quarter ended 31 March 1997........................ 1,705 18 83,711 396 6,425 (79,196) 11,354
Issuance of common stock upon exercise of stock
options............................................ 2,753 28 36,232 -- -- -- 36,260
Issuance of common stock from Employee Stock Purchase
Plan............................................... 366 3 6,925 -- -- -- 6,928
Tax benefit from exercise of nonqualified stock
options............................................ -- -- 39,941 -- -- -- 39,941
Foreign currency translation........................... -- -- -- (1,020) -- -- (1,020)
Unrealized gain on marketable securities............. -- -- -- 56 -- -- 56
Repurchase of common stock........................... (2,537) (26) (115,908) -- -- 79,196 (36,738)
Net loss............................................. -- -- -- -- (28,356) -- (28,356)
------- ---- --------- ------- -------- -------- --------
Balances, 31 December 1997............................. 69,921 $699 $ 191,047 $ (54) $168,067 $ -- $359,759
======= ==== ========= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
78
<PAGE> 79
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (28,356) $ 64,110 $ 42,341
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Acquired in-process research and development............ 75,717 19,504 7,153
Depreciation and amortization......................... 25,436 17,484 12,199
Deferred taxes........................................ (23,593) (4,806) (1,455)
Unrealized gain on investments........................ 56 184 --
Changes in assets and liabilities:
Accounts receivable................................ (46,355) (22,031) (19,230)
Refundable income taxes............................ 1,593 4,195 (5,228)
Prepaids and other assets.......................... (9,017) (2,847) (368)
Accounts payable and accrued liabilities........... 71,815 18,277 9,676
Deferred revenue................................... 23,390 5,254 5,347
--------- --------- ---------
Net cash provided by operating activities........ 90,686 99,324 50,435
--------- --------- ---------
Cash flows from investing activities:
Elimination of Network General cash flow for the quarter
ended 31 March 1997..................................... 14,354 -- --
Purchases of available-for-sale investments............... (785,060) (199,854) (30,800)
Sales of available-for-sale investments................... 768,867 162,332 20,784
Purchases of held-to-maturity investments................. (81,668) (112,062) (204,626)
Sales of held-to-maturity investments..................... 45,307 112,977 213,262
Additions to fixed assets................................. (23,305) (22,657) (16,294)
Net liabilities of Jade K.K. and net assets of SHBV
acquired in pooling transactions........................ (198) -- --
Net assets of Helix Software acquired in pooling
transaction, net of transaction costs................... 2,609 -- --
Acquisition of AIM Technology............................. -- -- (6,501)
Acquisition of Cinco Networks, Inc........................ (25,079) -- --
Acquisition of Compusul................................... (3,350) -- --
Acquisition of 3DV Technology, Inc........................ (20,000) -- --
Acquisition of PGP........................................ (24,974) -- --
Acquisition of Paradigm................................... (1,833) -- --
Purchased intangibles..................................... (374) -- --
Net assets of FSA acquired under pooling transaction...... -- 387 --
--------- --------- ---------
Net cash used in investing activities............ (134,704) (58,877) (24,175)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering
costs................................................... -- -- 232
Proceeds from exercise of stock options................... 43,188 41,057 21,509
Tax benefit from exercise of nonqualified stock options... 39,941 32,107 8,386
Cost of secondary security offering....................... -- -- (445)
Repurchase of common stock................................ (39,738) (52,949) (30,870)
--------- --------- ---------
Net cash provided (used) by financing
activities..................................... 43,391 20,215 (1,188)
--------- --------- ---------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................. (1,020) -- 8
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (1,647) 60,662 25,080
Cash and cash equivalents at beginning of year.............. 125,141 64,479 39,399
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 123,494 $ 125,141 $ 64,479
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes................ $ 14,316 $ 12,610 $ 18,075
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
79
<PAGE> 80
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Networks Associates, Inc. (the Company), formerly McAfee Associates, Inc.,
develops, markets, distributes and supports network security and management
software products. The Company's markets are worldwide and include corporate,
governmental, and institutional users as well as resellers and distributors
throughout the world. Software products and updates are delivered primarily
through electronic distribution under two-year subscription licenses and as
boxed product sold through the retail channel. International sales and support
are provided by subsidiaries in principal European markets and independent
agents and distributors elsewhere internationally. The Company changed its name
to Networks Associates, Inc. in connection with the merger with Network General,
in December 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Certain Risks and Concentrations:
The Company's product revenues are concentrated in the personal computer
software industry which is highly competitive and rapidly changing. Significant
technological changes in the industry or customer requirements, or the emergence
of competitive products with new capabilities or technologies could adversely
affect operating results. In addition, a significant portion of the Company's
revenue and net income is derived from international sales and independent
agents and distributors. Fluctuations of the U.S. dollar against foreign
currencies, changes in local regulatory or economic conditions, piracy or
non-performance by independent agents could adversely affect operating results.
The Company maintains the majority of cash balances and all of its
marketable securities with six financial institutions. The Company invests with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. The Company has significant
amounts receivable from customers across a broad demographic base. Management of
the Company performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts.
Certain of the Company's products contain critical components supplied by a
single or a limited number of third parties. The Company has been required to
purchase and inventory certain of the computer platforms around which it designs
its products so as to ensure an available supply of the product for its
customers. Any significant shortage of these platforms or other components or
the failure of the third party supplier to maintain or enhance these products
could materially adversely affect the Company's results of operations.
80
<PAGE> 81
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign Currency Translation:
The Company considers the local currency to be the functional currency for
its international subsidiaries. Assets and liabilities denominated in foreign
currencies are translated using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average exchange rates prevailing during
the year. Translation adjustments resulting from this process are charged or
credited to equity. Foreign currency transaction gains and losses, which to date
have not been material, are included in the determination of net income.
Revenue Recognition:
Revenue from product licenses is generally recognized when a customer
purchase order has been received, a license agreement has been delivered, the
software or system has been shipped (or software has been electronically
delivered), remaining obligations are insignificant, and collection of the
resulting account receivable is probable. Maintenance revenue for providing
product updates and customer support is deferred and recognized ratably over the
service period. For subscription sales that have the maintenance fee included
with the licensing fee, maintenance revenue is derived based upon the amount
charged for such services when they are sold separately. Revenue from hardware
products is recognized upon shipment subject to a reserve for returns. Revenues
on rental units under operating leases and service agreements are recognized
ratably over the term of the rental or service period.
Revenue generated from products sold through traditional channels where the
right of return exists is reduced by reserves for estimated sales returns. Such
reserves are based on estimates developed by management. As unsold products in
these distribution channels are exposed to rapid changes in consumer preferences
or technological obsolescence due to new operating environments, product updates
or competing products, it is reasonably possible that these estimates will
change in the near term.
Prior to 1 July 1995 revenue from subscription licenses for anti-virus
software was recognized ratably over a two year period as the Company did not
separately sell the product license and maintenance. Effective 1 July 1995, the
Company began to sell these components separately and currently recognizes, upon
the initial sale, 80 per cent. of the total fee as product license revenue and
defers 20 per cent. of the fee as maintenance. The maintenance fee is recognized
over the service period, generally two years. The effect of this change was to
increase 1995 net income by $7.7 million ($0.16 per share).
Advertising:
Advertising costs are expensed as incurred and included in "Marketing and
Sales Expenses."
Research and Development:
Research and development expenditures are charged to operations as
incurred. Under the Company's development process, technological feasibility is
established on completing a working model. Subsequent costs for the Company have
not been significant and all software development costs have therefore been
expensed.
Cash and Cash Equivalents:
Cash equivalents are comprised of highly liquid debt instruments with
original maturities of 90 days or less.
81
<PAGE> 82
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Marketable Securities:
All marketable securities are classified as either available-for-sale or
held-to-maturity. Available-for-sale securities are carried at fair value, and
held-to-maturity securities are stated at cost, adjusted for amortization or
premiums and accretion of discounts to maturity, in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"). Current marketable
securities are those with maturities less than one year from the balance sheet
date. Non-current marketable securities are those with maturities greater than
one year from the balance sheet date. Unrealized gains and losses on marketable
securities classified as available-for-sale, when material, are reported net of
related taxes as a separate component of stockholders' equity. Realized gains
and losses on sales of all such investments are reported in earnings and
computed using the specific identification cost method. No debt or equity
securities were classified as held-to-maturity at 31 December 1997.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material and related manufacturing overhead.
Fixed Assets:
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets is provided using the straight-line method over the estimated useful
lives of the assets (2 to 5 years).
Intangible Assets:
Intangible assets include the estimated fair market values of purchased
technology when the related products or products under development are
considered technologically feasible and goodwill arising from acquisitions and
other intangibles. Intangibles are amortized over their estimated useful lives
(typically three years to five years).
Fair Value of Financial Instruments:
Carrying amounts of the Company's financial instruments including cash and
cash equivalents, marketable securities, accounts receivable, accounts payable
and accrued liabilities approximate fair value due to their short maturities.
Stock Based Compensation:
The Company accounts for stock based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock. The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Net Income Per Share:
Net income (loss) per share has been computed in accordance with SFAS 128.
Basic net income (loss) per share is computed using the weighted average common
shares outstanding during the period. Diluted net income per share is computed
using the weighted average common shares and common equivalent shares
outstanding during the period.
82
<PAGE> 83
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Dividend:
During October 1995 and April and October, 1996, the Company declared and
paid stock dividends of one share of common stock for every two shares of common
stock outstanding. All per share data contained herein has been restated to
reflect the increased number of shares outstanding.
3. BUSINESS COMBINATIONS AND ACQUISITIONS
MERGER WITH NETWORK GENERAL CORPORATION
On 1 December 1997, the Company acquired Network General Corporation
(Network General), a provider of network fault and performance management
solutions for approximately 17.9 million shares of the Company's common stock.
The Company also assumed and exchanged all options to purchase Network General
stock for options to purchase approximately 3.3 million shares of the Company's
common stock. The transaction was accounted for as a pooling of interests and
therefore all prior period financial statements have been restated to include
the results of Network General for all periods presented. On 1 December 1997, in
connection with the merger, McAfee changed its name to Networks Associates, Inc.
Network General had a fiscal year ended 31 March. Restated financial statements
combine Network General results for the fiscal years ended 31 March 1997 and
1996 with the results for the years ended 31 December 1996 and 1995,
respectively. In order to conform Network General's fiscal year end to the
Company's fiscal year end, the consolidated statement of operations for the year
ended 31 December 1997 includes the three months ended 31 March 1997 for Network
General which are also included in the consolidated statement of operations for
the year ended 31 December 1996. Revenue and net loss of Network General for
such period were $68.0 million and $6.4 million, respectively. Stockholders'
equity for the year ended 31 December 1997 has been adjusted to eliminate these
amounts.
Separate and combined results of operations for the periods prior to the
merger are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
31 SEPTEMBER YEAR ENDED 31 DECEMBER
------------ ----------------------
1997 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Revenues:
McAfee...................................... $247,960 $181,126 $ 90,065
Network General............................. 190,928 240,668 188,845
-------- -------- --------
Combined.................................... $438,888 $421,794 $278,910
-------- -------- --------
Net income (loss):
McAfee...................................... $ 67,850 $ 39,017 $ 14,916
Network General............................. (15,310) 25,093 27,425
-------- -------- --------
Combined.................................... $ 52,540 $ 64,110 $ 42,341
-------- -------- --------
Net income (loss) per share:
McAfee...................................... $ 1.26 $ 0.73 $ 0.30
-------- -------- --------
Network General............................. (0.86) 1.32 1.44
-------- -------- --------
Combined.................................... $ 0.73 $ 0.89 $ 0.62
-------- -------- --------
</TABLE>
83
<PAGE> 84
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, 1996 and 1995 the Company acquired other companies or assets
for common stock as poolings of interests or for cash and other consideration in
purchase transactions. The companies acquired in poolings of interests were not
significant and the financial statements were not restated. The following is a
summary of such acquisitions:
<TABLE>
<CAPTION>
COMMON STOCK
ISSUED IN POOLINGS PURCHASE PRICE OF PURCHASE
OF INTEREST TRANSACTIONS
------------------ ------------------------------
<S> <C> <C>
1997
Jade K.K............................ 336,071 shares
Schuijers Holdings B.V.............. 63,721 shares
3DV Technology, Inc................. $20.0 million
Compusul Consultores de Informatica,
Ltd............................... $2.6 million plus $1.0 million
contingently payable
Cinco Networks, Inc................. $26.0 million
Paradigm Agency Pty Ltd............. $2.0 million
Helix Software Company.............. 550,000 shares
Pretty Good Privacy, Inc............ $35 million plus warrants to
purchase 250,000 shares of
Common Stock at $60 per share.
1996
Vycor Corporation................... $9.0 million
Assets acquired from Interactive
Distributed Systems Software
GmbH.............................. $2.1 million
FSA Corporation..................... 534,000 shares
1995
Saber Software Corporation.......... 2,100,000 shares
AIM Technology...................... $7.1 million
IPE................................. $2.5 million
Assurdata........................... $1.6 million plus a warrant to
purchase 33,750 shares of
Common Stock at $11.26 per
share
Distribution rights from three
German distribution entities...... $1.9 million
</TABLE>
Of the total purchase price paid for the acquisitions treated as purchases
in 1997, 1996 and 1995, the Company expensed (primarily as in-process R&D), in
the year acquired, approximately $74.4 million, $9.9 million and $11.4 million,
respectively and capitalized (primarily as developed technology and goodwill)
approximately $11.2 million, $1.2 million and $1.7 million, respectively.
Amounts are being amortized over 3 to 6 years.
84
<PAGE> 85
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MARKETABLE SECURITIES
At 31 December 1997 and 1996, marketable securities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
1997: COST FAIR VALUE GAINS
----- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Available-for-Sale Securities
U.S. Government debt securities.......... $ 6,014 $ 6,021 $ 7
Municipal debt securities................ 245,671 246,049 378
Corporate debt securities................ 35,655 36,273 618
-------- -------- ------
$287,340 $288,343 $1,003
======== ======== ======
</TABLE>
At 31 December 1997, all marketable debt securities have scheduled
maturities of less than three years.
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
1996 COST FAIR VALUE GAINS
---- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Held-to-Maturity Securities
U.S. Government debt securities........... $ 9,955 $ 9,955 $ --
Municipal debt securities................. 74,784 74,890 106
------- ------- ----
$84,739 $84,845 $106
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR VALUE GAINS
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Available-for-Sale Securities
U.S. Government debt securities........... $ 1,002 $ 1,000 $ (2)
Municipal debt securities................. 85,084 85,014 (70)
Corporate debt securities................. 10,171 9,759 (412)
------- ------- -----
$96,257 $95,773 $(484)
======= ======= =====
</TABLE>
5. DERIVATIVES
During fiscal year 1997, the Company began using forward foreign exchange
contracts to hedge certain assets denominated in foreign currencies. For these
instruments, risk reduction is assessed on a transaction basis and the
instruments are designated as, and effective as a hedge and are highly inversely
correlated to the hedged item as required by generally accepted accounting
principles. Gains and losses on these hedges are included in the carrying amount
of the assets and are ultimately recognized in income. If a hedging instrument
ceases to qualify for hedge accounting, it is accounted for on a mark to market
basis and any subsequent gains and losses are recognized currently in income.
The Company does not use any derivatives for trading or speculative purposes.
Forward Exchange Contracts
The Company conducts business globally. As a result, it is exposed to
movements in foreign currency exchange rates. The Company enters into forward
exchange contracts to hedge exposures associated with nonfunctional currency
assets and liabilities denominated in Canadian, Australian and several European
currencies.
85
<PAGE> 86
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company does not generally hedge anticipated foreign currency cash
flows nor does the Company enter into forward contracts for trading purposes.
Gains and losses on the contracts are reported in other income and generally
offset gains or losses from the revaluation of nonfunctional currency assets and
liabilities. The forward contracts range from one to three months in original
maturity. The forward contracts outstanding and their unrealized gains and
(losses) are presented below (in thousands):
<TABLE>
<CAPTION>
NOTIONAL NOTIONAL
VALUE VALUE UNREALIZED
PURCHASED SOLD GAIN/(LOSS)
--------- -------- -----------
<S> <C> <C> <C>
Australian Dollar........................ $ -- $ 866 $ (2)
Canadian Dollar.......................... -- 2,486 8
Dutch Guilder............................ 2,900 -- (23)
Other European Currencies................ -- 8,878 (59)
------ ------- ----
$2,900 $12,230 $(76)
====== ======= ====
</TABLE>
6. BALANCE SHEET DETAIL (IN THOUSANDS)
<TABLE>
<CAPTION>
31 DECEMBER
--------------------
1997 1996
-------- --------
<S> <C> <C>
Fixed assets:
Furniture and fixtures............................. $ 19,321 $ 39,536
Computers, demonstration and rental equipment...... 61,204 19,416
Leasehold improvements............................. 9,026 6,021
-------- --------
89,551 64,973
Less accumulated depreciation and amortization..... (60,981) (36,610)
-------- --------
$ 28,570 $ 28,363
======== ========
Intangibles assets:
Purchased technology............................... $ 6,678 $ 3,516
Other.............................................. 1,261 1,261
Goodwill........................................... 13,285 2,046
-------- --------
21,224 6,823
Less accumulated amortization...................... (7,338) (5,822)
-------- --------
13,886 1,001
Other assets......................................... 3,846 1,840
-------- --------
$ 17,732 $ 2,841
======== ========
Accrued liabilities:
Accrued compensation............................... $ 18,175 $ 12,223
Accrued acquisition and merger costs............... 65,225 2,708
Accrued taxes...................................... 29,298 1,198
Other accrued expenses............................. 28,385 20,231
-------- --------
$141,083 $ 36,360
======== ========
</TABLE>
7. COMMITMENTS
The Company leases its operating facilities under non-cancellable operating
leases through December 2002. In addition, the Company has leased certain
equipment under various leases which expire no later than 1998.
86
<PAGE> 87
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At 31 December 1997, future minimum payments under non-cancellable
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING 31 DECEMBER
-----------------------
<S> <C>
1998..................................................... $ 15,460
1999..................................................... 15,440
2000..................................................... 14,696
2001..................................................... 12,271
2002 and thereafter...................................... 115,306
--------
$173,173
========
</TABLE>
Rent expense for the years ended 31 December 1997, 1996 and 1995 amounted
to $10.0 million, $7.3 million and $5.9 million, respectively.
The Company presently intends to move its headquarters to larger facilities
in Santa Clara, California. To that end, the Company has agreed, as the assignee
of certain rights of the existing tenant, to rent a facility of approximately
200,000 square feet commencing on or about 1 April 1998. The underlying lease is
set to expire in 2013.
8. NETWORK GENERAL SHARE REPURCHASE PROGRAM
In July 1993, the Board of Directors of Network General authorized Network
General to repurchase up to 1,666,800 shares of its common stock on the open
market to satisfy commitments under its stock option and stock purchase plans.
In fiscal year 1996, up to an additional 1,666,800 shares of Network
General common stock were authorized for repurchase for the same purpose. At 1
December 1997, Network General had repurchased and retired 1,954,323 shares at
an aggregate cost of $92,574,000.
9. EMPLOYEE BENEFIT PLANS
401(k) and Profit Sharing Plan:
Under the Company's 401(k) and Profit Sharing Plans, the Board of
Directors, at its discretion, can match employee contributions in an amount not
to exceed 20 per cent. of total compensation. Annual amounts provided by the
Company under the plan to date have not been material.
Employee Stock Purchase Plan:
Under the 1994 Employee Qualified Stock Purchase Plan, the Company can
grant stock purchase rights to all eligible employees during one year offering
periods with exercise dates approximately every six months (beginning each
August and February). The Company has reserved 506,250 shares of common stock
for issuance under the plan. Shares are purchased through employees' payroll
deductions at exercise prices equal to 85 per cent. of the lesser of the fair
market value of the Company's common stock at either the first day of an
offering period or the last day of such offering period. No participant may
purchase more than $25,000 worth of common stock in any one calendar year.
10. STOCKHOLDERS' EQUITY
Preferred Stock:
The Company has authorized 5,000,000 shares of preferred stock, par value
$.01 per share. The Company's Board of Directors has authority to provide for
the issuance of the shares of
87
<PAGE> 88
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred stock in series, to establish from time to time the number of shares
to be included in each such series and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof, without any further vote or action by the
shareholders.
In connection with the acquisition of FSA, the Company issued one share of
Series A preferred stock. 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 common shares issuable in exchange for certain exchangeable non-voting
shares of FSA. At 31 December 1997, 325,062 shares of the Company's common stock
were reserved for conversion.
Stock Option Plans:
In June 1997, the Board of Directors approved the 1997 Stock Incentive Plan
(the "1997 Plan") to replace the 1995 Stock Incentive Plan. Under the 1997 Plan,
the Company has reserved 5,850,000 shares for issuance to employees, officers,
directors, third-party contractors and consultants. The plan provides for an
option price no less than 100 per cent. of the fair market value of the
Company's common stock on the date of grant for incentive stock options granted
to employees and officers (including directors who are also employees) or 85 per
cent. of the fair market value on the date of grant for all others. The options
may be exercisable immediately, or over time, generally vest 25 per cent. one
year after commencing employment or from date of grant and vest thereafter in
monthly increments over three years. All options under the option plan expire
ten years after grant.
Under the amended Stock Option Plan for Outside Directors, the Company has
reserved 421,875 shares for issuance to certain members of its Board who are not
employees of the Company or any affiliated corporation. The plan provides for an
option price at fair market value of the Company's common stock on the date of
grant. The initial grant to each outside director generally vests ratably over a
three-year period. Subsequent option grants will vest after three years from the
date of grant. All options under the option plan expire ten years after grant.
88
<PAGE> 89
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate activity under stock option plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------------------------------
AVAILABLE NUMBER OF PRICE PER AGGREGATE WEIGHTED
FOR GRANT SHARES SHARE PRICE AVG. EX.
---------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balances, 31 December
1994..................... 5,157,492 8,329,889 $ .00 - $24.60 $ 64,076,423 $ 7.69
Additional shares
authorized............... 6,750,000 -- -- -- --
Shares granted............. (7,525,651) 7,525,651 $5.48 - $48.00 114,919,788 $15.27
Shares exercised........... -- (2,586,378) $ .00 - $34.13 (13,061,481) $ 5.05
Shares cancelled........... 1,609,600 (1,723,056) $1.70 - $46.80 (16,620,144) $ 9.65
---------- ---------- ------------
Balances, 31 December
1995..................... 5,991,441 11,546,106 $ .00 - $48.00 149,314,586 $12.93
Shares granted............. (4,197,370) 4,197,370 $1.13 - $65.69 134,948,924 $32.15
Shares exercised........... -- (3,328,493) $0.01 - $48.00 (28,567,332) $ 8.58
Shares cancelled........... 1,528,694 (1,528,694) $1.70 - $60.30 (27,610,011) $18.06
---------- ---------- ------------
Balances, 31 December
1996..................... 3,322,765 10,886,289 $ .01 - $65.69 228,086,167 $20.95
Eliminate duplicate
period................... 55,318 148,985 $0.80 - $60.30 1,017,800 $6.830
Additional shares
authorized............... 7,850,000 -- -- -- --
Shares granted............. (5,973,398) 5,973,398 $0.98 - $60.30 260,853,796 $43.67
Shares exercised........... -- (2,752,673) $0.80 - $60.30 (36,259,606) $12.71
Shares cancelled........... 2,721,278 (2,721,278) $0.98 - $66.63 (76,792,667) $28.22
---------- ---------- ------------
Balances, 31 December
1997..................... 7,975,963 11,534,721 $0.98 - $66.63 $376,905,490 $43.01
========== ========== ============
</TABLE>
At 31 December 1997, a total of 2,963,535 options to purchase common stock
were exercisable at an aggregate average exercise price of $25.66.
The following information regarding the stock option program and employee
stock purchase programs is provided in compliance with SFAS 123, "Accounting for
Stock Based Compensation".
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISABLE EXERCISABLE EXERCISE
EXERCISE PRICES AT 31/12/97 LIFE(YRS) PRICE AT 31/12/97 PRICE
- --------------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.98 - $ 8.37 718,198 6.98 $ 5.50 381,147 $ 5.06
$ 8.89 - $11.11 1,487,544 7.38 $10.00 451,723 $10.17
$12.67 - $20.55 820,316 6.91 $16.88 449,514 $17.15
$20.67 - $31.50 1,131,303 7.76 $24.52 477,187 $24.71
$32.38 - $36.30 708,524 9.07 $35.29 353,484 $35.83
$38.55 - $39.30 946,969 8.82 $38.93 280,078 $38.85
$40.00 - $40.00 1,761,000 9.22 $40.00 4,000 $40.00
$40.25 - $43.95 1,419,522 9.42 $42.65 94,368 $41.47
$44.13 - $48.15 1,182,611 8.52 $46.17 422,399 $46.97
$49.38 - $66.63 1,358,734 9.38 $55.02 49,635 $51.92
---------- ---------
$ 0.98 - $66.63 11,534,721 7.43 $32.97 2,963,535 $25.66
========== =========
</TABLE>
89
<PAGE> 90
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISABLE EXERCISABLE EXERCISE
EXERCISE PRICES AT 31/12/96 LIFE(YRS) PRICE AT 31/12/96 PRICE
- --------------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.80 - $ 6.03 1,700,597 7.55 $ 3.44 643,152 $ 3.28
$ 8.37 - $ 8.37 734,937 8.28 $ 8.37 49,809 $ 8.37
$ 8.89 - $ 9.70 1,437,072 8.53 $ 9.67 110,094 $ 9.69
$10.95 - $20.01 2,243,669 8.03 $14.24 492,451 $13.85
$20.33 - $37.55 2,209,395 8.69 $25.26 311,980 $24.71
$38.10 - $38.55 315,773 9.45 $38.55 33,632 $38.54
$39.15 - $46.80 1,415,462 9.26 $42.64 163,131 $42.38
$47.10 - $48.15 470,613 9.09 $47.90 30,647 $47.98
$49.50 - $65.69 358,771 9.73 $53.59 1,997 $55.94
---------- ---------
$ 0.80 - $65.69 10,886,289 8.47 $20.94 1,836,893 $15.20
========== =========
</TABLE>
The fair market value of options granted has been calculated using the
Black-Scholes option pricing model using the multiple option approach. A typical
option grant vests over a four year period. Parameters for the option analysis
are listed below.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate................................... 5.50% 5.85% 5.39%
Expected life (yrs)....................................... 4 4 4
Volatility................................................ 0.66 0.66 0.66
Dividend yield............................................ 0 0 0
</TABLE>
The weighted average expected life of the option grants was estimated based
on examination of previously exercised options over the life of the program.
Volatility was estimated on a monthly basis since the Company became public in
October of 1992. The average volatility for the twelve months ending December
1997 and 36 month period from January 1995 through December 1997 was 66 per
cent. Since the volatility has been relatively stable one value was selected for
all segments. The Company has not paid a dividend, and has no plans to do so.
The weighted average fair value of options granted in 1997, 1996 and 1995
was $27.85, $17.44 and $10.05, respectively.
The Company has also estimated the fair value of purchase rights issued
under the Employee Stock Purchase Program. Rights under this plan were also
evaluated using the Black-Scholes option pricing model. The Company's plan is
described in Note 7. Purchase periods occur twice yearly and each effectively
contains a 6 and 12 month option.
<TABLE>
<CAPTION>
FEB. 95 AUG. 95 FEB. 96 AUG. 96 FEB. 97 AUG. 97
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Risk Free Interest
Rate............... 6.06% 5.47% 4.84% 5.73% 5.40% 5.44%
Expected Life........ 6, 12 mos 6, 12 mos 6, 12 mos 6, 12 mos 6, 12 mos 6, 12 mos
Volatility........... 0.66 0.66 0.66 0.66 0.66 0.66
Dividend Yield....... -- -- -- -- -- --
</TABLE>
The weighted average fair value of options granted pursuant to the Employee
Stock Purchase Program in 1997, 1996 and 1995 was $16.66, $10.51 and $9.03,
respectively.
90
<PAGE> 91
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following pro forma income information has been prepared following the
provisions of SFAS 123.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net income (loss) -- pro forma
(thousands)............................ $(77,284) $38,993 $33,721
Net income (loss) per share -- diluted --
pro forma.............................. $ (1.12) $ 0.54 $ 0.49
</TABLE>
The impact on pro forma earnings per share and net income in the table
above may not be indicative of the effect in future years as options vest over
several years and the Company continues to grant stock options to new employees.
This policy may or may not continue.
Warrants:
Pursuant to the acquisition of PGP, the Company issued warrants to purchase
250,000 shares of common stock at a price of $60 per share, which expire,
subject to certain extensions, on 5 June 1999, all of which were outstanding at
31 December 1997. In addition, warrants for the purchase of 4,227 shares of
Common Stock issued in connection with the Company's 1995 acquisition of
Assurdata were outstanding at 31 December 1997.
11. PROVISION FOR INCOME TAXES
Taxable income from continuing operations from the years ended 31 December
was earned in the following jurisdictions (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Domestic................................. $16,506 $119,623 $67,073
Foreign.................................. 16,458 (4,229) 1,422
------- -------- -------
$32,964 $115,394 $68,495
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal:
Current payable........................... $24,784 $43,337 $23,114
Deferred.................................. 20,173 (3,856) (2,992)
------- ------- -------
Total federal................... 44,957 39,481 20,122
------- ------- -------
State:
Current payable........................... 6,477 9,878 5,530
Deferred.................................. 2,270 55 (38)
------- ------- -------
Total state..................... 8,747 9,933 5,492
------- ------- -------
Foreign................................... 7,616 1,870 540
------- ------- -------
Provision for income taxes................ $61,320 $51,284 $26,154
======= ======= =======
</TABLE>
91
<PAGE> 92
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of net deferred tax assets at 31 December are as
follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER 1997 1996 1997
- ----------------------- ------- ------- -------
<S> <C> <C> <C>
Deferred revenue.......................... $ 1,387 $ 1,865 $ 4,753
In-process technology..................... 6,190 6,355 6,349
State taxes............................... 1,740 1,631 502
Accrued liabilities and reserves.......... 26,939 8,690 5,292
Depreciation and amortization............. 5,727 3,868 2,927
Subsidiaries operating loss carryover..... 10,597 968 2,472
------- ------- -------
52,580 23,377 22,295
Valuation allowance....................... (7,728) (968) (2,472)
------- ------- -------
$44,852 $22,409 $19,823
======= ======= =======
Current portion........................... $28,679 $10,321 $ 5,794
Non-current portion....................... 16,173 12,088 14,029
------- ------- -------
$44,852 $22,409 $19,823
======= ======= =======
</TABLE>
The valuation allowance relates to the tax benefit of operating losses of
PGP and 3DV. The operating losses are subject to certain annual limitations as a
result of the acquisition and may expire before the Company can utilize them.
Accordingly, a valuation allowance has been established.
Realization of the remaining net deferred tax assets of $44,852,000 as of
31 December 1997 is dependent on generating sufficient taxable income to offset
future deduction of the related items. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
assets will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
U.S. income taxes were not provided for on a cumulative total of
approximately $17,038,000 of undistributed earnings for certain non-U.S.
subsidiaries. The Company intends to reinvest these earnings indefinitely in
operations outside the United States.
The Company's effective tax rate on income before income taxes differs from
the U.S. Federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED 31 DECEMBER 1997 1996 1995
- ----------------------- ----- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory income tax rate............. 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit..... 4.7 5.9 5.1
Non deductible acquisition and other costs......... 159.3 8.5 4.9
Other, net......................................... (13.0) (4.9) (6.8)
----- ---- ----
186.0% 44.5% 38.2%
===== ==== ====
</TABLE>
92
<PAGE> 93
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET INCOME (LOSS) PER SHARE:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net income
(loss) per share calculations is provided as follows (in thousands of U.S.
dollars, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)........................ $(28,356) $64,110 $42,341
======== ======= =======
Net income (loss) available to common
stockholders........................... $(28,356) $64,110 $42,341
======== ======= =======
DENOMINATOR
Basic weighted average common shares
outstanding............................ 68,748 65,835 63,651
Effect of dilutive securities:
Common stock options..................... -- 6,386 5,042
-------- ------- -------
Diluted weighted average common shares... 68,748 72,221 68,693
======== ======= =======
Diluted net income (loss) per share...... (0.41) 0.89 0.62
======== ======= =======
</TABLE>
13. BUSINESS SEGMENT INFORMATION:
The Company operates in one industry segment and markets and services its
products in the United States and in foreign countries through its own direct
sales organization and through independent agents and distributors. In 1997,
foreign operations accounted for approximately 28 per cent. of the Company's net
revenue, but less than 10 per cent. of the Company's net income, and
identifiable assets. No one customer accounted for more than 10 per cent. of net
revenue during fiscal 1997, 1996 and 1995.
Net revenue information by geographic area is as follows (in thousands of
U.S. dollars):
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
North America......................... $437,948 $321,002 $208,495
International......................... 174,245 100,792 70,415
-------- -------- --------
$612,193 $421,794 $278,910
</TABLE>
14. LITIGATION:
On 24 April 1997, the Company 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 the Company.
Symantec alleges that the Company's computer software program called "PC Medic"
copied portions of Symantec's computer software program entitled "CrashGuard."
Symantec's complaint sought injunctive relief and unspecified money damages. On
20 July 1997, Symantec sought leave to amend its complaint to include additional
allegations of copyright infringement and trade secret misappropriation
pertaining to the Company's "VirusScan" product. Symantec sought injunctive
relief and unspecified money damages. On 6 October 1997, the Court issued an
order granting Symantec's motion to amend its complaint and enjoining the
Company 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 or distribution of McAfee's current
93
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NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
product." On 19 December 1997, the Court denied Symantec's motion to enjoin sale
or distribution of the Company's current PC Medic product. On 11 February 1998,
Symantec filed another motion seeking leave to again amend its complaint to
include additional allegations of trade secret misappropriation, interference
with economic advantage and business relations and violations of the Racketeer
Influenced and Corrupt Organization Act ("RICO"), in connection with the alleged
use at the Company by a former Symantec employee of allegedly proprietary
Symantec customer information. Symantec also filed a motion for a preliminary
injunction relating to these new allegations, and has scheduled both motions for
hearing on 15 May 1998. Trial is currently set for September 1998.
On 13 May 1997, Trend Micro, Inc. ("Trend") filed suit in United States
District Court for the Northern District of California against both the Company
and Symantec. Trend alleges that the Company's "WebShield" and "GroupShield"
products infringe a Trend patent which issued on 22 April 1997. Trend's
complaint seeks injunctive relief and unspecified money damages. On 6 June 1997,
the Company filed its answer denying any infringement. The Company also filed a
counterclaim against Trend alleging unfair competition, false advertising, trade
libel, and interference with prospective economic advantage. On 19 September
1997, Symantec filed a motion to sever Trend's action against the Company from
its action against Symantec. The Company did not oppose Symantec's motion to
sever, other than to recommend a joint hearing on patent claim interpretation.
On 19 December 1997, the Court granted Symantec's motion to sever and adopted
the Company's recommendation regarding a joint hearing on patent claim
interpretation. As a result of the Court's decision, Trend's actions against the
Company and Symantec will proceed separately. The exact terms of the severance
order have not yet been approved by the Court, and the Court has yet to reset
key dates for discovery and trial in the two cases. The Company anticipates that
the Court will shortly reset the date for the joint patent claim interpretation
hearing for late June or July, 1998. Thirty days after the joint patent claim
interpretation hearing, the Court has indicated it will set further dates for
discovery and trial.
On 6 May 1997, RSA Data Security, Inc. ("RSA") filed a lawsuit against PGP,
a wholly owned subsidiary of the Company since 9 December 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 22 May
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 9
October 1997. The Court stayed the state court proceedings and ordered the
action to arbitration. The arbitration proceedings are in the preliminary
stages.
On 14 October 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 4 November 1997, PGP moved to stay the federal action, or,
in the alternative, compel it to arbitration. On 23 December 1997, RSA filed a
motion to amend its complaint to include the Company as defendant. PGP's motion
to stay and RSA's motion to amend its complaint are scheduled to be heard by the
federal court in February 1998.
On 15 September 1997, the Company was named as a defendant in a patent
infringement action filed by Hilgraeve Corporation ("Hilgraeve") in the United
States District Court, Eastern District of Michigan. Hilgraeve alleges that the
Company's "VirusScan" product infringes a Hil-
94
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NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
graeve patent which was issued on 7 June 1994. Hilgraeve's action seeks
injunctive relief and unspecified money damages. The case is in discovery.
Although the Company has not been served in any suit, three companies
(including Network Associates Corporation in California and Network Associates,
Inc. in Oregon) have made claims (including various trademark claims) or demands
with respect to the Company's use of the name Network Associates.
While there can be no assurance that the above litigation will not have a
material adverse effect on the Company, management does not expect that the
ultimate costs to resolve these matters will have a material adverse effect on
the Company's consolidated financial position, results of operations, or cash
flow.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", which
requires a separate financial statement showing changes in comprehensive income,
is effective for financial statements issued for fiscal years beginning after 15
December 1997. SFAS 130 requires reclassification of all prior-period financial
statements for comparative purposes. The Company is evaluating alternative
formats for presenting this information, but does not expect this pronouncement
to materially impact the Company's results of operations.
In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information", which requires companies to report certain
information about operating segments, including certain information about their
products, services, the geographic areas in which they operate and their major
customers. This statement supersedes FASB Statements Nos. 14, 18, 24 and 30.
SFAS 131 is effective for financial statements for fiscal years beginning after
15 December 1997. The Company is evaluating the requirements of SFAS 131 and the
effects, if any, on the Company's current reporting and disclosures.
Statement of Position (SOP) 97-2, "Software Revenue Recognition" was issued
in October 1997 and addresses software revenue recognition matters primarily
from a conceptual level and does not include specific implementation guidance.
The SOP supersedes SOP 91-1 and is effective for transactions entered into for
fiscal years beginning after 15 December 1997. Based on its reading and
interpretation of SOP 97-2, the Company believes it is currently in compliance
with the final standard. However, detailed implementation guidelines for this
standard have not yet been issued. Once issued, such detailed implementation
guidance could lead to unanticipated changes in the Company's current revenue
accounting practices, and such changes could be material to the Company's
revenues and earnings.
16. SUBSEQUENT EVENTS:
On 10 February 1998, the Company agreed to issue in a private placement
zero coupon convertible subordinated debentures due in 2018. The debentures,
with an aggregate face amount at maturity of $770 million, are expected to
generate net proceeds to the Company of approximately $293.6 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 per cent. (on a semi-annual bond
equivalent basis). The debentures are convertible into Common Stock at the rate
of 5.692 shares per $1,000 of face amount at maturity, which equates to
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<PAGE> 96
NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
an initial conversion price of $68.70 per share. On such date, the Company also
granted an option to purchase on or prior to 10 March 1998 up to an additional
$115.5 million aggregate principal amount due at maturity of debentures to cover
over-allotments, if any. If such over-allotment option is exercised in full, the
Company would expect to receive additional net proceeds of approximately $44
million (after deducting the fees paid to the initial purchaser of the
debentures but no other expenses of the placement). On 13 February 1998, the
initial purchaser exercised the option in full.
Pending Acquisitions (Unaudited): On 22 February 1998, the Company agreed
to acquire, in a pooling of interest merger, Trusted Information Systems, Inc.
("TIS"), a publicly traded provider of security solutions for the protection of
computer networks. In the acquisition, a wholly owned subsidiary of the Company
will merge with and into TIS. Each outstanding share of TIS common stock will be
converted into 0.323 shares of common stock of the Company. The acquisition,
which is expected to close in the second quarter of 1998, is subject to
customary conditions to closing including TIS stockholder approval and
Hart-Scott-Rodino anti-trust clearance.
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<PAGE> 97
APPENDIX 4
DR SOLOMON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis at Part B of this
Appendix for the nine month periods ended 28 February 1998 and 1997 should be
read in conjunction with the condensed unaudited consolidated financial
statements of Dr Solomon's and the related notes referred to at Part B of
Appendix 2 of this document. Such results are not necessarily indicative of the
results to be expected for the full year or any future periods.
The following management's discussion and analysis at Part C of this
Appendix for the financial years ended 31 May 1997, 1996 and 1995 should be read
in conjunction with the audited consolidated financial statements of Dr
Solomon's and the related notes set out at Part B of Appendix 2 of this
document.
The consolidated financial statements have been prepared in accordance with
U.K. GAAP, which differs in certain significant respects from U.S. GAAP. See
Note 22 to the audited consolidated financial statements.
PART A
OVERVIEW
Dr Solomon's develops, markets and supports anti-virus software programs
for PCs and PC networks. Dr Solomon's products provide effective and easy to use
software solutions to the risks posed by the proliferation of new and
increasingly sophisticated types of computer viruses. Dr Solomon's principal
product line is the "Dr Solomon's Anti-Virus Toolkit" family of anti-virus
software programs. Since its introduction in 1989, the Toolkit has become one of
the leading global anti-virus software programs. Dr Solomon's sells its products
in the United Kingdom, the United States, Germany, Switzerland and Australia
through direct sales forces, corporate resellers and distributors and elsewhere
internationally through republishers and distributors.
Dr Solomon's recognizes revenues in accordance with the American Institute
of Certified Public Accountant's Statement of Position of Software Revenue
Recognition (SOP 97-2). Dr Solomon's revenues derive from (i) product licenses,
(ii) sales of boxed products and (iii) providing updates to boxed product
purchasers. Dr Solomon's recognizes revenues from product licenses and update
services evenly over the terms of the contracted service (normally one, two or
three years in the case of product licenses and one year in the case of update
services). Dr Solomon's recognizes 50 per cent. of the revenues from sales of
those boxed products which include an update service at the time of sale and the
remaining 50 per cent. evenly over the term of the update service included in a
sale (normally 12 months). For those boxed products not including an update
service, revenue is recognized at time of sale.
Although Dr Solomon's has experienced significant growth in bookings, Dr
Solomon's does not believe that such growth rates are sustainable, particularly
in those markets where growth has been from a small market share. The ratio of
net deferred revenue to bookings depends upon the relative levels of bookings in
previous years and the current year, the mix of sales between product types and
the average length of licenses. Dr Solomon's believes that period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
RECENT DEVELOPMENTS
Dr Solomon's is currently reviewing its results of operations for the three
months ended 31 May 1998. Based on preliminary indications, which are subject to
additional review and
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<PAGE> 98
amendment, bookings for such period were approximately L20.5 million (compared
to L14.8 million for the three months ended 31 May 1997). Dr Solomon's does not
currently expect that its financial results for such period will deviate
materially from historical trends adjusted for this level of bookings.
PART B
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED 28 FEBRUARY 1998
The following table sets forth, for the periods indicated, certain profit
and loss account data.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
28 FEBRUARY
----------------------------------------------------
POUNDS STERLING POUNDS STERLING
IN THOUSANDS 1998 IN THOUSANDS 1997
1998 % 1997 %
--------------- ----- --------------- -----
<S> <C> <C> <C> <C>
Turnover.................... 41,535 100.0 25,432 100.0
Cost of Sales............... (9,481) (22.8) (5,230) (20.6)
------- ----- ------- -----
Gross Profit................ 32,054 77.2 20,202 79.4
Operating Expenses
Distribution Costs.......... (4,863) (11.7) (2,749) (10.8)
Administrative Expenses..... (17,589) (42.4) (11,402) (44.8)
------- ----- ------- -----
Total Operating Expenses.... (22,452) (54.1) (14,151) (55.6)
------- ----- ------- -----
Operating Profit............ 9,602 23.1 6,051 23.8
======= ===== ======= =====
</TABLE>
The following table sets forth, for the periods indicated, certain profit
and loss account data as a percentage of bookings(1).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
28 FEBRUARY
--------------
1998 1997
% %
----- -----
<S> <C> <C>
Bookings.................................................... 100.0 100.0
Net Deferred Revenue........................................ (13.9) (17.3)
Cost of Sales............................................... (19.7) (17.0)
Total Operating Expenses.......................... (46.5) (46.1)
----- -----
Operating Profit............................................ 19.9 19.6
===== =====
</TABLE>
- ---------------
(1) Bookings is not a measurement under either U.S. GAAP or U.K. GAAP. Bookings
represents amounts invoiced to customers with respect to product licenses,
sales of boxed products and the provision of updates to boxed product
purchasers plus royalty income (which is recognized on an accruals basis).
The following table sets forth, for the periods indicated, bookings data by
location of customer.
<TABLE>
<CAPTION>
NINE MONTHS ENDED 28 FEBRUARY
---------------------------------------------------
1998 1997
POUNDS STERLING POUNDS STERLING
IN THOUSANDS % IN THOUSANDS %
--------------- ----- --------------- -----
<S> <C> <C> <C> <C>
United Kingdom................ 25,428 52.7 18,698 60.8
United States................. 9,902 20.5 3,470 11.3
Germany....................... 5,279 11.0 3,455 11.2
Rest of the World............. 7,630 15.8 5,135 16.7
------ ----- ------ -----
Total......................... 48,239 100.0 30,758 100.0
====== ===== ====== =====
</TABLE>
98
<PAGE> 99
TURNOVER
Turnover was L41.5 million for the nine months ended 28 February 1998
compared to L25.4 million for the same period in the 1997 financial year,
representing an increase of 63.3 per cent.
BOOKINGS
Bookings were L48.2 million for the nine months ended 28 February 1998
compared to L30.8 million for the same period in the 1997 financial year,
representing an increase of 56.8 per cent.
Bookings in the United Kingdom increased to L25.4 million for the nine
months ended 28 February 1998 compared to L18.7 million for the same period in
the 1997 financial year, representing an increase of 36.0 per cent. However, the
proportion of total bookings attributable to the United Kingdom fell from 60.8
per cent. to 52.7 per cent. over the same period.
Bookings in the United States increased to L9.9 million for the nine months
ended 28 February 1998 compared to L3.5 million for the same period in the 1997
financial year and these now represent 20.5 per cent. of worldwide bookings
compared to 11.3 per cent. for the same period in the 1997 financial year. The
increase reflected mainly continuing strong growth of the retail boxed product,
but also the contribution from the acquisitions in the second quarter of 1998 of
the Virex and netOctopus product lines.
Bookings in Germany increased by 52.8 per cent. for the nine months ended
28 February 1998 to L5.3 million, representing 11.0 per cent. of worldwide
bookings compared to L3.5 million (11.2 per cent.) for the same period in the
1997 financial year. If the Sterling/Deutsche Mark exchange rates had been the
same for the nine months ended 28 February 1998 as for the same period in the
1997 financial year, the Sterling equivalent of bookings would have been L6.0
million, a 72.3 per cent. increase on the same period in the 1997 financial
year.
Bookings in the rest of the world increased by 48.6 per cent. for the nine
months ended 28 February 1998 to L7.6 million and represented 15.8 per cent. of
worldwide bookings compared to L5.1 million (16.7 per cent.) for the same period
in the 1997 financial year.
NET DEFERRED REVENUE
Net deferred revenue was L6.7 million for the nine months ended 28 February
1998 compared to L5.3 million for the same period in the 1997 financial year. As
a percentage of bookings, net deferred revenue decreased from 17.3 per cent. for
the nine months ended 28 February 1997 to 13.9 per cent. for the same period in
1998, reflecting mainly the increased levels of bookings on retail boxed
products on which revenue is not deferred.
COST OF SALES
Dr Solomon's cost of sales is composed of the cost of freight, media,
software duplication, assembly, manuals and packaging, commissions payable to
U.K. resellers acting as agents of Dr Solomon's and an allowance for
co-operative marketing costs based on bookings for certain distributors and
resellers. All costs are charged to the profit and loss account at the time of
invoicing; none are deferred. Cost of sales as a percentage of bookings
increased from 17.0 per cent. for the nine months ended 28 February 1997 to 19.7
per cent. for the same period in 1998, resulting mainly from the introduction
during the period in 1998 of retail products in the United States and the United
Kingdom on which material and co-operative marketing costs are proportionately
higher.
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<PAGE> 100
OPERATING EXPENSES
Operating expenses, which comprise distribution costs, administrative
expenses and other operating income, were L22.5 million for the nine months
ended 28 February 1998, compared to L14.2 million for the same period in the
1997 financial year, representing an increase of 58.7 per cent. As a percentage
of bookings, operating expenses were 46.5 per cent. for the nine months ended 28
February 1998, compared to 46.1 per cent. for the same period in the 1997
financial year.
Salaries and related costs, the largest component of operating expenses,
were L10.5 million for the nine months ended 28 February 1998, compared to L6.2
million for the same period in the 1997 financial year. As a percentage of
bookings, salaries and related costs were 21.8 per cent. for the nine months
ended 28 February 1998, compared to 20.1 per cent. for the same period in the
1997 financial year.
Another significant component of operating expenses is marketing, primarily
advertising, trade shows and literature, which were L3.9 million for the nine
months ended 28 February 1998, compared to L2.1 million for the same period in
the 1997 financial year. As a percentage of bookings, marketing expenses were
8.1 per cent. for the nine months ended 28 February 1998, compared to 6.8 per
cent. for the same period in the 1997 financial year.
Research and product development expenses, comprising primarily salaries
and benefits for the software development, test and technical support staff plus
depreciation on equipment, were L5.0 million for the nine months ended 28
February 1998, compared to L2.8 million for the same period in the 1997
financial year. As a percentage of bookings, research and product development
expenses were 10.4 per cent. for the nine months ended 28 February 1998,
compared to 9.1 per cent. for the same period in the 1997 financial year.
OPERATING PROFIT
Operating profit was L9.6 million for the nine months ended 28 February
1998, compared to L6.1 million for the same period in the 1997 financial year,
representing an increase of 58.7 per cent. As a percentage of bookings,
operating profit was 19.9 per cent. for the nine months ended 28 February 1998,
compared to 19.6 per cent. for the same period in the 1997 financial year.
INTEREST RECEIVABLE AND INTEREST PAYABLE
Net interest receivable was L1.1 million for the nine months ended 28
February 1998, compared to net interest payable of L0.5 million for the same
period in the 1997 financial year.
TAX ON PROFIT ON ORDINARY ACTIVITIES
Income taxes were L3.8 million for the nine months ended 28 February 1998,
compared to L2.4 million for the same period in the 1997 financial year. Dr
Solomon's effective tax rates were 35.4 per cent. for the nine months ended 28
February 1998, compared to 44.1 per cent. for the same period in the 1997
financial year. The high rates of effective taxation, compared to the statutory
U.K. rate of 33 per cent. (reduced to 31 per cent. with effect from April 1997),
are due primarily to the losses incurred in the United States that could not be
offset against U.K. profits for taxation purposes.
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION
Profit on ordinary activities after taxation was L6.9 million for the nine
months ended 28 February 1998, compared to L3.1 million for the same period in
the 1997 financial year.
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<PAGE> 101
EARNINGS PER SHARE
Earnings per Dr Solomon's Ordinary Share were L0.125 (per Dr Solomon's
ADS -- L0.376) for the nine months ended 28 February 1998, compared to L0.055
(per Dr Solomon's ADS -- L0.165) for the same period in the 1997 financial year.
LIQUIDITY AND CAPITAL RESOURCES
At 28 February 1998, Dr Solomon's had L18.6 million in cash, of which L8
million was held as deposits, all of which mature in three months.
Dr Solomon's movements on cash and deposits for the periods indicated are
summarized in the following table.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
28 FEBRUARY
-------------------
1998 1997
-------- -------
POUNDS STERLING IN
THOUSANDS
<S> <C> <C>
Net cash inflow from operating activities............... 12,521 8,384
Net cash inflow/(outflow) from return on investments and
servicing of finance.................................. 1,118 (529)
Corporation tax paid.................................... (2,875) (1,435)
Net cash outflow from capital expenditure and financial
investment............................................ (6,211) (1,636)
Acquisitions............................................ (11,383) --
Net cash inflow from financing.......................... -- 10,916
------- ------
Movements on cash and deposits.......................... (6,830) 15,700
======= ======
</TABLE>
Net cash inflow from operating activities was L12.5 million for the nine
months ended 28 February 1998, compared to L8.4 million for the same period in
the 1997 financial year. This increased operating cash flow was primarily due to
increased bookings and improved operating results. Accounts receivable, net of
allowance for doubtful amounts, were L14.7 million at 28 February 1998, compared
to L8.6 million at 28 February 1997, representing 64 days bookings and 57 days
bookings respectively.
Investment in fixed assets increased from L1.6 million for the nine months
ended 28 February 1997 to L6.2 million for the same period in the 1998 financial
year, the latter including an investment of L1.7 million in freehold premises
close to Dr Solomon's Aylesbury headquarters to accommodate expansion of its
group development and U.K. sales and technical support staff.
U.S. GAAP RECONCILIATION
During the second quarter of the 1998 financial year, Dr Solomon's
purchased the Virex and netOctopus product lines through its U.S. subsidiary. In
addition, Dr Solomon's purchased the intellectual property rights to the Audit
product which it previously sold under license from the original developers.
Under U.K. GAAP, costs of acquisition in excess of the fair value of the
tangible net assets of acquired businesses at the date of acquisition may be
written off against shareholders equity either in the year of acquisition or in
future years. Dr Solomon's has written off such goodwill, amounting to L13.9
million, against shareholders equity in the year of acquisition.
PART C
RESULTS OF OPERATIONS FOR THE FINANCIAL YEARS ENDED 31 MAY 1997, 1996 AND 1995
The discussion set forth below of the results of operations uses the
audited consolidated results of Dr Solomon's for the years ended 31 May 1997,
1996 and 1995 and includes as a basis of
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<PAGE> 102
comparison the unaudited combined results of S&S International for the period
from 1 June 1995 until 6 February 1996 (the date of the Management Buyout) with
the audited results of Dr Solomon's for the period from 7 February 1996 to 31
May 1996 and the audited results of S&S International for the year ended 31 May
1995. Dr Solomon's believes that this is the most meaningful presentation for
comparative purposes. References to a year or financial year shall, unless
otherwise indicated, be referenced by the financial year ending on 31 May of
that year.
The following table sets forth, for the periods indicated, certain profit
and loss account data as a percentage of turnover.
<TABLE>
<CAPTION>
YEAR ENDED 31 MAY
-----------------------------
1997(%) 1996(%) 1995(%)
------- ------- -------
<S> <C> <C> <C>
Turnover...................................... 100.0 100.0 100.0
Cost of Sales................................. (21.4) (21.1) (20.6)
----- ----- -----
Gross Profit.................................. 78.6 78.9 79.4
Operating Expenses
Distribution Costs.......................... (10.8) (8.5) (9.8)
Administrative Expenses..................... (43.3) (54.3) (59.9)
Other Operating Income...................... -- 0.1 0.2
----- ----- -----
Total Operating Expenses...................... (54.1) (62.7) (69.5)
----- ----- -----
Operating Profit.............................. 24.5 16.2 9.9
===== ===== =====
</TABLE>
The following table sets forth, for the periods indicated, certain profit
and loss account data as a percentage of bookings.
<TABLE>
<CAPTION>
YEAR ENDED 31 MAY
-----------------------------
1997(%) 1996(%) 1995(%)
------- ------- -------
<S> <C> <C> <C>
Bookings...................................... 100.0 100.0 100.0
Net Deferred Revenue.......................... (18.3) (26.2) (19.0)
Cost of Sales................................. (17.5) (15.6) (16.6)
Total Operating Expenses...................... (44.2) (46.3) (56.3)
----- ----- -----
Operating Profit.............................. 20.0 11.9 8.1
===== ===== =====
</TABLE>
The following table sets forth, for the periods indicated, bookings data by
location of customer.
<TABLE>
<CAPTION>
YEAR ENDED 31 MAY
---------------------------------------------------------------------------
POUNDS STERLING 1997 POUNDS STERLING 1996 POUNDS STERLING 1995
IN THOUSANDS % IN THOUSANDS % IN THOUSANDS %
--------------- ----- --------------- ----- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
United Kingdom....... 26,991 59.2 19,420 68.6 10,465 75.0
United States........ 6,645 14.6 2,007 7.1 51 0.4
Germany.............. 4,607 10.1 1,943 6.9 664 4.8
Rest of the World.... 7,327 16.1 4,933 17.4 2,773 19.8
------ ----- ------ ----- ------ -----
Total................ 45,570 100.0 28,303 100.0 13,953 100.0
====== ===== ====== ===== ====== =====
</TABLE>
TURNOVER
Turnover was L37.2 million, L20.9 million and L11.3 million in the 1997,
1996 and 1995 financial years, respectively, representing increases of 78.1 per
cent. and 84.8 per cent. Although these increases were primarily attributable to
increases in turnover in the United Kingdom which increased from L8.6 million to
L22.4 million over this period, the proportion of group turnover attributable to
the United Kingdom fell from 75.8 per cent. to 60.2 per cent. Dr Solomon's U.S.
subsidiary, established in March 1995, increased turnover from L0.2 million in
the 1995 financial year to L4.4 million in 1997.
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<PAGE> 103
Dr Solomon's German subsidiary increased turnover from L0.8 million in the 1995
financial year to L3.2 million in 1997. In the Rest of the World, turnover
increased from L1.7 million in the 1995 financial year to L7.1 million in 1997.
BOOKINGS
Bookings were L45.6 million, L28.3 million and L14.0 million in the 1997,
1996 and 1995 financial years, respectively, representing increases of 61.0 per
cent. and 102.8 per cent. Dr Solomon's believes that the higher rate of growth
in 1996 was due in part to the appearance of macro viruses in late summer 1995
and management has previously indicated that it did not expect this rate of
growth to be sustainable. Prices remained broadly stable throughout this period
and Dr Solomon's believes that the bookings increases reflect growth in the
market plus market share gains in some markets particularly the United States
and Germany.
Bookings in the United Kingdom increased to L27.0 million in the 1997
financial year compared to L19.4 million in 1996 and L10.5 million in 1995,
representing year-on-year increases of 39.0 per cent. and 85.6 per cent.
respectively.
Bookings in the United States increased by 231.1 per cent. to L6.6 million
in 1997 and these represented 14.6 per cent. of worldwide bookings compared to
L2.0 million (7.1 per cent.) for 1996 and L0.1 million (0.4 per cent.) for 1995.
Corporate license revenue grew sequentially each quarter in 1997 and an
increasing proportion of business was derived from the expanding corporate
reseller network. The retail boxed product was launched late in the third
quarter of the 1997 financial year, contributing significantly to bookings in
the fourth quarter.
Bookings in Germany increased by 137.1 per cent. in 1997 to L4.6 million,
although in local currency the increase was 161.6 per cent., reflecting the
strength in sterling compared to the Deutsche mark during such period. This
represented 10.1 per cent. of worldwide bookings and compares with L1.9 million
(6.9 per cent.) in 1996 and L0.7 million (4.8 per cent.) in 1995.
Bookings in the Rest of the World increased by 48.5 per cent. in 1997 to
L7.3 million and represented 16.1 per cent. of worldwide bookings compared to
L4.9 million (17.4 per cent.) in 1996 and L2.8 million (19.8 per cent.) in 1995.
NET DEFERRED REVENUE
Net deferred revenue was L8.4 million, L7.4 million and L2.6 million in the
1997, 1996 and 1995 financial years, respectively. As a percentage of bookings,
net deferred revenue was 18.3 per cent. in 1997, 26.2 per cent. in 1996 and 19.0
per cent. in 1995. The fall between 1996 and 1997 reflected the lower rate of
increase in bookings compared to the previous year on a relatively stable
product mix plus the introduction of retail boxed products on which revenue is
not deferred.
COST OF SALES
Cost of sales was L8.0 million, L4.4 million and L2.3 million in the 1997,
1996 and 1995 financial years, respectively, representing year-on-year increases
of 80.5 per cent. and 91.3 per cent. As a percentage of bookings, cost of sales
was 17.5 per cent. in 1997, 15.6 per cent. in 1996 and 16.6 per cent. in 1995.
The increase in cost of sales in 1997 was due solely to the introduction of the
retail product with its proportionately higher material and co-operative
marketing costs as well as the higher proportion of sales made through agents in
the United Kingdom.
OPERATING EXPENSES
Operating expenses were L20.1 million in 1997, L13.1 million in 1996 and
L7.8 million in 1995, representing year-on-year increases of 53.7 per cent. and
66.9 per cent. As a percentage of bookings, operating expenses were 44.2 per
cent. in 1997, 46.3 per cent. in 1996 and 56.3 per cent. in 1995, reflecting the
operating leverage of the business as bookings grew. This reduction in
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operating expenses as a percentage of bookings slowed in 1997 as Dr Solomon's
increased its investment in product development and quality staff and in its
sales and marketing activities, particularly in the United States. Dr Solomon's
does not anticipate any further reduction in operating expenses as a percentage
of bookings over the next few quarters.
Salaries and related costs, the largest component of operating expenses,
were L8.9 million in 1997, L5.6 million in 1996 and L3.6 million in 1995,
representing year-on-year increases of 58.9 per cent. and 55.6 per cent. This
reflects an increase in average headcount from 145 in 1995 to 205 in 1996 and
308 in 1997. As a percentage of bookings, salaries and related costs were 19.5
per cent. in 1997, 19.8 per cent. in 1996 and 25.8 per cent. in 1995.
Another significant component of operating expenses is marketing, primarily
advertising, trade shows and literature, which were L3.2 million in 1997, L1.8
million in 1996 and L1.3 million in 1995, representing year-on-year increases of
77.8 per cent. and 38.5 per cent. As a percentage of bookings, marketing
expenses were 7.1 per cent. in 1997, 6.4 per cent. in 1996 and 9.3 per cent. in
1995.
Research and product development expenses, comprising primarily salaries
and benefits for the software development, test and technical support staff plus
depreciation on equipment, were L4.0 million in 1997, L2.1 million in 1996 and
L1.2 million in 1995, representing year-on-year increases of 90.5 per cent. and
77.7 per cent. As a percentage of bookings, research and product development
expenses were 8.8 per cent. in 1997, 7.6 per cent. in 1996 and 8.7 per cent. in
1995.
OPERATING PROFIT
Operating profit was L9.1 million in 1997, L3.4 million in 1996 and L1.1
million in 1995. As a percentage of bookings, operating profit was 20.0 per
cent. in 1997, 11.9 per cent. in 1996 and 8.1 per cent. in 1995. The increase in
the level of operating profit in 1997 primarily reflects the 78.1 per cent.
increase in turnover compared to the 53.7 per cent. increase in operating
expenses.
INTEREST RECEIVABLE AND INTEREST PAYABLE
Net interest payable was L0.2 million in 1997 and L0.5 million in 1996
compared to net interest receivable of L0.1 million in 1995. The 1997 figure
reflects net interest payable for the first two quarters in respect of
borrowings incurred in connection with the management buyout of Dr Solomon's in
February 1996 of L0.9 million, offset by interest receivable of L0.7 million for
the latter two quarters.
TAX ON PROFIT ON ORDINARY ACTIVITIES
Income taxes were L3.7 million in 1997, L1.4 million in 1996 and L0.6
million in 1995. Dr Solomon's effective tax rates were 41 per cent. in 1997, 47
per cent. in 1996 and 48 per cent. in 1995. The high rates of effective
taxation, compared to the statutory U.K. rate of 33 per cent.(reduced to 31 per
cent. with effect from April 1997), were due primarily to the losses incurred in
the United States that could not be offset against U.K. profits for taxation
purposes.
PROFITS ON ORDINARY ACTIVITIES AFTER TAXATION
Profit on ordinary activities after taxation was L5.3 million in 1997, L1.5
million in 1996 and L0.7 million in 1995.
EARNINGS PER SHARE
Earnings per Dr Solomon's Ordinary Share were L0.098 (per Dr Solomon's
ADS -- L0.295) for the 1997 financial year.
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LIQUIDITY AND CAPITAL RESOURCES
Dr Solomon's cash flows for the periods indicated are summarized in the
following table.
<TABLE>
<CAPTION>
YEAR ENDED 31 MAY
------------------------------
1997 1996 1995
------- -------- -------
POUNDS STERLING IN THOUSANDS
<S> <C> <C> <C>
Net cash inflow from operating activities... 14,028 10,919 3,189
Net cash (outflow)/inflow from return on
investments and servicing of finance...... (205) (520) 118
Corporation tax paid........................ (1,904) (505) (693)
Net cash outflow from capital expenditure
and financial investment.................. (2,447) (1,286) (1,347)
Acquisitions and disposals.................. -- (22,084) --
Equity dividends paid....................... -- -- (955)
Net cash inflow from financing.............. 10,681 21,560 --
------ ------- ------
Increase in cash and deposits............... 20,153 8,084 312
====== ======= ======
</TABLE>
Net cash inflow from operating activities was L14.0 million in 1997, L10.9
million in 1996 and L3.2 million in 1995. This increased operating cash flow was
primarily due to increased bookings and improved operating margins. Accounts
receivable, net of allowance for doubtful amounts, were L11.1 million at May 31,
1997, compared to L5.7 million at May 31, 1996, representing 60 days bookings
and 57 days bookings respectively.
Net cash outflow from capital expenditure and financial investment was L2.4
million in 1997, L1.3 million in 1996 and L1.3 million in 1995. Investments in
fixed assets were L2.5 million in 1997, L1.7 million in 1996 and L1.4 million in
1995 and this increasing investment trend is expected to continue as staff
levels continue to grow. Acquisition costs in 1996 of L22.1 million related to
the Management Buyout in February 1996.
During the year ended May 31, 1997, Dr Solomon's received L36.1 million
from the issue of ordinary share capital (net of expenses) mainly through a
public offering and has repaid borrowings and redeemed preference shares
totalling L25.4 million. Dr Solomon's held cash and deposit balances of L25.4
million at May 31, 1997. In the 1996 financial year, net cash inflow from
financing activities was L21.6 million, resulting from the issue of ordinary and
preference share capital and from borrowings, both to finance the management
buyout.
EFFECTS OF INFLATION
Dr Solomon's believes that the current level of inflation will not have a
material impact on Dr Solomon's operations or financial condition.
CURRENCY FLUCTUATIONS
Dr Solomon's consolidated financial statements are denominated in pounds
sterling, and changes in the exchange rate between the pound sterling and other
currencies (principally the U.S. dollar and the Deutsche mark) will affect the
translation of the financial results of Dr Solomon's non-U.K. subsidiaries into
pounds sterling for purposes of Dr Solomon's consolidated financial results, and
will also affect the pound sterling value of any amounts distributed to Dr
Solomon's by its subsidiaries. Such changes may also affect Dr Solomon's balance
sheet and changes in assets and liabilities resulting from exchange-rate
movements may result in foreign currency gains and losses being recorded.
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APPENDIX 5
NETWORK ASSOCIATES' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis at Part B of this
Appendix should be read in conjunction with the condensed unaudited consolidated
financial statements for the financial quarter ended 31 March 1998 of Network
Associates and related notes referred to at Part B of Appendix 3 of this
document. Such results are not necessarily indicative of the results to be
expected for the full year or any future periods.
The following management's discussion and analysis at Part C of this
Appendix for the financial years ended 31 December 1997, 1996 and 1995 should be
read in conjunction with the audited consolidated financial statements and
related notes thereto set out at Part B of Appendix 3 of this document.
PART A
OVERVIEW
Network Associates' results of operations can fluctuate significantly on a
quarterly basis. Causes of such fluctuations may include the volume and timing
of new orders and renewals, the introduction of new products, distributor
inventory levels and return rates, company inventory levels, product upgrades or
updates released by Network Associates or its competitors, changes in product
prices, the impact of competitive pricing or products, timely availability and
acceptance of new products, changes in product mix, changes in the market for
anti-virus or network management software, inclusion of network security or
management software functionality in system software, failure to manage growth
and/or potential acquisitions, seasonality, trends in the computer industry,
general economic conditions, extraordinary events such as acquisitions or
litigation and the occurrence of unexpected events. Historically, renewals have
accounted for a significant portion of Network Associates' net revenue, however,
there can be no assurance that Network Associates will be able to sustain
current renewal rates in the future. In addition, revenue generated through
distribution channels tends to be non-linear and this may cause Network
Associates' revenue to fluctuate in the future. Network Associates' results for
any given period should not be relied upon as indicative of future performance.
Network Associates' future earnings and stock price may be subject to
volatility in any period. Any shortfall in various operating results, including
licensing activity, product sales, net revenue, operating income, net income or
net income per share from historical levels or expectations of securities
analysts may have significant adverse effects on the trading price of Network
Associates' stock. Furthermore, other factors such as acquisitions or unforeseen
events in the technology or software industry or in Network Associates' day to
day activities can have a material adverse effect on Network Associates' stock
performance.
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PART B
RESULTS OF OPERATIONS FOR THE FINANCIAL QUARTER ENDED 31 MARCH 1998
The following table sets forth, for the periods indicated, the percentage
of net revenue represented by certain items in Network Associates' statements of
operations for the three months ended 31 March 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
31 MARCH
--------------
1998 1997
----- -----
<S> <C> <C>
Net revenue............................................... 100.0% 100.0%
Operating costs and expenses:
Cost of net revenue....................................... 18.1 18.0
Research and development.................................. 13.6 12.7
Marketing and sales....................................... 30.0 28.7
General and administrative................................ 5.9 6.7
Amortization of intangibles............................... 0.4 0.1
Acquisition and other unusual costs....................... -- 13.8
Total operating costs and expenses.............. 68.0 80.0
----- -----
Income from operations.................................. 32.0 20.0
Other income.............................................. 2.5 2.0
----- -----
Income before income taxes.............................. 34.5 22.0
Provisions for income taxes............................... 12.4 12.6
----- -----
Net Income................................................ 22.1% 9.4%
===== =====
</TABLE>
NET REVENUE
Net revenue includes product, revenues from software support, maintenance
contracts, education and consulting services as well as revenues from those
warranty, customer support and maintenance contracts which are deferred and
recognized over the related service period. Net revenue increased 33 per cent.
to U.S.$188.4 million in the three months ended 31 March 1998 from U.S.$141.4
million in the three months ended 31 March 1997. The increase was primarily due
to increases in the licensing of anti-virus software products to new customers,
renewing expiring anti-virus licenses, continued acceptance of Network
Associates' Sniffer products, continued acceptance of Network Associates'
consulting and support services as well as the growth of the installed customer
base and the resulting renewal of maintenance contracts. The increase is also
attributable to a lesser extent to the licensing of products (other than
anti-virus and Sniffer products) to new and existing customers as well as
expansion into indirect product distribution channels and international markets.
Although Network Associates has had significant growth in net revenue and
net income (before acquisition and other related charges), 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. Due to these factors and
factors such as a maturing anti-virus market and an increasingly higher base
from which to grow, the historic revenue growth rate may 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' change in business strategies, including its newly introduced suite
pricing model and its development of a two-year subscription licensing model for
Network Associates' Sniffer products and a software only version of Network
Associates' Sniffer
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products, could also cause fluctuations in Network Associates' operating results
and could make comparisons with historic operating results and balances
difficult. To more effectively service its customer's evolving needs, Network
Associates also intends to significantly expand and develop its worldwide
professional service organization.
Although Network Associates believes that its products and systems are Year
2000 compliant, Network Associates' revenues and results of operations and
financial condition may be adversely impacted by, among other things, failure of
third party equipment and software utilized by Network Associates to be Year
2000 compliant and the potential adverse impact of Year 2000 compliance on its
customers purchasing patterns and availability of resources to acquire Company
products.
International revenue accounted for approximately 32 per cent. and 27 per
cent. of net revenue for the three months ended 31 March 1998 and 1997,
respectively. The increase in international net revenue as a percentage of net
revenue was due primarily to increased acceptance of Network Associates'
products in international markets and the continued investment in international
operations. 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 affect 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. There are a number of additional risks related
to the export from the United States of Network Associates' PGP and TIS security
products.
COST OF REVENUE
Cost of revenue is comprised of cost of product revenue and cost of
services and support revenue. Cost of product revenue consists primarily of the
cost of media, manuals and packaging for products distributed through
traditional channels, royalties and, with respect to certain Sniffer products,
computer platforms and other hardware components. Cost of services and support
revenue consists principally of salaries and benefits related to employees
providing customer support and consulting and education services. Cost of
revenue increased 34 per cent. to U.S.$34.2 million in the three months ended 31
March 1998 from U.S.$25.5 million in the three months ended 31 March 1997. This
increase is due to an increase in net revenue (particularly product revenues) as
well as the initial investment in the anti-virus professional services
organization.
Network Associates continues to expand its professional services
organization which is expected to cause the cost of services and support revenue
to increase in absolute dollars and may cause such expenses as a percentage of
net revenue to increase. To the extent that the percentage of Network
Associates' net revenue which is generated through traditional distribution
channels increases, Network Associates' cost of net revenue will increase and,
accordingly, gross margins will decrease. In addition, to the extent that
Network Associates increases its reliance on retail distribution, it may
encounter problems related to product returns and limited shelf space
availability. Network Associates is seeking to expand the breadth and depth of
its product suites.
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RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salary and benefits
for Network Associates' development and technical support staff. Research and
development expenses increased 43 per cent. to U.S.$25.5 million in the three
months ended 31 March 1998 from U.S.$17.9 million in the three months ended 31
March 1997. This increase was primarily a result of the expansion of Network
Associates' product development and technical support staff and, to a lesser
extent, the increased use of independent contractors. As a percentage of net
revenue, research and development expenses increased to 14 per cent. in the
three months ended 31 March 1998 from 13 per cent. in the three months ended 31
March 1997.
Network Associates believes that its ability to maintain its
competitiveness will depend in large part upon its ability to enhance existing
products, develop and acquire new products and develop and integrate acquired
products. The market for computer software is characterized by low barriers to
entry and rapid technological change, and is highly competitive with respect to
timely product introductions. The timing and amount of research and development
expenses may vary significantly based upon the number of new products and
significant upgrades under development and products acquired during a given
period.
MARKETING AND SALES
Marketing and sales expenses consist primarily of salary, commissions and
benefits for marketing, sales and customer support personnel and costs
associated with advertising and promotions. Marketing and sales expenses
increased 39 per cent. to U.S.$56.6 million in the three months ended 31 March
1998 from U.S.$40.6 million in the three months ended 31 March 1997. This
increase was primarily the result of an increase in marketing and sales
personnel and, to a lesser extent, increased advertising and promotional
activities required to support increased sales volumes and expanding product
lines. As a percentage of net revenue, marketing and sales expense was 30 per
cent. in the three months ended 31 March 1998 and 29 per cent. in the three
months ended 31 March 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist principally of salary and
benefit costs for administrative personnel and general operating costs. General
and administrative costs increased 17 per cent. to U.S.$11.2 million in the
three months ended 31 March 1998 from U.S.$9.5 million in the three months ended
31 March 1997. The increase is largely a result of an increased staffing to
support operations both domestically and internationally and to accommodate the
growth in revenue. As a percentage of net revenue, general and administrative
expenses were 6 per cent. in the three months ended 31 March 1998 and 7 per
cent. in the three months ended 31 March 1997.
ACQUISITION AND OTHER RELATED COSTS
In March 1997, Network Associates wrote off U.S.$19.5 million of acquired
in-process technology in connection with the acquisition of 3DV Technology, Inc.
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. 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. For
example, in the three months ending 30 June 1998, Network Associates expects to
take significant acquisition related charges in
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connection with the TIS and Magic Solutions acquisitions which were both
consummated in the second quarter ending 30 June 1998. 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 acquisition will gain acceptance in Network Associates' markets or that
Network Associates will obtain the anticipated or desired benefits of such
transactions.
INTEREST AND OTHER INCOME AND EXPENSE, NET
Interest and other income and expense increased to U.S.$4.8 million in the
three months ended 31 March 1998 from U.S.$2.9 million in the three months ended
31 March 1997. This increase was due to the investment of cash generated from
operating activities and the issuance, in February 1998, of debentures with net
proceeds of approximately U.S.$337.6 million. Interest expense increased to
U.S.$2.5 million in the three months ended 31 March 1998 from zero in the three
months ended 31 March 1997. Interest expense relates to the debentures issued in
February 1998.
PROVISION FOR INCOME TAXES
Network Associates' effective tax rate was 36 per cent. and 57 per cent.
for the three months ended 31 March 1998 and 1997 respectively. Excluding the
one time charge for the write off of in-process research and development,
Network Associates' effective tax rate in the three months ended 31 March 1997
would have been 35 per cent.
LIQUIDITY AND CAPITAL RESOURCES
At 31 March 1998, Network Associates had U.S.$191.0 million in cash and
cash equivalents and U.S.$591.5 million in marketable securities, for a combined
total of U.S.$782.5 million.
Net cash provided by operating activities was U.S.$28.9 million and
U.S.$40.9 million in the three months ended 31 March 1998 and 1997 respectively.
Net cash provided by operating activities in the three months ended 31 March
1998 consisted primarily of net income and an increase in deferred revenue which
were offset primarily by an increase in accounts receivable, prepaid and other
assets and accounts payable and accrued liabilities. In the three months ended
31 March 1997, net cash provided by operating activities consisted primarily of
net income before acquisition costs, plus increases in deferred revenue and
prepaid and other assets, offset primarily by increases in accounts receivable
and deferred taxes.
Network Associates expects its accounts receivable balance as a percentage
of sales to increase due to Network Associates' increased emphasis on
international sales (typically having longer payment terms) and Network
Associates' emphasis on licensing its network security and management product
suites to enterprise customers (which complex products may require longer
installation and implementation cycles, in turn resulting in potentially longer
payment cycles). Increased licensing through the indirect channel may also
impact Network Associates' receivable collection experience due to the longer
payment cycle for value added resellers ("VARs") and system integrators. To
address this increase in accounts receivable and to improve cash flow, Network
Associates may, among other things, take actions to encourage earlier payment of
receivables or sell receivables. To the extent that Network Associates'
receivable balance increases, Network Associates will be subject to greater
general credit risks with respect thereto.
Net cash used in investing activities was U.S.$370.4 million and U.S.$27.3
million in the three months ended 31 March 1998 and 1997, respectively,
primarily reflecting purchases of marketable securities and additions to fixed
assets and intangible assets.
Net cash provided by financing activities was U.S.$409.0 million in the
three months ended 31 March 1998, consisting primarily of net proceeds from the
issuance of the Debentures, and the
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proceeds and tax benefits associated with the exercise of non-qualified stock
options. Net cash provided by financing activities was U.S.$12.0 million in the
three months ended 31 March 1997, consisting primarily of the proceeds and tax
benefits associated with the exercise of non-qualified stock options partially
offset by the repurchase of common stock under the Network General stock
repurchase program.
PART C
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED 31 DECEMBER 1997, 1996 AND 1995
The following table sets forth for the periods indicated the percentage of
net revenue represented by certain items in Network Associates' Statements of
Operations.
<TABLE>
<CAPTION>
YEARS ENDED 31
DECEMBER
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenue:
Product............................................ 83% 82% 90%
Services and support............................... 17 18 10
Total revenue.............................. 100 100 100
Cost of revenue:
Product............................................ 13 14 14
Services and support............................... 5 5 4
Total cost of revenue...................... 18 19 18
Operating costs and expenses:
Research and development........................... 14 12 13
Marketing and sales................................ 29 29 33
General and administrative......................... 7 7 7
Amortization of intangibles........................ -- 1 1
Acquisition and other related costs................ 29 7 7
--- --- ---
Total operating costs and expenses......... 79 56 61
Income from operations.......................... 3 25 21
Interest and other income, net....................... 2 2 3
--- --- ---
Income before provision for income taxes........... 5 27 24
Provision for income taxes........................... 10 12 9
--- --- ---
Net income (loss)............................... (5)% 15% 15%
--- --- ---
</TABLE>
NET REVENUE
Net revenue increased 45 per cent. to U.S.$612.2 million in 1997 from
U.S.$421.8 million in 1996, and 51 per cent. from U.S.$278.9 million in 1995.
The increases in net revenue are due to the increases in product revenue and
services and support revenues described below.
Product revenue increased 49 per cent. to U.S.$510.8 million from
U.S.$343.9 million in 1996, and 36 per cent. from U.S.$252.2 million in 1995.
The increase in the growth rate in product revenues was primarily due to
increases in the licensing of anti-virus software products to new customers,
renewing expiring anti-virus licenses, continued acceptance of Network
Associates' Sniffer products and continued acceptance of Network Associates'
consulting and support services. The increase is also attributable to a lesser
extent to the licensing of products (other than anti-virus and Sniffer products)
to new and existing customers as well as expansion into indirect product
distribution channels and international markets. Finally, changes in 1995 in
Network Associates' anti-virus revenue recognition described below contributed
to the increase in product revenue in both 1996 and 1995.
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Prior to 1 July 1995 revenue from subscription licenses for anti-virus
software was recognized ratably over a two year period as Network Associates did
not separately sell the product license and maintenance. Effective 1 July 1995,
Network Associates began to sell these components separately and currently
recognizes, upon the initial sale, 80 per cent. of the total fee as product
license revenue and defers 20 per cent. of the fee as maintenance. The
maintenance fee is recognized over the service period, generally two years.
As a result of the change in revenue recognition for anti-virus licenses in
July 1995, period-to-period results are not directly comparable and should not
be relied upon as indicative of future performance. As a decreasing percentage
of Network Associates' net revenue is attributable to the recognition of
previously deferred anti-virus revenue, Network Associates' net revenue in
future periods may be subject to greater fluctuations. In addition to generating
net revenue through licenses, Network Associates sells certain of its network
security and management products with shrink-wrap licenses through traditional
distribution channels. Network Associates recognizes revenue from sales to
distributors upon shipment, subject to a reserve for returns.
Service revenues increased 30 per cent. to U.S.$101.4 million in 1997 from
U.S.$77.9 million in 1996 which in turn increased 192 per cent. from U.S.$26.7
million in 1995. The increase in services and support revenues resulted from
growth in all categories of service revenues, principally due to the growth of
the installed customer base and the resulting renewal of maintenance contracts.
The high growth from 1995 to 1996 was due primarily to Network Associates
initiating consulting and support services relating to the anti-virus and
network security software products.
International revenue accounted for approximately 28 per cent., 24 per
cent. and 25 per cent. of net revenue for 1997, 1996 and 1995, respectively. The
increase in international net revenue as a percentage of net revenue from 1996
to 1997 was due primarily to increased acceptance of Network Associates'
products in international markets and the continued investment in international
operations. The decrease from 1995 to 1996 was due primarily to domestic revenue
growing at a faster rate than international revenue.
COST OF REVENUE
Cost of revenue increased 41 per cent. to U.S.$108.2 million in 1997 from
U.S.$76.9 million in 1996, which in turn increased by 58 per cent. from
U.S.$48.7 million in 1995. The increases in net revenue are due to the increases
in cost of product revenue and cost of services and support revenue described
below.
Cost of product revenues increased 35 per cent. to U.S.$77.7 million in
1997 from U.S.$57.6 million in 1996. From 1995 to 1996 cost of product revenues
increased 52 per cent. from U.S.$37.9 million. The increase in cost of product
revenues from 1996 to 1997 was primarily due to a corresponding increase in
product revenues. The increase in cost of product revenues from 1995 to 1996 was
due to an increase in product revenues as well as the increase in sales of third
party computer platforms and other hardware components as part of certain
Sniffer products, which have a lower gross margin than Network Associates' other
products. As a percentage of net product revenue, cost of product revenue was 15
per cent. in 1997 and 17 per cent. in 1996 and 15 per cent. in 1995.
In 1997, cost of services and support revenue increased 58 per cent. to
U.S.$30.5 million from U.S.$19.4 million in 1996. From 1995 to 1996, cost of
services and support revenues increased 78 per cent. from U.S.$10.8 million.
These increases are due to increases in net revenue as well as the initial
investment in the anti-virus professional services organization. Costs increased
at a higher rate than revenue due to the shift in the mix of support and
professional services revenue versus revenue from warranty and maintenance
contracts previously deferred. Costs of services and support revenue as a
percentage of net services and support revenue was 30 per cent. in 1997, 25 per
cent. in 1996 and 41 per cent. in 1995.
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<PAGE> 113
RESEARCH AND DEVELOPMENT
Research and development expenses increased 63 per cent. to U.S.$85.0
million in 1997 from U.S.$52.2 million in 1996. From 1995 to 1996, research and
development expenses increased 42 per cent. from U.S.$36.8 million. These
increases were primarily a result of the expansion of Network Associates'
product development and technical support staff and, to a lesser extent, the
increased use of independent contractors. As a percentage of net revenue,
research and development expenses increased to 14 per cent. in 1997 from 12 per
cent. in 1996. Research and development spending decreased as a percentage of
net revenue in 1996 from 13 per cent. in 1995. Although in absolute dollars,
research and development spending increased, as a percentage of net revenue
research and development expenses decreased due to a higher rate of increase in
net revenue.
MARKETING AND SALES
Marketing and sales expenses increased 48 per cent. to U.S.$181.0 million
in 1997 from U.S.$122.6 million in 1996. From 1995 to 1996, marketing and sales
expenses increased 33 per cent. from U.S.$92.3 million in 1995. These increases
were primarily the result of an increase in marketing and sales personnel and,
to a lesser extent, increased advertising and promotional activities required to
support increased sales volumes and expanding product lines. As a percentage of
net revenue, marketing and sales expense was 29 per cent. in 1997 and 1996 a
decrease from 33 per cent. in 1995. Although in absolute dollars, marketing and
sales spending increased from 1995 to 1996, as a percentage of net revenue these
expenses decreased due to a higher rate of growth in net revenue. Network
Associates is seeking to expand the breadth and depth of its product suites.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased 42 per cent. to U.S.$43.1
million in 1997 from U.S.$30.3 million in 1996. From 1995 to 1996, general and
administrative expenses increased 51 per cent. from U.S.$20.1 million. The
increase in 1997 is largely a result of a increased staffing to support
operations both domestically and internationally and to accommodate the growth
in revenue. As a percentage of net revenue, general and administrative expenses
were 7 per cent. in 1997, 1996 and 1995.
ACQUISITION AND OTHER RELATED COSTS
In connection with the Network General merger, Network Associates incurred
direct transaction costs of approximately U.S.$15 million consisting of fees for
investment bankers, attorneys, accountants, financial printing and other related
charges. These costs have been charged to operations in December 1997. Network
Associates has also incurred restructuring charges of approximately U.S.$69.2
million in connection with the merger and the acquisitions of Helix software
company, Paradigm Agency Pty Ltd. and Pretty Good Privacy, Inc. ("PGP"). These
restructuring costs relate to the closure and elimination of duplicate leased
facilities, the write-off of inventory associated with duplicate and
discontinued product, repackaging of product, the write-off of impaired assets
and severance costs related to terminated employees. In addition, U.S.$18
million of restructuring costs relate to the write-off of contingent payments
associated with the acquisition of Cinco Networks, Inc. ("Cinco") by Network
General. Network Associates also wrote off U.S.$73.6 million of acquired
in-process research and development in 1997 in connection with the acquisitions
of PGP, Cinco and 3DV Technology, Inc. ("3DV").
In 1996, Network Associates wrote off U.S.$19.5 million of acquired
in-process technology in connection with the acquisition of 3DV and also
expensed U.S.$9.0 million and U.S.$2.1 million in connection with the
acquisitions of Vycor and Interactive Distributed Systems Software GmbH,
respectively.
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<PAGE> 114
In 1995, Network Associates wrote off U.S.$7.1 million of acquired
in-process technology in connection with the acquisition of AIM Technology and
expensed U.S.$6.8 million, U.S.$1.6 million and U.S.$2.5 million in connection
with the acquisitions of Saber, Assurdata and IPE, respectively. Also in 1995,
Network Associates expensed U.S.$1.9 million in connection with the acquisition
of distribution rights from three German distribution entities.
INTEREST AND MISCELLANEOUS INCOME
Interest and miscellaneous income increased to U.S.$14.7 million in 1997
from U.S.$9.5 million in 1996 and U.S.$8.8 million in 1995. Interest and
miscellaneous income increased from 1996 to 1997 and from 1995 to 1996 due to
the investment of cash generated from operating activities.
PROVISION FOR INCOME TAXES
Network Associates' effective tax rate for 1997, 1996 and 1995 was 186 per
cent. 44 per cent. and 38 per cent., respectively. Network Associates' effective
tax rate for 1997 and 1996 was 38 per cent. and 36 per cent. respectively,
excluding the effect of one-time non-deductible in-process research and
development, merger and other acquisition costs.
LIQUIDITY AND CAPITAL RESOURCES
At 31 December 1997, Network Associates had U.S.$123.5 million in cash and
cash equivalents and U.S.$233.1 million in marketable securities, for a combined
total of U.S.$356.6 million.
Net cash provided by operating activities was U.S.$90.7 million, U.S.$99.3
million and U.S.$50.4 million in 1997, 1996 and 1995, respectively. Net cash
provided by operating activities in 1997 consisted primarily of net income
before acquisition costs, plus increases in accounts payable and accrued
liabilities and deferred revenue which were offset primarily by an increase in
accounts receivable and deferred taxes. In 1996, net cash provided by operating
activities consisted primarily of net income plus accounts payable and accrued
liabilities which was offset primarily by increases in accounts receivable and
deferred taxes. In 1995, net cash provided by operating activities consisted
primarily of net income, accounts payable and accrued liabilities and deferred
revenue offset primarily by increases in accounts receivable and a decrease in
refundable income taxes.
Net cash used in investing activities was U.S.$134.7 million, U.S.$58.9
million and U.S.$24.2 million in 1997, 1996 and 1995, respectively, primarily
reflecting investments in acquisitions and mergers, purchases of marketable
securities and additions to fixed assets and intangible assets.
Net cash provided by financing activities was U.S.$43.4 million and
U.S.$20.2 million in 1997 and 1996 consisting primarily of the proceeds and tax
benefits associated with the exercise of non-qualified stock options. Net cash
used in financing activities in 1995 was U.S.$1.2 million consisting primarily
of the repurchase of common stock offset by the tax benefits associated with the
exercise of non-qualified stock options.
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<PAGE> 115
APPENDIX 6
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
have been prepared to give pro forma effect to the Acquisition using the pooling
of interests method of accounting. All amounts are presented in U.S. dollars.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions deemed probable by Network Associates' management regarding
the Acquisition (for example, 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 Network Associates' 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 condensed balance sheet as of 31 March
1998 gives effect to the Acquisition as if it had occurred on 31 March 1998, and
combines the unaudited consolidated balance sheet of Network Associates as of 31
March 1998 and the unaudited consolidated balance sheet of Dr Solomon's as of 28
February 1998. The unaudited pro forma combined statements of operations for
each of the three years in the period ended 31 December 1997 and the three month
periods ended 31 March 1997 and 1998 have been prepared from the historical
financial statements of Network Associates and Dr Solomon's, and give effect to
the Acquisition as if it had occurred on 1 January 1995. Dr Solomon's fiscal
year ends 31 May. Dr Solomon's plans to change its year end to 31 December,
effective with the closing of the Acquisition. The pro forma statements of
operations for the years ended 31 December 1995, 1996 and 1997 reflect the
statements of operations of Network Associates for the years ended 31 December
1995, 1996 and 1997, respectively, and the profit and loss accounts of Dr
Solomon's based on the aggregation of unaudited quarterly financial information
for each of the years ended 30 November 1995, 1996 and 1997, respectively. The
pro forma statements of operations for the three months ended 31 March 1997 and
1998 reflect the statements of operations of Network Associates for the three
months ended 31 March 1997 and 1998, respectively, and the profit and loss
accounts of Dr. Solomon's for the three months ended 28 February 1997 and 1998.
Network Associates and Dr Solomon's estimate that they will incur direct
transaction costs of approximately $18 million associated with the Acquisition,
consisting of transaction fees for investment bankers, attorneys, accountants,
financial printing and other related charges. These transactions costs will be
charged to operations upon consummation of the Acquisition. The combined company
will incur an additional significant charge to operations, which is not
currently reasonably estimable, to reflect costs associated with integrating the
two companies. This charge has not been reflected in the pro forma condensed
balance sheet or pro forma condensed statements of operations. There can be no
assurance that the combined company will not incur additional charges to reflect
costs associated with the Acquisition or that management will be successful in
its efforts to integrate the operations of the two companies.
The financial information of Dr Solomon's included in these pro forma
condensed financial statements has been derived from the historical financial
statements of Dr Solomon's prepared in accordance with U.K. GAAP and stated in
pounds sterling. U.K. GAAP and U.S. GAAP differ in certain significant respects
which are described in the Notes to the Financial Statements of Dr Solomon's
included at Part B of Appendix 2. These financial statements have been adjusted
to comply with U.S. GAAP and have been translated to U.S. dollars at the rate of
$1.65 per pound sterling in the unaudited pro forma condensed combined balance
sheet as of 31 March 1998, and at the rates of $1.58, $1.56, $1.65 per pound
sterling for the years ended 31 December 1995, 1996 and 1997, respectively, and
at the rates of $1.65 and $1.64 per pound sterling for the three month periods
ended 31 March 1997 and 1998, respectively, in the pro forma combined condensed
statements of operations. Such translations should not be construed as
representations that the
115
<PAGE> 116
pound sterling amounts represent, or have been, or could be converted into U.S.
dollars at that or any other rate. Certain reclassifications have been made to
Dr Solomon's financial statements included in these pro forma financial
statements to conform to Network Associates' presentation.
The following unaudited pro forma combined consolidated financial
information is presented for illustrative purposes only and is not necessarily
indicative of the financial position or results of operations that would have
actually been reported had the Acquisition occurred at the beginning of the
periods presented, nor is it necessarily indicative of future financial position
or results of operations. These unaudited pro forma combined financial
statements are based upon, and should be read in conjunction with, the
respective historical consolidated financial statements and notes thereto of Dr
Solomon's and Network Associates included in this document at Part B of Appendix
2 and Part B of Appendix 3, respectively, and do not incorporate, nor do they
assume any benefits from cost savings or synergies of operations of the combined
companies.
116
<PAGE> 117
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
31 MARCH 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO PRO
NETWORK FORMA FORMA
ASSOCIATES DR SOLOMON'S ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 190,983 $30,671 $ -- $ 221,654
Marketable securities................. 436,474 -- -- 436,474
Accounts receivable, net.............. 139,624 25,839 -- 165,463
Prepaid and other expenses and
deferred taxes...................... 74,555 3,052 -- 77,607
---------- ------- ----------
Total current assets........ 841,636 59,562 -- 901,198
Marketable securities................. 155,001 -- -- 155,001
Fixed assets, net..................... 37,241 12,131 -- 49,372
Intangibles, deferred taxes and other
assets, net......................... 29,558 27,086 -- 56,644
---------- ------- -------- ----------
Total assets................ $1,063,436 $98,779 $ -- $1,162,215
========== ======= ======== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... 22,682 5,608 -- 28,290
Accrued acquisition costs........... -- -- 18,000 18,000
Accrued liabilities................. 129,374 4,677 -- 134,051
Deferred revenue and taxes.......... 77,420 43,548 -- 120,968
---------- ------- -------- ----------
Total current liabilities... 229,476 53,833 18,000 301,309
Long term deferred revenue and
taxes............................ 14,512 9,923 -- 24,435
Long term debt and other
liabilities...................... 354,663 -- -- 354,663
---------- ------- -------- ----------
Total liabilities........... 598,651 63,756 18,000 680,407
Stockholders' equity
Common stock and additional paid-in
capital.......................... 254,471 30,456 -- 284,927
Retained earnings................... 210,314 4,567 (18,000) 196,881
---------- ------- -------- ----------
Total stockholders'
equity.................... 464,785 35,023 (18,000) 481,808
---------- ------- -------- ----------
Total liabilities and
stockholder's equity...... $1,063,436 $98,779 $ -- $1,162,215
========== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
117
<PAGE> 118
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED 31 DECEMBER 31 MARCH
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue..................... $302,245 $466,069 $691,563 $157,275 $212,663
Operating costs & expenses:
Cost of net revenue............. 53,695 85,926 126,474 28,962 39,466
Research & development.......... 38,651 55,931 92,064 19,368 28,403
Marketing & sales............... 96,525 129,932 194,708 43,060 60,358
General & administrative........ 30,352 77,032 63,824 13,715 17,850
Amortization of intangibles..... 1,356 20,554 6,135 2,416 2,280
Acquired in-process research and
development and related
costs......................... 19,936 42,159 185,136 19,504 --
-------- -------- -------- -------- --------
Total operating costs
and expenses........ 240,515 411,534 668,341 127,025 148,357
-------- -------- -------- -------- --------
Income from operations.......... 61,730 54,535 23,222 30,250 64,306
Interest and other income and
expense, net.................. 9,079 7,328 17,054 3,378 5,306
-------- -------- -------- -------- --------
Net income before tax........... 70,809 61,863 40,276 33,628 69,612
Provision for income taxes...... 27,606 54,489 68,628 19,497 24,488
-------- -------- -------- -------- --------
Net income...................... $ 43,203 $ 7,374 $(28,352) $ 14,131 $ 45,124
======== ======== ======== ======== ========
Net income per share............ $ 0.41 $ 0.07 $ (0.24) $ 0.12 $ 0.37
======== ======== ======== ======== ========
Shares used in per share
calculation................... 104,427 107,703 118,401 116,729 122,231
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
118
<PAGE> 119
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
31 December 1995, 1996 and 1997 reflect the combination of the financial
statements of Network Associates for the years ended 31 December 1995, 1996 and
1997 and the aggregation of unaudited quarterly financial statements of Dr
Solomon's for the years ended 31 November 1995, 1996 and 1997. The unaudited pro
forma combined statements of operations for the three month periods ended 31
March 1997 and 1998 reflect the combination of the statements of operations of
Network Associates for the three months ended 31 March 1997 and 1998 and the
statements of operations of Dr Solomon's for the three months ended 28 February
1997 and 1998.
These unaudited pro forma combined financial statements reflect the
issuance of 15,279,387 shares of Network Associates Common Stock in exchange for
an aggregate of 55,310,000 Dr Solomon's Ordinary Shares (in issue as of 31 May
1998) in connection with the Acquisition, based on the Exchange Ratio of 0.27625
per Dr Solomon's Ordinary Share (or 0.82875 per Dr Solomon's ADS) set forth in
the following table:
<TABLE>
<S> <C>
Dr Solomon's Ordinary Shares in issue as of 31 May 1998..... 55,310,000
Exchange Ratio.............................................. 0.27625:1.0
Number of Shares of Network Associates Common Stock
exchanged................................................. 15,279,387
Number of shares of Network Associates Common Stock
outstanding at 31 May 1998................................ 115,053,768
------------
Number of shares of Network Associates Common Stock
outstanding after the completion of the Acquisition....... 130,333,155
============
</TABLE>
The actual number of Network Associates Common Stock to be issued will be
determined on the Effective Date based on the number of Dr Solomon's Ordinary
Shares in issue at that date.
(2) PRO FORMA COMBINED BALANCE SHEET
(a) Network Associates and Dr Solomon's estimate that they will incur
direct transaction costs of approximately $18 million associated with the
Acquisition, consisting of transaction fees for investment bankers, attorneys,
accountants, financial printing and other related charges. These transaction
costs will be charged to operations upon consummation of the Acquisition. These
charges have been reflected in the unaudited pro forma combined balance sheet
but have not been included in the unaudited pro forma combined statements of
operations.
(b) It is expected that following the Acquisition, 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 statement of operations. There can be no assurance that the
combined company will not incur additional charges to reflect costs associated
with the Acquisition or that the combined companies' management will be
successful in its efforts to integrate the operations of the two companies.
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<PAGE> 120
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 Dr Solomon's and their pro forma combined results to reflect the
Acquisition as if it were effected for all periods presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED 31 DECEMBER 31 MARCH
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Revenues:
Network Associates............ $278,910 $421,794 $612,193 $141,362 $188,415
Dr Solomon's.................. 23,335 44,275 79,370 15,913 24,248
-------- -------- -------- -------- --------
$302,245 $466,069 $691,563 $157,275 $212,663
======== ======== ======== ======== ========
Cost of revenues:
Network Associates............ $ 48,722 $ 76,913 $108,216 $ 25,514 $ 34,163
Dr Solomon's.................. 4,973 9,013 18,258 3,448 5,303
-------- -------- -------- -------- --------
$ 53,695 $ 85,926 $126,474 $ 28,962 $ 39,466
======== ======== ======== ======== ========
Research and development:
Network Associates............ $ 36,771 $ 52,244 $ 85,021 $ 17,908 $ 25,525
Dr Solomon's.................. 1,880 3,687 7,043 1,460 2,878
-------- -------- -------- -------- --------
$ 38,651 $ 55,931 $ 92,064 $ 19,368 $ 28,403
======== ======== ======== ======== ========
Sales and marketing:
Network Associates............ $ 92,295 $122,638 $181,017 $ 40,613 $ 56,556
Dr Solomon's.................. 4,230 7,294 13,691 2,447 3,802
-------- -------- -------- -------- --------
$ 96,525 $129,932 $194,708 $ 43,060 $ 60,358
======== ======== ======== ======== ========
General and administrative:
Network Associates............ $ 20,134 $ 30,315 $ 43,060 $ 9,534 $ 11,172
Dr Solomon's.................. 10,218 46,717 20,764 4,181 6,678
-------- -------- -------- -------- --------
$ 30,352 $ 77,032 $ 63,824 $ 13,715 $ 17,850
======== ======== ======== ======== ========
Amortization of intangibles:
Network Associates............ $ 1,356 $ 3,169 $ 858 $ 104 $ 792
Dr Solomon's.................. 0 17,385 5,277 2,312 1,488
-------- -------- -------- -------- --------
$ 1,356 $ 20,554 $ 6,135 $ 2,416 $ 2,280
======== ======== ======== ======== ========
Acquisition and other related
costs:
Network Associates............ $ 19,936 $ 30,669 $175,800 $ 19,504 $ --
Dr Solomon's.................. -- 11,490 9,336 -- --
-------- -------- -------- -------- --------
$ 19,936 $ 42,159 $185,136 $ 19,504 $ --
======== ======== ======== ======== ========
Interest and other income and
expense, net:
Network Associates............ $ 8,799 $ 9,548 $ 14,743 $ 2,897 $ 4,765
Dr Solomon's.................. 280 (2,220) 2,311 481 541
-------- -------- -------- -------- --------
$ 9,079 $ 7,328 $ 17,054 $ 3,378 $ 5,306
======== ======== ======== ======== ========
</TABLE>
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED 31 DECEMBER 31 MARCH
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income taxes:
Network Associates............ $ 26,154 $ 51,284 $ 61,320 $ 17,811 $ 23,390
Dr Solomon's.................. 1,452 3,205 7,308 1,686 1,098
-------- -------- -------- -------- --------
$ 27,606 $ 54,489 $ 68,628 $ 19,497 $ 24,488
======== ======== ======== ======== ========
Net income (loss):
Network Associates............ $ 42,341 $ 64,110 $(28,356) $ 13,271 $ 41,582
Dr Solomon's.................. 862 (56,736) 4 860 3,542
-------- -------- -------- -------- --------
$ 43,203 $ 7,374 $(28,352) $ 14,131 $ 45,124
======== ======== ======== ======== ========
</TABLE>
(4) PRO FORMA NET INCOME (LOSS) 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'
historical statements of operations and the aggregation of Dr Solomon's
unaudited quarterly historical statements of operations.
SHARES USED IN PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED 31 DECEMBER 31 MARCH
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT THE CONVERSION NUMBER)
<S> <C> <C> <C> <C> <C>
Historical -- Network
Associates(1)...................... 95,477 98,753 103,122 101,450 106,952
------- ------- ------- ------- -------
Historical Ordinary Shares -- Dr
Solomon's(2)....................... 32,400 32,400 55,310 55,310 55,310
Conversion Number.................... 0.27625 0.27625 0.27625 0.27625 0.27625
------- ------- ------- ------- -------
8,950 8,950 15,279 15,279 15,279
------- ------- ------- ------- -------
Pro forma combined................... 104,427 107,703 118,401 116,729 122,231
------- ------- ------- ------- -------
</TABLE>
- ---------------
(1) Share information set forth in historical statements of operations for the
years ended 31 December 1995, 1996 and 1997 have been restated to reflect a
3-for-2 stock split in the form of a stock dividend paid on 29 May 1998.
(2) Share numbers are derived from the average of the aggregation of the
unaudited quarterly share numbers for the years ended 30 November 1995, 1996
and 1997.
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<PAGE> 122
APPENDIX 7
RISK FACTORS
The following factors should be considered carefully by holders of Dr
Solomon's Shares in evaluating whether to approve the Acquisition and the
Scheme. These factors should be considered in conjunction with the other
information included in this document.
RISKS RELATED TO THE ACQUISITION
DIFFICULTIES OF INTEGRATING TWO COMPANIES. The successful combination of
Network Associates and Dr Solomon's will require substantial attention from
management. The anticipated benefits of the Acquisition will not be achieved
unless the operations of Dr Solomon's 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, the coordination of their
research and development and sales and marketing efforts and managing a more
geographically diverse business. Shortly after the Acquisition, Network
Associates intends to incorporate Dr Solomon's Anti-Virus Toolkit as part of its
enterprise security suites. To do so will require significant engineering and
product integration and related expense. There can be no assurance as to how
long this process will take to complete or the amount of the related expense.
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. It is expected that the announcement and pendency of the Acquisition
will cause certain customers to defer or alter purchasing decisions. The
diversion of management's attention 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 Dr Solomon's may also be compounded by
Network Associates' recent acquisitions of Magic Solutions and TIS or, subject
to the limitations set out in the Transaction Agreement, any other acquisition
transaction Network Associates may enter into.
In addition, as a cross-border acquisition, the Acquisition entails certain
risks in addition to those normally encountered in a domestic acquisition. These
include the difficulty of integrating employees from a different culture into
the acquiring organization; the need to understand the different incentives that
motivate employees in a non-U.S. company; the greater difficulty of implanting
the acquiring company's "corporate culture" in an organization that is
physically distant; and the difficulty and expense of relocating employees from
one country to another in the event of an internal group restructuring following
an acquisition. These factors can reduce the likelihood of the long-term success
of a cross-border acquisition, as employees of the acquired company may become
disenchanted with the acquiring company and terminate their employment. Network
Associates has never made an acquisition of a company of Dr Solomon's size whose
headquarters and principal operations are outside the United States. Although
Network Associates derives a substantial portion of its revenues from non-U.S.
sales, it has little experience integrating the management, sales, product
development and marketing organizations of a significant non-U.S. business with
its existing operations. Although Dr Solomon's has sales and marketing
operations in the United States and derives a significant portion of its revenue
from U.S. sales, its management and product development personnel are
predominantly based in the United Kingdom, and it derives a substantial portion
of its revenues from sales and services in Europe. There can be no assurance
that Network Associates will be able to successfully integrate the personnel and
operations of Dr Solomon's into the existing Network Associates organization.
RISKS ASSOCIATED WITH FIXED EXCHANGE RATIO. As a result of the Acquisition,
each outstanding Dr Solomon's Ordinary Share and each outstanding Dr Solomon's
ADS (representing three
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<PAGE> 123
Dr Solomon's Ordinary Shares) will be converted into the right to receive
0.27625 and 0.82875, respectively, 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
Dr Solomon's ADSs (which are traded on EASDAQ and NASDAQ). The market value of
the consideration to be received by Dr Solomon's Shareholders in the Acquisition
will, therefore, depend on the market price of Network Associates Common Stock
on and after the Effective Date. In the event that the market price of Network
Associates Common Stock decreases or increases prior to the Effective Date, the
market value of Network Associates Common Stock to be received by Dr Solomon's
Shareholders in the Acquisition would correspondingly decrease or increase. The
market prices of Network Associates Common Stock and Dr Solomon's ADSs are set
out under the heading Market Quotations in Appendix 11 of this document. Dr
Solomon's Shareholders should obtain recent market quotations for Network
Associates Common Stock and Dr Solomon's ADSs. Network Associates Common Stock
and Dr Solomon's ADSs historically have been subject to substantial price
volatility. No assurance can be given as to the market prices of Network
Associates Common Stock or Dr Solomon's ADSs at any time before the Effective
Date or as to the market price of the Network Associates Common Stock at any
time thereafter.
SUBSTANTIAL EXPENSES RESULTING FROM THE ACQUISITION. The negotiation and
implementation of the Acquisition will result in significant pre-tax expenses to
Network Associates and Dr Solomon's. Excluding costs associated with combining
the operations of the two companies, pre-tax expenses are estimated at
approximately $18 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 companies.
POTENTIAL DILUTIVE EFFECT TO STOCKHOLDERS. Although Network Associates
believes that beneficial synergies will result from the Acquisition, there can
be no assurance that combining the two companies' businesses, even if achieved
in an efficient, effective and timely manner, will result in combined results of
operations and financial condition superior to what would have been achieved by
each company independently, or as to the period of time required to achieve such
result. The issuance of new Network Associates Common Stock in connection with
the Acquisition will have the effect of reducing Network Associates' net income
per share and could reduce the market price of the Network Associates Common
Stock unless and until revenue growth or cost savings and other business
synergies sufficient to offset the effect of such issuance can be achieved.
There can be no assurance that holders of Dr Solomon's Shares would not achieve
greater returns on investment if Dr Solomon's were to remain an independent
company.
DEPENDENCE ON KEY PERSONNEL. Network Associates' future success after the
Acquisition depends in significant part upon the continued service of Dr
Solomon's key technical, sales and senior management personnel. The loss of the
services of one or more of these key employees could have a material adverse
effect on Network Associates' business and operating results. Additions of new
and departures of existing personnel, particularly in key positions, can be
disruptive and can result in departures of other existing personnel. As a result
of the Acquisition, and pursuant to the terms of Dr Solomon's Share Option
Schemes, the exercisability of outstanding options under such option schemes
will accelerate in full. Such acceleration, taken in conjunction with the
nominal exercise price payable in connection with a significant majority of
these options, may reduce the incentive for a significant number of Dr Solomon's
employees to remain with Network Associates after the Acquisition.
RISKS RELATED TO BUSINESS AND OPERATIONS
VARIABILITY OF QUARTERLY OPERATING RESULTS. Each of Network Associates' and
Dr Solomon's results of operations have been subject to significant
fluctuations, particularly on a quarterly basis,
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and their future results of operations could fluctuate significantly from
quarter to quarter and from year to year.
Network Associates' and Dr Solomon'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 it 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
Dr Solomon'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 industry
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.
The timing and amount of Network Associates' and Dr Solomon'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 Dr Solomon's
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 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 Dr Solomon's ADSs
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.
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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 Dr Solomon's products as standard features of computer hardware
or of operating system software or other software could render Network
Associates' and Dr Solomon's products obsolete and unmarketable, particularly if
the quality of such functionality were comparable to that of Network Associates'
or Dr Solomon'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 Dr Solomon'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 Dr Solomon's,
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.
NATURE OF VIRUSES. Many computer viruses are designed to circumvent
anti-virus protection devices and sabotage computer systems. Accordingly,
Network Associates and Dr Solomon's products are under constant attack by new
and increasingly sophisticated types of viruses. There can be no assurance that
Network Associates or Dr Solomon's will be able to respond effectively to any
new viruses or that demand for their respective products will not suffer if they
are unable to do so. In addition, there can be no assurance that diskettes
containing their respective software will not become infected by viruses despite
constant vigilance in this regard. Anti-virus software products are attractive
as candidates for carriers of computer viruses.
RISKS ASSOCIATED WITH NETWORK ASSOCIATES' ACQUISITIONS. Network Associates
faces significant risks associated with its recent combination with Network
General and other recent acquisitions (including the acquisitions of PGP and
Helix in December 1997, the acquisitions of Magic Solutions and TIS in April
1998 and the acquisition of Secure Networks, Inc. in May 1998). 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, Helix's utilities
products, Secure's security auditing products, Magic Solutions' helpdesk
software and TIS's firewall and intrusion detection software) 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.
During 1997, Network Associates incurred significant non-recurring charges
associated with Network General combination and the acquisitions of PGP and
Helix. During the second quarter of 1998, Network Associates expects to incur
significant non-recurring charges associated with the acquisition of Magic and
TIS. There can be no assurance that Network Associates will not incur additional
material charges in subsequent quarters to reflect additional costs associated
with these
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transactions and with respect to its name change and the marketing of its
products under the "Network Associates" name.
In addition to its recent acquisitions, Network Associates has consummated
a series of significant additional acquisitions since 1994, including its
international distributors in Australia, Finland, Brazil, Japan and The
Netherlands. 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.
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 it is expected that Network Associates will
continue to grow through such strategic acquisitions in order, among other
things, to expand the breadth and depth of its product suites and to build its
professional services organization. Subject to certain provisions of the
Transaction Agreement, prior to the Effective Date, Network Associates may enter
into agreements or negotiations with respect to one or more acquisitions of
other businesses, products and/or technologies. Consequently, Network Associates
expects that acquisition risks of the type mentioned above will continue in the
future.
RISKS ASSOCIATED WITH FAILURE TO MANAGE GROWTH -- NETWORK
ASSOCIATES. 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 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 the
section headed "Network Associates, dependence on Revenue from Flagship
Anti-Virus and Sniffer Products" below. 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 Service Desk. 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
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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,
Magic Solutions' helpdesk products, TIS firewall and intrusion detection
products and any products acquired in the Acquisition) 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.
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.
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 to replace, or shorten
the life cycles of, Network Associates' existing
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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.
There can be no assurance that (i) Network Associates will be able to
counter challenges to its current products; (ii) Network Associates' future
product offerings will keep pace with the technological changes implemented by
competitors or persons seeking to breach information security; (iii) Network
Associates' products will satisfy evolving preferences of customers and
prospects; or (iv) Network Associates 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 Network Associates' financial condition or results of
operations.
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RAPID TECHNOLOGICAL CHANGE; FREQUENT PRODUCT ENHANCEMENTS; RISKS OF PRODUCT
DEFECTS -- DR SOLOMON'S. The markets for Dr Solomon's software products are
characterized by rapid technological advances, evolving industry standards in
computer hardware and software technology, changes in customer requirements and
frequent new product introductions and enhancements. As a result, Dr Solomon's
future success will depend upon its ability to continue to update its product
line on a timely basis and to develop and introduce new product features and
enhancements that keep pace with technological developments and new competitive
product offerings, satisfy increasingly sophisticated customer requirements and
achieve market acceptance. In particular, Dr Solomon's must continue to
anticipate and respond adequately to the development and proliferation of new
computer viruses and to advances in personal computer operating systems. There
can be no assurance that Dr Solomon's will be successful in developing and
marketing, on a timely and cost-effective basis, fully functional product
enhancements that respond to such factors and achieve market acceptance. Any
failure by Dr Solomon's to respond adequately to new virus threats or changing
market conditions, or significant delays in product development or introduction,
could have a material adverse effect on Dr Solomon's.
Dr Solomon's estimates that the number of computer viruses is currently
increasing at an average rate of more than 200 new viruses per month. To respond
to new viruses Dr Solomon's updates nearly all of its anti-virus software
products at least monthly. This monthly updating process requires significant
software development and distribution resources. Dr Solomon's believes that it
is now possible for virus authors to generate easily vast numbers of new viruses
and to multiply quickly the size of the current virus population. Macro viruses,
in particular, are generally easier to write than other types of viruses and can
generally be written and distributed by users of common application software
packages. If this were to occur over a relatively short time period Dr Solomon's
would likely be required to deploy additional resources to disassemble these
viruses, which might not be offset by a corresponding increase in revenues. In
addition, significant growth in the virus threat could lead to requirements to
deploy additional technical support personnel. In these respects, there can be
no assurance that Dr Solomon's would be able to respond adequately to such a
large number of new viruses. In addition, a large increase in the number of new
viruses could result in the Toolkit requiring significantly greater memory space
on a user's PC or network and requiring several diskettes for distribution and
installation. It is also possible that virus authors could develop virus
techniques that would neutralise or render ineffective anti-virus technologies
currently being used by the Toolkit. Although it is likely that other anti-virus
software vendors would also face similar problems, it is possible that virus
authors could produce viruses targeted to avoid detection by the Toolkit or that
new viruses could be detected by competitive products but not by the Toolkit.
In addition, software programs as complex as those offered by Dr Solomon's
may contain undetected errors or "bugs" when new versions are released which,
despite testing by Dr Solomon's, are discovered only after a product has been
installed and used by customers. For example, because of its strong sense of
obligation to customers, during 1996, Dr Solomon's sent six letters to its
customers warning of serious bugs, in one case resulting in a product recall
from distributors. In 1997, there were various problems associated with the
NetWare Toolkit which resulted in Dr Solomon's assisting customers to recover
lost data.
Dr Solomon's believes that these incidences have been satisfactorily
resolved. However, there can be no assurance that, despite the testing carried
out by Dr Solomon's errors will not be found in Dr Solomon's products. The
occurrence of errors could result in adverse publicity, loss of or delay in
market acceptance or claims by customers against Dr Solomon's, any of which
could have a material adverse effect on Dr Solomon's.
In addition, from time to time, Dr Solomon's issues significant new
releases of its software products to improve performance and enhance
functionality and ease of use. As a result of the complexities inherent in
anti-virus software and the broad functionality and performance demanded by
customers, major new product enhancements can require long development and
testing periods to achieve market acceptance. While Dr Solomon's has on occasion
experienced delays in the
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scheduled introduction of new and enhanced products, to date Dr Solomon's
business has not been materially adversely affected by the release of products
containing errors.
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. 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 Dr Solomon'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 Dr Solomon's 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 Dr Solomon's products will be chosen
by organisations 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 Dr Solomon's expect that
competition will increase.
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, global distribution, breadth of product lines, 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, 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.
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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, Microsoft, Seagate 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 industry, Network
Associates' principal competitors are Security Dynamics Technologies, Inc.
("SDTI"), Cylink Corporation, Entrust Technologies and VeriSign, Inc. Network
Associates' principal competitors in the help desk area are Remedy Corporation
and Software Artistry (recently acquired by Tivoli Systems/IBM). Network
Associates' principal competitor in the software-based network fault and
performance management area 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 industry from Checkpoint Software, Cisco,
SDTI, Microsoft and other vendors in the encryption/firewall area. 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
industry 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 IBM's 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.
COMPETITION -- DR SOLOMON'S. The markets for Dr Solomon's products are
highly competitive and are characterized by constant pressures to update and
enhance Dr Solomon's products to identify and eradicate recently discovered
viruses, to optimize product performance and improve ease of use and to
incorporate new product features and product enhancements. Dr Solomon's primary
competitor is Symantec, vendor of the Norton line of anti-virus software
products. Other direct competitors include both smaller companies such as AVP,
Command Software, FRISK, Norman Data, Sophos and Trend Micro, and divisions of
larger companies such as Computer Associates, Intel Corporation, IBM and
Microsoft. In addition, in the future, vendors of computer hardware, operating
systems or other software products may enhance their products to include
functionality that is currently only provided by anti-virus software utility
products.
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Alternatively, changes in the design of computer hardware or operating
systems could render computers more immune to the threats posed by viruses. In
addition, the personal computer software market has historically been
characterized by low financial barriers to entry.
Many of Dr Solomon's competitors have longer operating histories, greater
name recognition, broader product lines, access to larger customer bases and
significantly greater financial, technical, marketing, distribution and other
resources than Dr Solomon's. 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 Dr
Solomon's. Certain of Dr Solomon's competitors have more diversified product
lines than Dr Solomon's and, therefore, may be able to withstand better any
downturns in the anti-virus software market. Dr Solomon's believes that its
primary competitor, Symantec, recently has been allocating greater resources to
the development of their anti-virus businesses. In addition, certain of Dr
Solomon's competitors may determine, for strategic reasons, to consolidate,
substantially lower the price of their anti-virus software products or bundle
their products with other products, such as hardware products or other software
products. In addition, current or potential competitors may establish financial
or strategic relationships among themselves or with current or potential
customers, resellers or other third parties. For example, IBM and Symantec
recently announced that IBM will resell Symantec's anti-virus products.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share, particularly if large
computer software companies with substantial financial and marketing resources
obtain access to anti-virus software technologies by acquiring smaller
anti-virus software companies.
Internationally, Dr Solomon's operates through 60 international partners
who act as distributors or republishers in those territories where Dr Solomon's
does not have direct operations. It is possible that competitors could acquire
these partners. Such acquisitions may result in the loss of business in that
territory and in additional costs in establishing a new partnership and in
defending the existing business.
There can be no assurance that Dr Solomon's will be able to compete
successfully against current or future competitors or that competitive pressures
faced by Dr Solomon's will not have a material adverse effect on Dr Solomon's.
Dr Solomon's believes that the principal competitive factors in the anti-virus
software market are product performance (the number and types of viruses that
can be detected, the rate of false alarms, speed of operation, and obtrusiveness
in use of system memory and other scarce system resources), price, product
features, breadth of product line, ease of use, customer service and technical
support, supplier reputation and brand recognition. The relative importance of
these factors varies by market. For example, Dr Solomon's believes that
customers in the United States have placed greater emphasis on price, product
features and ease of use (where the Toolkit generally rates less highly than
competitive products) than on product performance (where the Toolkit generally
rates highly). The Toolkit frequently achieves scores of 100 per cent. against
the virus collections of software testers but competing products have recently
been improving their performance in this respect and have been achieving scores
close to the scores of Dr Solomon's. Should competitive pressures in the
industry increase, Dr Solomon's may have to increase its spending on sales,
marketing and research and development as a percentage of net revenues,
resulting in lower profit margins. In addition, aggressive pricing strategies of
competitors, some of whom have significantly greater financial resources than Dr
Solomon's may cause Dr Solomon's to reduce software prices and/or increase sales
and marketing expenses. Also, there can be no assurance that Dr Solomon's
current and potential competitors will not develop anti-virus products that may
be more effective than Dr Solomon's current or future products.
NEED TO DEVELOP ENTERPRISE AND NATIONAL ACCOUNTS SALES FORCE AND SECURITY
PRODUCTS SALES FORCE; RISKS RELATED TO DIRECT SALES FORCE. 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
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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 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 co-ordination 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 and
price reductions on products and, consequently, in reductions in Network
Associates' gross margin and operating profit.
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.
In December 1997, Network Associates changed its legal name to "Networks
Associates, Inc." and has since begun conducting business as "Network
Associates." Three companies have made unresolved claims or demands with respect
to Network Associates' use of the name "Network Associates": (i) Network
Associates, Inc. of Oregon ("NAI-Oregon"); (ii) Network Associates, Inc. of
Kansas ("NAI-Kansas") and (iii) Ronald L. Myers ("Myers"), a California resident
doing business as The Network Associates. Each of these claimants has asserted
that it has exclusive rights to use the "Network Associates" name and that
Network Associates' use of the name constitutes a violation of those rights.
On 26 March 1998, Network Associates commenced a declaratory judgment
action in the United States District Court for the Northern District of
California against the above-cited claimants. Network Associates seeks a
declaration that its use of the "Network Associates" title does not violate the
federal, state or common law rights of any of the defendants. Defendants
NAI-Oregon and NAI-Kansas have since been granted extensions of time in which to
respond to the complaint; defendant Myers has not yet been served.
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On 24 April 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 copied portions of Symantec's computer software program entitled
CrashGuard. Symantec's complaint sought injunctive relief and unspecified money
damages. On 20 July 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 6 October 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 Courts order expressly stated that the
court is not enjoining the sale or distribution of McAfee's current product. On
19 December 1997, the Court denied Symantec's motion to enjoin sale or
distribution of Network Associates current PC Medic product. On 1 April 1998,
Symantec filed an amended complaint including additional allegations of trade
secret misappropriation, unfair competition, interference with economic
advantage and contractual relations and violations of the Racketeer Influenced
and Corrupt Organization Act ("RICO"), in connection with the alleged use by
Network Associates employees of proprietary Symantec customer information. On 10
April 1998, Network Associates moved to dismiss the RICO claims. Symantec also
filed a motion for a preliminary injunction relating to these new allegations
which is scheduled for hearing on 5 June 1998. Trial is currently set for
September 1998.
On 13 May 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 issued on 22 April 1997.
Trend's complaint seeks injunctive relief and unspecified money damages. On 6
June 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 19 September 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 19 December 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. The Court has set the date for the joint patent claim
interpretation hearing for September 1998. Thirty days after the joint patent
claim interpretation hearing, the Court has indicated it will set further dates
for discovery and trial.
On 6 May 1997, RSA Data Security, Inc. ("RSA") filed a lawsuit against PGP,
a wholly owned subsidiary of Network Associates since 9 December 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 RSAs 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 22 May
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 9
October 1997. The Court stayed the state court proceedings and ordered the
action to arbitration.
On 14 October 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 4 November 1997, PGP moved to stay the federal action, or,
in the alternative, compel it to arbitration. On 23 December
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1997, RSA filed a motion to amend its complaint to include Network Associates as
defendant. On 2 March 1998, the court granted PGPs motion to stay the federal
patent action.
On 15 April 1998, RSA filed a patent infringement lawsuit against Network
Associates in the United States District Court for the Northern District of
California, alleging that Network Associates has infringed the same patent as in
the earlier lawsuit against PGP. RSA has stipulated to stay this lawsuit on the
same basis as the prior lawsuit against PGP. All of the above matters involving
RSA were settled at a settlement conference on 29 May 1998.
On 15 September 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 7 June 1994. Hilgraeve's action seeks injunctive relief and
unspecified money damages. The case is in discovery. Discovery is presently
scheduled to be completed by 15 December 1998. There is a status conference
scheduled for 22 September 1998. A trial date has been set for June 1999.
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 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.
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.
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 Network Associates is or may become party which could
have a material adverse effect on Network Associates' business, financial
condition and results of operation.
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
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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.
PROPRIETARY TECHNOLOGY AND RIGHTS -- DR SOLOMON'S. Dr Solomon's regards its
software as proprietary and relies upon a combination of license agreements and
copyrights, trademark and trade secret laws in attempting to protect its
proprietary rights. Dr Solomon's products are not generally copy protected. Dr
Solomon's presently has no patents or patent applications pending and has not
registered any of its copyrights. Dr Solomon's has not registered all of its
trademarks, although it has registered its "Dr Solomon's", "Ring Fence" and
"Anti-Stealth Methodology" trademarks in the United Kingdom and has registered
"Dr Solomon's" in several other European countries, including France, Germany,
Italy, The Netherlands, Spain and Sweden and the United States and has applied
for trademark registration for certain trademarks in several other
jurisdictions, including Chile and Japan. Under U.S. copyright and trademark
law, registration is not a condition of copyright and trademark protection.
Registration is, however, a prerequisite to obtaining certain remedies (e.g.
statutory remedies and attorneys' fees) for infringement and, while an
unregistered copyright or trademark is valid and the owner of such unregistered
copyright or trademark may have a valid cause of action for infringement, such
rights cannot be enforced in the federal courts unless and until registration
has been made. In addition, Dr Solomon's believes that the laws of some foreign
countries, including Mexico and India, either do not protect proprietary rights
as fully as do the laws of the United States or the United Kingdom or offer only
limited, if any, practical protection for those rights. While in most countries,
copyright or trademark registration is not required in order to receive
protection, each country may premise the ability to bring an enforcement action
and certain remedies on compliance with that country's copyright or trademark
laws. Consequently, Dr Solomon's failure to register its copyrights and
trademarks in certain countries may make enforcement of these rights more
difficult and/or reduce the available remedies in any enforcement action.
Dr Solomon's uses a printed "break-the-seal" license for its boxed-product
sales for its corporate license customers. Since its "break-the-seal" licenses
are not signed by the licensees, they may not be enforceable under the laws of
certain jurisdictions. Dr Solomon's generally enters into confidentiality or
license agreements with its employees, consultants and distributors, and
generally controls access to and distribution of its software, documentation and
other proprietary information.
Despite Dr Solomon's efforts to protect its proprietary rights, it may be
possible for unauthorized parties to copy certain aspects of Dr Solomon's
products or to reverse engineer or obtain and use information that Dr Solomon's
regards as proprietary. There can be no assurance that the steps taken by Dr
Solomon's to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or to provide an adequate remedy in the event
of a breach by others. Policing unauthorized use of Dr Solomon's products is
difficult, and although Dr Solomon's is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. It is likely that a substantial number of users of Dr
Solomon's
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products have not paid any registration or license fees to Dr Solomon's. If, as
a result of changing legal interpretations of liability for unauthorized use of
Dr Solomon's software, users were to become less sensitive to avoiding copyright
infringement, it could have a material adverse effect on Dr Solomon's. In
addition, litigation may be necessary in the future to protect and enforce Dr
Solomon's proprietary rights, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on Dr Solomon's.
While Dr Solomon's relies upon a combination of license agreements and
copyright, trademark and trade secret laws as described above, Dr Solomon's
believes that factors such as the superior performance of its products and the
expertise and experience of its personnel are more essential to establishing and
maintaining a technology leadership position.
From time to time, Dr Solomon's receives notices from third parties
claiming infringement by Dr Solomon's products of third party proprietary
rights. Although there are currently no outstanding infringement or invalidity
claims, there can be no assurance that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against Dr Solomon's in the future or that any such
assertions or prosecutions will not have a material adverse effect on Dr
Solomon's. For example, U.S. Patent No. 5,319,776 asserts a patent over "in
transit" virus detection. Dr Solomon's believes that its products do not
infringe this patent. The patent holder has sent a circular to Dr Solomon's
inviting Dr Solomon's to license their technology and has recently taken action
against other anti virus companies on the basis of this patent. There has been
no assertion that Dr Solomon's currently infringes and Dr Solomon's does not
currently intend to license the technology. There can be no assurance, however,
that a claim may not be made in the future. Dr Solomon's expects that software
companies will increasingly be subject to infringement claims as the number of
products and competitors in the anti-virus industry segment grows and the
functionality of products in different industry segments overlaps. For example,
it has been reported recently that Trend Micro has taken legal action against
one of Dr Solomon's competitors claiming infringement of U.S. patent covering
electronic mail interception technology. Any such claim or other claim made
against Dr Solomon's, with or without merit, could result in costly litigation,
cause product shipment delays or require Dr Solomon's to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to Dr Solomon's or at all.
Dr Solomon's licenses certain technology from third parties, including
software that is integrated with internally developed software and used in Dr
Solomon's products to perform key functions. There can be no assurance that
these third party technology licenses will continue to be available to Dr
Solomon's on commercially reasonably terms. The loss of or inability to maintain
any of these technology licenses could result in delays or reductions in product
shipments until equivalent technology is identified, licensed and integrated.
Any such delays or reductions in product shipments could have a material adverse
effect on Dr Solomon's.
RISKS ASSOCIATED WITH INFORMATION SECURITY INDUSTRY. The software security
industry is in an early stage of development. Declines in demand for Dr
Solomon'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 Dr Solomon'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 Dr Solomon's and
Network Associates. Similarly, an actual or perceived breach of network or
computer security at one of Dr Solomon's or Network Associates' customers,
regardless of whether such breach is attributable to Dr Solomon's or Network
Associates' products, could adversely affect the market's perception of them and
their financial condition or results of
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operations. In addition, although the effectiveness of Dr Solomon'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 Dr Solomon's or Network Associates' products, which could have
an adverse effect on Dr Solomon's or Network Associates' 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 Dr Solomon's believe that their products and systems are Year 2000
compliant, Network Associates and Dr Solomon's 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 Dr Solomon's 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 Dr Solomon'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 Dr Solomon's, which
could have a material adverse effect on Network Associates' or Dr Solomon's
businesses, operating results and financial condition.
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APPENDIX 8
FURTHER INFORMATION ON DR SOLOMON'S
1. SHARE CAPITAL
The authorised and issued share capital of Dr Solomon's as at 23 June 1998
was as follows:
<TABLE>
<CAPTION>
AUTHORISED ISSUED AND FULLY PAID
- ------------------- ---------------------
L SHARES L SHARES
- ------- ---------- ------- ------------
<S> <C> <C> <C> <C>
582,318 58,231,800 ordinary shares of 1p each 553,100 55,310,000
ordinary
shares of
1 pence each
</TABLE>
Dr Solomon's Ordinary Shares are traded in the form of American Depositary
Shares, each representing three Dr Solomon's Ordinary Shares, on NASDAQ under
the symbol "SOLLY" and on EASDAQ under the symbol "SOLL". The Dr Solomon's ADSs
are evidenced by Dr Solomon's ADRs issued by The Bank of New York, as Depositary
under a Deposit Agreement dated 2 December 1996 among Dr Solomon's, The Bank of
New York, the registered holders from time to time of Dr Solomon's ADRs and the
owners of a beneficial interest in Dr Solomon's ADRs. The Dr Solomon's ADSs are
registered under the Exchange Act.
2. MATERIAL CHANGES
Save for the effect of the current trading position described in the
Chairman's letter on pages 8 to 11 of this document and as reflected in Section
B of Appendix 2 to this document, there have been no material changes in the
financial or trading position of the Dr Solomon's Group since 31 May 1997, the
date to which the latest audited consolidated accounts were drawn up.
3. MATERIAL CONTRACTS
The following contracts, not being contracts entered into in the ordinary
course of business, have been entered into by members of the Dr Solomon's Group
since 9 June 1996 (being two years prior to the date of the commencement of the
Offer period) and are, or may be, material:
(a) an underwriting agreement dated 25 November 1996 made among Dr
Solomon's (1), Apax U.K. V-A, L.P., Apax U.K. V-B, AP Partners, L.P.,
AP-S&S Partners, L.P., Geoffrey Leary, Keith Perrett, David Stephens and 3i
Group plc ("the Selling Shareholders") (2) and Goldman Sachs & Co. and
Hambrecht & Quist LLC (as representatives of the US Underwriters referred
to in Schedule 1 to such agreement) (3) pursuant to which the US
Underwriters agreed to underwrite the issue and sale by Dr Solomon's of an
aggregate of 2,800,000 Dr Solomon's ADSs and to underwrite the sale by the
Selling Shareholders of an aggregate of 1,200,000 Dr Solomon's ADSs at a
price of $15.81 per Dr Solomon's ADS. The agreement also contains
warranties, representations, undertakings and indemnities given to the US
Underwriters by Dr Solomon's;
(b) an international underwriting agreement dated 25 November 1996
made among Dr Solomon's (1), the Selling Shareholders (as defined in
paragraph (a) above) (2) and Goldman Sachs & Co and Hambrecht & Quist LLC
(as representatives of the International Underwriters referred to in
Schedule 1 to the agreement) (3) pursuant to which the International
Underwriters agreed to underwrite the sale by Dr Solomon's and the Selling
Shareholders of up to 1,955,000 Dr Solomon's ADSs at a price of $15.81 per
Dr Solomon's ADS. The agreement also contains warranties, representations,
undertakings and indemnities given to the International Underwriters by Dr
Solomon's;
(c) an underwriting agreement dated 20 June 1997 made among Dr
Solomon's (1), the Selling Shareholders (as defined in such agreement) (2)
and Goldman, Sachs & Co.,
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Hambrecht & Quist LLC and Robertson, Stephens & Company LLC (as
representatives of the US Underwriters referred to in Schedule 1 to such
agreement) (3) pursuant to which the US Underwriters agreed to underwrite
the sale by the Selling Shareholders of an aggregate of 2,501,529 Dr
Solomon's ADSs at a price of $22.625 per Dr Solomon's ADS. The agreement
also contains warranties, representations, undertakings and indemnities
given to the U.S. Underwriters by Dr Solomon's;
(d) an international underwriting agreement dated 20 June 1997 made
among Dr Solomon's (1), the Selling Shareholders (as defined in such
agreement) (2), and Goldman Sachs International, Hambrecht & Quist LLC and
Robertson Stephens International Ltd. (as representatives of the
International Underwriters referred to in Schedule I to such agreement)
(3), pursuant to which the International Underwriters agreed to underwrite
the sale by the Selling Shareholders of an aggregate of 1,667,686 Dr
Solomon's ADSs at a price of $22.625 per Dr Solomon's ADS. The agreement
also contains warranties, representations, undertakings and indemnities
given to the International Underwriters by Dr Solomon's;
(e) an agreement dated 1 August 1997 and made between Loadplan
Australasia Pty Ltd ("Loadplan") (1) and Dr Solomon's Software Australasia
Pty Ltd ("DSSA") (2) pursuant to which DSSA acquired from Loadplan the Sale
Assets (as defined in such agreement) for a consideration of AUS$750,000;
(f) an agreement dated 9 October 1997 made between Datawatch
Corporation ("Datawatch") (1), Pole Position Software GmbH (2) and Dr
Solomon's Software Inc. ("DSSI") (3) pursuant to which DSSI acquired the
Business (as defined in such agreement) comprising the Virex and netOctopus
businesses for a consideration of $16,750,000;
(g) an agreement dated 5 November 1997 and made between Performance
Republishing Limited ("PPL") (1), Ian Dunn and James Aiken (the
"Individuals") (2) and Dr Solomon's Software Limited ("DSS") (3) pursuant
to which DSS acquired the Program Materials (as defined in such agreement)
from PPL and the Individuals for a consideration of L700,000. In addition,
DSS agreed to pay to PPL a royalty of 4 per cent. of the Net Sales Value
(as defined in the Agreement) of all Sales Products (as defined in such
agreement) sold by DSS during the period between 1 October 2000 and 30
September 2002;
(h) the agreement (the "Trustee Agreement") dated 8 June 1998 between
Network Associates (1), Dr Solomon's (2) and Bank of Scotland Trust Company
(International) Limited (3) relating to the shares of new Network
Associates Common Stock that will be issued to the Trustee upon the Scheme
becoming effective in exchange for Dr Solomon's Ordinary Shares held in the
Dr Solomon's Trust and the transfer of such Network Associates Common Stock
from the Dr Solomon's Trust to beneficiaries of the Dr Solomon's Trust to
satisfy outstanding obligations of Dr Solomon's in relation to the exercise
of options under the Group Scheme once the Scheme becomes effective and to
obligations of Network Associates in relation to such transfers of Network
Associates Common Stock and the satisfaction of fractional entitlements to
Network Associates Common Stock; and
(i) the Transaction Agreement, the terms of which are set out in
Appendix 1 of this document.
4. DIRECTORS SERVICE AND OTHER CONTRACTS
(a) On 6 February 1996, Dr Solomon's entered into service agreements with
each of Geoffrey Leary, David Stephens and Keith Perrett, which are terminable
by Dr Solomon's or the respective director upon nine months written notice.
(b) Mr Keith Perrett is entitled to a fixed salary of L45,000 per annum
together with an annual bonus in an amount to be determined by the Board of Dr
Solomon's.
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<PAGE> 141
(c) Mr David Stephens is entitled to a fixed salary of L75,000 per annum
together with an annual bonus in an amount to be determined by the Board of Dr
Solomon's.
(d) Mr Geoffrey Leary is entitled to a fixed salary of L85,000 per annum
together with an annual bonus in an amount to be determined by the Board of Dr
Solomon's.
(e) On 6 February 1996, Dr Solomon's entered into a consultancy agreement
with Secure Computing Limited (now known as Authentec Consulting Limited)
relating to the provision of the consultancy services of Dr A.M. Solomon to Dr
Solomon's for a fixed period of two years from 6 February 1996 ("the Consultancy
Agreement"). Under the terms of such agreement, Dr A.M. Solomon is entitled to a
fee of L50,000 per annum or such other fee as may be agreed by Dr Solomon's and
Secure Computing Limited together with an additional fee of L500 per day or part
of a day if such services include certain public engagements referred to in the
Consultancy Agreement.
On 29 May 1998, Dr Solomon's entered into a deed of variation and novation
of the Consultancy Agreement with Authentec Consulting Limited, Internet Privacy
Limited and Dr A.M. Solomon pursuant to which it was agreed:
(i) that the term of the Consultancy Agreement be extended by two years;
(ii) the Consultancy Agreement be assigned and novated to Internet
Privacy Limited; and
(iii) the terms of an option granted to Dr A.M. Solomon on 6 November
1996 under the terms of the Group Scheme as amended under the
terms of a side letter dated 12 November 1996 be varied so as to
preserve certain terms of the option notwithstanding the
assignment of the Consultancy Agreement.
There are no service contracts between any member of the Dr Solomon's Group and
any director of such company which has more than 12 months to run and no such
agreement has been amended in the six months preceding the Offer period.
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<PAGE> 142
APPENDIX 9
FURTHER INFORMATION ON NETWORK ASSOCIATES
1. SHARE CAPITAL
(a) The authorised share capital of Network Associates as at 23 June 1998
was as follows: 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, of which
130,333,155 shares of Common Stock and one share of Series A Preferred Stock
(the only authorised share of Series A Preferred Stock, which was issued in
connection with Network Associates' acquisition of FSA Corporation in September
1996) were in issue.
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 at 30 May 1998 such exchangeable shares of FSA
Corporation were exchangeable for 487,593 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.
Since Network Associates' initial public offering on 6 October 1992, the
Network Associates Common Stock has traded on NASDAQ. Since the combination with
Network General Corporation on 1 December 1997, Network Associates Common Stock
has traded under the symbol NETA. Prior thereto, Network Associates Common Stock
traded under the symbol MCAF.
(b) Upon the Scheme becoming effective, the authorised and issued share
capital of Network Associates will be approximately as follows (based on shares
outstanding as at 31 May 1998 and without giving effect to the exercise of any
option, conversion, any other subscription rights or share issues):
<TABLE>
<CAPTION>
ISSUED AND FULLY PAID AND
AUTHORIZED NON-ASSESSABLE
SHARES OF SHARES OF
COMMON STOCK, COMMON STOCK,
PAR VALUE $0.01 EACH PAR VALUE $0.01 EACH
-------------------- --------------------
<S> <C> <C> <C>
300,000,000 130,333,155
</TABLE>
<TABLE>
<CAPTION>
ISSUED AND FULLY PAID AND
AUTHORIZED NON-ASSESSABLE
SHARES OF SHARES OF
PREFERRED STOCK, PREFERRED STOCK,
PAR VALUE $0.01 EACH PAR VALUE $0.01 EACH
-------------------- --------------------
<S> <C> <C> <C>
5,000,000 1 share of Series A
Preferred Stock
</TABLE>
2. MATERIAL CHANGES
Save for aggregate charges previously disclosed of approximately $110
million (of which approximately $90 million relates to acquisition of in-process
research and development) which Network Associates expects to incur in the
financial quarter ending 30 June 1998 in connection with
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<PAGE> 143
the acquisitions of TIS and Magic Solutions in April 1998, there have been no
material changes in the financial or trading position of the Network Associates
Group since 31 December 1997, the date to which the last audited consolidated
accounts were drawn up.
3. NATURE OF THE FINANCIAL INFORMATION
The financial information contained in Part B of Appendix 3 of this
document does not constitute statutory accounts within the meaning of Section
240 of the Companies Act 1985. The information for the three years ended 31
December 1997 has been extracted from the published reports and audited
consolidated financial statements of Network Associates for the three years
ended 31 December 1997. Network Associates' auditors have audited the financial
statements for the three periods ended 31 December 1997.
4. MATERIAL CONTRACTS
The following contracts, not being contracts entered into in the ordinary
course of business, have been entered into by members of the Network Associates
Group since 9 June 1996 (being two years prior to the commencement of the Offer
period) and are, or may be, material (the references to number of shares of
Network Associates Common Stock have been adjusted to give effect to the Network
Associates 3-for-2 Stock Split):
(a) Agreement and Plan of Reorganization dated 13 October 1997 by and
among Network Associates, Network General Corporation ("Network General")
and Mystery Acquisition Corp., a wholly-owned subsidiary of Network
Associates, as amended on 22 October 1997 (collectively the "Network
General Agreement"). Pursuant to the Network General Agreement, on 1
December 1997 Network Associates acquired 100 per cent. of the issued and
outstanding share capital of Network General. The Network General Agreement
contained customary terms, conditions, covenants and representations and
warranties on behalf of the parties to the transaction, with none of the
representations or warranties surviving the closing of the transaction.
Pursuant to the Network General Agreement, Network Associates issued
39,970,092 shares of Network Associates Common Stock to the former Network
General stockholders and assumed all unvested options to acquire Network
General common stock. The transaction was accounted for as a pooling of
interests;
(b) Agreement and Plan of Reorganization dated 1 December 1997 (the
"Helix Agreement") by and among Network Associates, Helix Software Company
("Helix") and DNA Acquisition Corp., a wholly-owned subsidiary of Network
Associates. Pursuant to the Helix Agreement, on 1 December 1997 Network
Associates acquired 100 per cent. of the issued and outstanding share
capital of Helix. The Helix Agreement contained customary terms,
conditions, covenants and representations and warranties on behalf of all
parties to the transaction. In particular, Helix's representations and
warranties survived the closing of the transaction for a period of twelve
months. At the closing, the former Helix stockholders received 825,000
shares of Network Associates Common Stock less 82,500 shares of Network
Associates Common Stock held in escrow in support of the Helix
stockholders' indemnification obligations. The Helix acquisition was
accounted for as a pooling of interest for accounting purposes;
(c) Agreement and Plan of Reorganization dated 1 December 1997 (the
"PGP Agreement"), by and among Network Associates, Pretty Good Privacy,
Inc. ("PGP") and PG Acquisition Corp., a wholly-owned subsidiary of Network
Associates. Pursuant to the PGP Agreement, on 9 December 1997 Network
Associates acquired 100 per cent. of the issued and outstanding share
capital of PGP. The PGP Agreement contained customary terms, conditions,
covenants and representations and warranties on behalf of the parties to
the transaction. In particular, the representations and warranties of PGP
survived the closing of the transaction for a period of twelve months. The
aggregate consideration payable for the acquisition was approximately $36
million (payable in cash and the assumption of certain liabilities) and
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<PAGE> 144
warrants to acquire 375,000 shares of Network Associates Common Stock. At
the closing, Network Associates paid approximately U.S.$35 million to the
former holders of outstanding PGP capital stock and vested options to
acquire PGP common stock less $5 million paid into to an escrow account in
support of PGP's indemnification obligations under the PGP Agreement.
Network Associates paid at the closing the above-mentioned warrants to the
holders of the PGP Series B Preferred Stock. The PGP acquisition was
accounted for under the purchase method of accounting. Network Associates
also assumed all outstanding unvested options to acquire PGP common stock;
(d) Agreement and Plan of Reorganization dated 2 March 1998 (the
"Magic Agreement"), by and among Network Associates, Magic Solutions and
Merlin Acquisition Corp., a wholly-owned subsidiary of Network Associates.
Pursuant to the Magic Agreement, on 1 April 1998 Network Associates
acquired 100 per cent. of the issued and outstanding share capital of Magic
Solutions. The Magic Agreement contained customary terms, conditions,
covenants and representations and warranties on behalf of all parties
involved in the transaction. In particular, Magic Solutions'
representations and warranties survived the closing of the transaction for
a period of twelve months. At the closing, Network Associates paid
approximately $110 million to the holders of Magic Solutions outstanding
capital stock and vested options to acquire Magic Solutions common stock
less $10.5 million which was paid into to an escrow account in support of
the Magic Solutions stockholders' indemnification obligations under the
Magic Solutions Agreement. The Magic Solutions acquisition was accounted
for under the purchase method of accounting. Network Associates also
assumed all outstanding unvested options to acquire Magic Solutions common
stock;
(e) Agreement and Plan of Reorganization dated 22 February 1998 (the
"TIS Agreement"), by and among Network Associates, TIS and Thor Acquisition
Corp., a wholly-owned subsidiary of Network Associates. Pursuant to the TIS
Agreement, on 28 April 1998 Network Associates acquired 100 per cent. of
the issued and outstanding share capital of TIS. The TIS Agreement
contained customary terms, conditions, covenants and representations and
warranties on behalf of all parties involved in the TIS acquisition, with
none of representations or warranties surviving the closing of the
transaction. Pursuant to the TIS Agreement, Network Associates issued
6,755,540 shares of Network Associates Common Stock to the stockholders of
TIS and assumed all unvested options to acquire shares of TIS common stock.
The transaction was accounted for as a pooling of interests;
(f) Purchase Agreement dated 29 July 1997 (the "Cinco Agreement"), by
and among Network General, Cinco Networks, Inc., a California corporation
("Cinco"), Network General Technology Corporation, a wholly-owned
subsidiary of Network General, and the shareholders of Cinco. Pursuant to
the Cinco Agreement, Network General acquired 100 per cent. of the issued
and outstanding share capital of Cinco. The Cinco Agreement contained
customary terms, conditions, covenants and representations and warranties
on behalf of the parties to the transaction. In particular, the
representations and warranties of Cinco survived the closing of the
transaction for a period of twenty four months. The aggregate consideration
payable in the acquisition was $40 million (payable in cash and upon the
achievement of certain contingencies) less $2.7 million paid into an escrow
account in support of Cinco's indemnification obligations under the Cinco
Agreement. The Cinco acquisition was accounted for under the purchase
method of accounting. Network General also assumed all options of Cinco,
which options the Company has now assumed following the Company's merger
with Network General on 13 October 1997;
(g) Agreement and Plan of Merger dated 13 October 1997 (the "Haystack
Agreement"), by and among TIS, Trusted Acquisitions, Inc., a wholly-owned
subsidiary of TIS, and Haystack Laboratories, Inc. ("Haystack"). Pursuant
to the Haystack Agreement, TIS acquired 100 per cent. of the issued and
outstanding share capital of Haystack. The Haystack Agreement contained
customary terms, conditions, covenants and representations and warranties
on
144
<PAGE> 145
behalf of the parties to the transaction, with certain of the
representations or warranties surviving the closing of the transaction for
a period of twelve months. Pursuant to the Haystack Agreement, (i) TIS
issued 2,105,494 shares of TIS common stock to the holders of Haystack,
less 210,549 shares which were held in an escrow account in support of
Haystack's indemnification obligations under the Haystack Agreement, and
(ii) TIS assumed all unvested options of Haystack. The Haystack acquisition
was accounted for by TIS as a pooling of interests. In connection with the
acquisition of TIS by the Company on 28 April 1998, the former shareholders
of Haystack received 680,075 shares of the Company's Common Stock;
(h) Indenture dated 13 February 1998 (the "Indenture"), between
Network Associates and State Street Bank and Trust Company of California,
N.A., as trustee, pursuant to which Network Associates issued its Zero
Coupon Convertible Subordinated Debentures Due 2018 with an aggregate
principal amount at maturity of U.S.$885,500,000;
(i) the Trustee Agreement referred to at paragraph 3(h) of Appendix 8
of this document; and
(j) the Transaction Agreement, the terms of which are set out in
Appendix 1 of this document.
5. DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME POSITION WITH NETWORK ASSOCIATES AGE
---- -------------------------------- ---
<S> <C> <C>
William L. Larson Chairman of the Board and Chief Executive Officer 42
Dennis L. Cline Executive Vice President of Worldwide Sales 37
Prabhat K. Goyal Chief Financial Officer, Vice President of Finance and
Administration, Treasurer and Secretary 43
Zachary A. Nelson Executive Vice President of Total Service Desk Division 36
Peter R. Watkins Executive Vice President of Total Virus and Defense 43
Leslie G. Denend Director 57
Virginia Gemmell Director 49
Edwin L. Harper Director 53
Harry J. Saal Director 54
</TABLE>
Mr Larson joined Network Associates in September 1993 as its Chief
Executive Officer. In October 1993, Mr Larson was appointed as a director of
Network Associates and was elected to the additional office of President. Mr
Larson served as President until December 1997. In April 1995, Mr Larson was
also elected Chairman of the Board of Directors. From August 1988 to September
1993, Mr Larson was employed as a Vice President of SunSoft, Inc., a system
software subsidiary of Sun Microsystems, Inc., where he was responsible for
worldwide sales and marketing.
Mr Cline became Executive Vice President of Worldwide Sales in January
1998. He joined Network Associates in September 1994 as Vice President of North
American Sales. Mr Cline was Vice President of North American Channel Sales from
October 1995 to April 1996 and was Vice President of Worldwide Channel Sales
from April 1996 to October 1996 when he became Vice President of International
Sales. From November 1993 to September 1994, Mr Cline performed sales consulting
services for various companies. From January 1993 to November 1993, Mr Cline was
Vice President of Worldwide Sales for Fifth Generation Systems, a software
utilities company.
Mr Goyal joined Network Associates in March 1996 and was elected as Vice
President of Finance, Corporate Controller and Treasurer in April 1996. Mr Goyal
became Chief Financial Officer, Vice President of Finance and Administration and
Secretary in October 1996. From July 1994 to March 1996, Mr Goyal was Director,
Finance and OEM Development, Solaris Products Group for SunSoft, Inc. From
November 1991 to June 1994, Mr Goyal served as Director, Finance and Sales
Operations of SunSoft, Inc.
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<PAGE> 146
Mr Nelson joined Network Associates in March 1997 as Vice President and
General Manager of Network Management. In January 1998, he became General
Manager of the Company's Total Service Desk Division. From February 1993 to
March 1997, Mr Nelson was employed in various capacities, most recently as Vice
President of Marketing, at Oracle Corporation. From January 1990 to February
1993, Mr Nelson was employed in various capacities, ultimately serving as
Director of Corporate Marketing, at SunSoft, Inc., a system software subsidiary
of Sun Microsystems, Inc.
Mr Watkins joined Network Associates in May 1995 as Vice President,
International Sales. Mr Watkins was Vice President of International Operations
from May 1995 to October 1996 and Vice President of Security from October 1996
to January 1997 when he became Vice President and General Manager of Security.
From January 1991 to April 1995, Mr Watkins was employed in various capacities,
ultimately serving as Managing Director of European Operations, at SunSoft,
Inc., a system software subsidiary of Sun Microsystems, Inc.
Mr Denend has been a director of Network Associates since 14 June 1995. In
December 1997, Mr Denend was elected President of Network Associates. Effective
30 April 1998, Mr Denend resigned as President of the Company. From June 1993 to
December 1997, Mr Denend was Chief Executive Officer and President of Network
General. From February 1993 to June 1993, Mr Denend was Senior Vice President of
Network General. Mr Denend serves as a director of Rational Software, Proxim
Inc., Informix Corporation and United Services Automobile Association.
Ms Gemmell has been a director of Network Associates since 16 September
1996. Ms Gemmell founded GlidePath, Inc., a consulting firm, and has served as
its President since August 1995. From May 1986 to August 1995, Ms Gemmell was a
Managing Partner of Synectics, Inc., a consulting firm.
Mr Harper has been a director of Network Associates since January 1993.
Since June 1996, Mr Harper has been the President and Chief Executive Officer of
SyQuest Technology, Inc., a manufacturer of computer peripherals. From June 1993
to June 1996, Mr Harper was President and Chief Executive Officer of Colorado
Memory Systems, a manufacturer of computer peripherals, from June 1992 to April
1993, and served as President and Chief Operating Officer of CMS from September
1990 through May 1992. Mr Harper currently serves as a director of SyQuest
Technology, Inc. and Apex PC Solutions, Inc.
Dr Saal has been a director of Network Associates since December 1997. He
was a founder of Network General, and served as Chairman of the Network General
Board of Directors from its inception until it merged with Network Associates in
December 1997. Dr Saal served as President of Smart Valley Inc., a trade
association, from September 1993 until December 1995. He served as President and
Chief Executive Officer of Network General from its inception in May 1986 until
June 1993. He was also Network General's Chief Financial Officer from May 1986
until November 1987. Dr Saal is also a director of Imaging Technologies
Corporation, Borland International, Inc., and Globalnet Systems, Limited and
serves as a director of several privately-held companies and non-profit
associations.
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<PAGE> 147
6. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF NETWORK
ASSOCIATES
The following table sets forth certain information, as of 15 April 1998,
except where noted, with respect to the beneficial ownership of Network
Associates' Common Stock by (i) all persons known by Network Associates to be
the beneficial owners of more than 5 per cent. of the outstanding Network
Associates Common Stock, (ii) each director of Network Associates, (iii) Network
Associates' Chief Executive Officer and the four most highly paid Network
Associates officers in 1997 and (iv) all executive officers and directors of
Network Associates as a group. The information set forth below has been derived
from Network Associates' Proxy Statement dated 8 May 1998 and has not been
adjusted to give effect to the Network Associates 3-for-2 Stock Split.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF
NAME & ADDRESS OF BENEFICIAL OWNERS(1)(2) NUMBER CLASS
----------------------------------------- --------- -------------
<S> <C> <C>
T. Rowe Price Associates, Inc.(3)......................... 5,667,633 7.9 %
100 East Pratt Street
Baltimore, MD 21202
Equitable Companies, Inc.(4).............................. 3,902,041 5.5
787 Seventh Ave
New York, NY 10019
William L. Larson(5)...................................... 656,719 *
John C. Bolger(6)......................................... 17,750 *
Leslie G. Denend(7)....................................... 244,938 *
Virginia Gemmell(8)....................................... 10,750 *
Edwin L. Harper(9)........................................ 30,825 *
Harry J. Saal(10)......................................... 669,893 *
Dennis L. Cline(11)....................................... 156,563 *
Prabhat K. Goyal(12)...................................... 122,500 *
Peter R. Watkins(13)...................................... 110,672 *
Executive officers and directors as a group 1,934,047 2.7
(9 persons)(14).........................................
</TABLE>
- ---------------
* Less than 1 per cent.
(1) Except as indicated in the footnotes to this table, Network Associates
believes that the persons named in the table have sole voting and
investment power with respect to all shares of Network Associates Common
Stock shown as beneficially owned by them, subject to community property
laws, where applicable.
(2) Unless otherwise indicated in these notes, the address of each person named
above is in care of Network Associates at 3965 Freedom Circle Santa Clara,
CA 95054.
(3) According to Schedule 13G filed with the Commission on 10 February 1998, T.
Rowe Price Associates, Inc. has sole voting power with respect to 542,270
of these shares and sole dispositive power with respect to all 5,667,633
shares.
(4) According to Schedule 13G filed with the Commission on 13 February 1998,
Equitable Companies, Inc., has sole voting power, shared voting power, sole
dispositive power and shared dispositive power with respect to 962,920,
2,886,713, 3,900,067 and 1,974 shares, respectively.
(5) Includes 656,719 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(6) Includes 17,750 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
Effective 30 April 1998, Mr. Bolger resigned as a director of Network
Associates.
(7) Includes 239,406 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
225,540 of the shares subject to the aforemen-
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<PAGE> 148
tioned stock options were granted to Mr. Denend pursuant to his employment
with Network General and subsequently converted into options to purchase
shares of Network Associates Common Stock on 1 December 1997 when Network
Associates acquired Network General and Mr. Denend was elected President of
Network Associates. Effective 30 April 1998, Mr. Denend resigned as
President of Network Associates.
(8) Includes 10,750 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(9) Includes 30,825 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(10) Includes 10,416 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(11) Includes 156,563 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(12) Includes 122,500 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(13) Includes 109,844 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
(14) Includes 1,268,210 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of 15 April 1998.
148
<PAGE> 149
APPENDIX 10
COMPARISON OF RIGHTS OF DR SOLOMON'S SHAREHOLDERS AND NETWORK ASSOCIATES
STOCKHOLDERS
The following is a summary of the material differences between the rights
of shareholders of Dr Solomon's and the rights of stockholders of Network
Associates arising from the differences between the corporate laws of England
and the Delaware General Corporation Laws ("DGCL"), respectively, and the
requirements of the governing instruments of the two companies. The following
summary does not purport to be a complete description of the rights of
shareholders of Dr Solomon's and rights of the stockholders of Network
Associates, and is qualified in its entirety by reference to, the corporate laws
of England, the DGCL, the memorandum and articles of association of Dr
Solomon's, the Network Associates Certificate of Incorporation and the Network
Associates Bylaws.
In addition to the laws of England and the memorandum and articles of
association of Dr Solomon's, the rights of holders of Dr Solomon's ADSs, which
each represent the right to receive three Dr Solomon's Ordinary Shares, are also
governed by the Deposit Agreement, pursuant to which the Dr Solomon's ADSs have
been issued. Copies of the Deposit Agreement are available for inspection at the
Corporate Trust Office of the Depositary, currently located at 101 Barclay
Street, New York, New York 10286, and at the principal office of the agent of
the Depositary (the "Custodian"), currently located in the London office of The
Bank of New York located at 46 Berkeley Street, London, W1Z 6AD. The
Depositary's principal executive office is located at 101 Barclay Street, New
York, New York 10286.
Dr Solomon's is subject to the Companies Act regulating notices of
shareholder meetings and solicitation of proxies. Notice of a shareholder
meeting is normally accompanied by a shareholder circular (or, in the case of an
annual general meeting, by an annual report and accounts) containing an
explanation of the purpose of the meeting and the board's recommendations with
respect to actions to be taken. All such communications are sent by Dr Solomon's
to the Depositary for distribution to holders of Dr Solomon's ADSs at the same
time as they are sent to holders of Dr Solomon's Ordinary Shares. As a foreign
private issuer with securities listed on NASDAQ and registered under Section 12
of the Exchange Act, Dr Solomon's is required under the Exchange Act to publicly
file with the Commission and NASDAQ annual reports and other information.
VOTING RIGHTS
Under English law, the voting rights of shareholders are governed by a
company's articles of association. Cumulative voting is essentially unknown
under English law. The Dr Solomon's Articles of Association specify that two
shareholders present in person or by proxy and entitled to vote constitute a
quorum. Any holder of Dr Solomon's Ordinary Shares on the register may vote in
person or, assuming the proxy is received by Dr Solomon's at least 48 hours
prior to the time set for the meeting, by proxy. There is no record date for
shareholder meetings under English law.
Subject to disenfranchisement in the event of non-compliance with a
statutory notice requiring disclosure as to beneficial ownership, each
registered holder of Dr Solomon's Ordinary Shares present in person (or, if a
corporation, present by a duly authorized representative) or by proxy, is
entitled to cast one vote for each Ordinary Share held.
Under the DGCL, each stockholder is entitled to one vote per share unless
the certificate of incorporation provides otherwise. In addition, the
certificate of incorporation may provide for cumulative voting in the election
of directors of the corporation. Under the Network Associates Certificate of
Incorporation and the Network Associates Bylaws, holders of Network Associates
Common Stock are entitled to one vote per share on all matters and the holder of
the share of Series A Preferred Stock is entitled to that number of votes equal
to the number of shares of Network Associates Common Stock issuable upon
exchange of then outstanding exchangeable
149
<PAGE> 150
shares of FSA Corporation, an Alberta corporation, and cumulative voting is not
permitted. A quorum consists of a majority of the shares entitled to vote,
unless otherwise required by law.
ACTION BY WRITTEN CONSENT
Dr Solomon's Articles of Association contain a provision enabling the
passing of a resolution by unanimous written consent of all shareholders
entitled to attend and vote.
Under the DGCL, unless otherwise provided in the certificate of
incorporation, an action required or permitted to be taken at any meeting of
stockholders may instead be taken without a meeting, without prior notice or a
vote if a written consent to the action is signed by holders of outstanding
shares of stock having at least the number of votes that would be required to
authorize such action at a meeting of stockholders at which all shares entitled
to vote thereon were present and voting. Under the Network Associates
Certificate of Incorporation, holders of Network Associates Common Stock may not
take any action required to be taken at a meeting of stockholders or any other
action which may be taken at a meeting of stockholders, without a meeting and
the power of stockholders to consent in writing to the taking of any action
without a meeting is specifically denied.
SOURCES AND PAYMENT OF DIVIDENDS
Under English law, a company may pay dividends on its ordinary shares,
subject to the prior rights of holders of its preferred shares, only out of its
distributable profits (accumulated, realized profits (not previously utilized by
distribution or capitalization) less accumulated, realized losses) and not out
of share capital, which includes share premiums (paid-in surplus). Amounts
credited to the share premium account (representing the excess of the
consideration for the issue of shares over the aggregate par value of such
shares) may not be paid out as cash dividends but may be used, among other
things, to pay up unissued shares which may then be distributed to shareholders
in proportion to their holdings and for other limited purposes. In addition, a
public company such as Dr Solomon's may make a distribution at any time only if,
at that time and immediately after such distribution the amount of its net
assets is not less than the aggregate of its called-up (i.e., issue and paid-up)
share capital and undistributable reserves. Under English law, a dividend must
be declared by reference to relevant accounts showing the availability of
distributable reserves for such dividends. As a public company, the relevant
accounts for Dr Solomon's are its last audited accounts or, where such accounts
do not show sufficient distributable reserves, interim accounts (which need not
be audited) prepared and filed with the Registrar.
Under the Dr Solomon's Articles of Association, the directors may pay to
holders of Dr Solomon's Ordinary Shares such interim dividends (i.e. dividends
resolved to be paid by directors without the approval of shareholders in a
general meeting), as appear to the directors to be justified by the profits of
Dr Solomon's. Any dividend unclaimed after the period of 12 years from the date
of its declaration may be forfeited and shall revert to Dr Solomon's. Each
dividend on ordinary shares will be paid to the holders thereof on the register
of members on the record date for such dividend who have not waived their
entitlement thereto.
The DGCL permits the payment of dividends on common stock, subject to any
restrictions contained in the certificate of incorporation, either (i) out of
its "surplus" (as defined below) or (ii) if there is no "surplus", out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year; except that no dividends may be paid out of such net
profits if the net assets of the corporation are less than the aggregate amount
of capital represented by the issued and outstanding stock having a preference
upon the distribution of assets. "Surplus" is defined in the DGCL as the amount
by which net assets (total assets less total liabilities) exceeds the capital of
the corporation. In accordance with the DGCL, "capital" is determined by the
board of directors and will not be less than the aggregate par value of the
outstanding capital stock of the corporation having par value. In addition, the
DGCL generally provides that a corporation may
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redeem or repurchase its own shares only if such redemption or repurchase would
not "impair the capital" of the corporation. The ability of a Delaware
corporation to pay dividends on, or redeem or to make repurchases or redemptions
of, its shares is dependent on the financial status of the corporation standing
alone and not on a consolidated basis. The Network Associates Certificate of
Incorporation and the Network Associates Bylaws do not restrict the payment of
dividends on Network Associates Common Stock.
RIGHTS OF PURCHASE AND REDEMPTION
Under English law, a company may issue redeemable shares if authorized by
its articles of association and subject to the conditions stated therein. The Dr
Solomon's Articles of Association do permit the issue of redeemable shares. A
company may purchase its own shares, including any redeemable shares, if
authorized by its articles of association and provided that such purchase has
been previously approved by an ordinary resolution of its shareholders in the
case of an on-market purchase or a special resolution in other cases. Shares may
be purchased only if fully paid and, in the case of public companies, only,
subject as provided below, out of distributable profits or the proceeds of a new
issue of shares issued for the purpose of the purchase. When shares are
purchased wholly out of profits, the amount by which the par value of the
company's issued share capital is diminished on cancellation of the shares so
purchased must be transferred to the capital redemption reserve, which is
generally treated as paid-up share capital. In addition, any amount payable on
purchase of any shares in excess of the par value thereof may be paid out of the
proceeds of a fresh issue of shares up to an amount equal to whichever is the
lesser of the aggregate of the premiums received by the company on the issue of
those shares or the amount of the company's share premium account as at the time
of the purchase including any sum transferred to that account in respect of
premiums on the new issue.
Under the DGCL, a corporation may purchase or redeem shares of any class of
its capital stock, but subject generally to the availability of sufficient
lawful funds therefor and provided that at all times that, at the time of any
such redemption, the corporation shall have outstanding shares of one or more
classes or series of capital stock, which have full voting rights that are not
subject to redemption. The Network Associates Certificate of Incorporation and
the Network Associates Bylaws do not restrict this right.
MEETINGS OF SHAREHOLDERS
Under English law, an annual general meeting (an "AGM") of a public company
must be held each year and at least once every fifteen months, and an
extraordinary general meeting (an "EGM") of shareholders may be called by the
board of directors or (notwithstanding any provision to the contrary in a
company's articles of association) by a request from shareholders holding not
less than one-tenth of the paid-up capital of the company carrying voting rights
at general meetings. An EGM at which an ordinary resolution is proposed requires
14 clear days' notice (other than an ordinary resolution to remove a director
which requires 21 clear days' notice). Such ordinary resolution requires a
majority of the votes cast by those present (in person or by proxy). An EGM at
which a special resolution is proposed requires 21 clear days' notice and such
resolution requires a three-quarters majority of the votes cast by those present
(in person or by proxy). An AGM requires 21 clear days' notice regardless of the
types of resolution to be proposed. The term "clear days' notice" means calendar
days and excludes the date of mailing, the deemed date of receipt of such notice
(which is provided for in the articles of association when first-class mail is
employed), and the date of the meeting itself. "Extraordinary resolutions" are
relatively unusual and are confined to certain matters out of the ordinary
course of business such as a proposal to wind up the affairs of the company.
Proposals that are the normal subject of "special resolutions" generally involve
proposals to change the name of the company, to alter its capital structure, to
change or amend the rights of shareholders, to permit the company to issue new
shares for cash without applying the shareholders' preemptive rights and to
amend the company's objects (purpose)
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clause in its memorandum of association and articles of association and to carry
out certain other matters where either the company's articles of association or
the Companies Act prescribe that a "special resolution" is required. All other
proposals relating to the ordinary course of the company's business such as the
election of directors would be the subject of an "ordinary resolution".
Under the DGCL, Network Associates is required to hold annual meetings of
its stockholders. Special meetings of stockholders may be called by the board of
directors or by such person or persons as may be authorized by the certificate
of incorporation or bylaws. The Network Associates Certificate of Incorporation
provides that a special meeting of stockholders may be called by a resolution of
the Network Associates Board or by the holders of shares entitled to cast not
less than 10 per cent. of the votes at the meeting. Under the DGCL, holders of
the Network Associates Common Stock must receive notice of any annual or special
meeting not less than ten nor more than 60 days prior to such meeting. The
record date for the meetings of the stockholders shall not be less than ten days
nor more than 60 days before the date of such meeting. The Network Associates
Certificate of Incorporation does not provide otherwise.
RIGHTS OF APPRAISAL
While English law does not generally provide for appraisal rights, if a
shareholder applies to a Court as described under "Shareholders' Votes on
Certain Reorganizations" below, the Court may specify such terms for the
acquisition as it considers appropriate. English law provides shareholders with
rights to dissent in respect of a reorganization of a company under Section 110
of the Insolvency Act of 1986 of England and Wales (the "Insolvency Act"). In
addition, dissenters' rights exist where an offeror who, pursuant to a takeover
offer for a company, has acquired or contracted to acquire not less than
nine-tenths in value of the shares to which the offer relates, seeks to acquire
compulsorily outstanding minority shareholdings.
Under the DGCL, stockholders who follow prescribed statutory procedures are
entitled, in the event of certain mergers or consolidations, to surrender their
shares to the corporation in exchange for the judicially determined "fair value"
of such shares. Such stockholders are entitled to such appraisal rights unless
the shares of stock (or depositary receipts in respect thereof) held by the
stockholder are either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 holders. No appraisal rights are available for any
shares of stock of the constituent corporation surviving a merger if the merger
did not require for its approval the vote of the stockholders of the surviving
corporation as provided in the DGCL. Regardless of the foregoing, appraisal
rights are available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by the terms of an
agreement of merger or consolidation to accept for such stock anything except
(i) shares of stock of the corporation surviving or resulting from such merger
or consolidation, or depositary receipts in respect thereof; (ii) shares of
stock of any other corporation or depositary receipts in respect thereof, which
shares of stock or depositary receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of record by more than
2,000 holders; (iii) cash in lieu of fractional shares or fractional depositary
receipts described in the foregoing clauses (i) and (ii); or (iv) any
combination of the shares of stock, depositary receipts and cash in lieu of
fractional shares, or fractional depositary receipts described in the foregoing
clauses (i), (ii) and (iii).
PREEMPTIVE RIGHTS
Under English law, the issue for cash of equity securities (securities that
with respect to dividends or capital carry a right to participate beyond a
specified amount) or rights to subscribe for or convert into equity securities
must be offered in the first instance to the existing equity
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shareholders in proportion to the respective nominal values of their holdings,
unless a special resolution has been passed in a general meeting of shareholders
to the contrary.
Unless the certificate of incorporation expressly provides otherwise,
stockholders of a Delaware corporation do not have preemptive rights. The
Network Associates Certificate of Incorporation does not provide for preemptive
rights.
AMENDMENT OF GOVERNING INSTRUMENTS
Under English law, the shareholders have the authority to alter, delete,
substitute or add to the objects clause in a company's memorandum and all
provisions of its articles of association by a vote of not less than
three-quarters of the shareholders entitled to vote and who do vote, either in
person or by proxy, at a general meeting subject, in the case of certain
alterations to the memorandum of association, to the right of dissenting
shareholders to apply to the courts to cancel the alterations. Under English
law, the board of directors is not authorized to change the memorandum or the
articles of association. Amendments affecting the rights of the holders of any
class of shares may, depending on the rights attached to such class and the
nature of the amendments, also require approval of the classes affected in
separate class meetings.
Under the DGCL, all amendments to a corporation's certificate of
incorporation require the approval of stockholders holding a majority of the
voting power of the corporation unless a different proportion is specified in
the certificate of incorporation. The Network Associates Certificate of
Incorporation does not specify a different proportion, except that the following
provisions of the Network Associates Certificate of Incorporation may be amended
only by the favourable vote of the holders of shares representing at least
two-thirds of the voting power of all the then outstanding shares of capital
stock of Network Associates entitled to vote generally in the election of
directors, voting as a single class, (i) the provision restricting stockholder
action by written consent, (ii) the provision setting the number and
classification of the Network Associates board the right to fill any vacancies
and providing for the removal of Network Associates directors, (iii) the
provision expressly authorizing the Network Associates Board to amend the
Network Associates Bylaws, (iv) the provision regarding the limitation on
liability and indemnification of Network Associates directors, and (v) the
provision requiring the two-thirds vote of the Network Associates stockholders
to amend or repeal certain provisions of the Network Associates Certificate of
Incorporation.
Under the DGCL, the bylaws of a corporation generally may be amended or
repealed by the affirmative vote of the holders of a majority of the issued and
outstanding stock of the corporation entitled to vote thereon as a class. The
Network Associates Certificate of Incorporation provides that the Network
Associates Bylaws maybe amended repealed or new bylaws adopted by a resolution
of the Network Associates Board or the affirmative vote of the holders of at
least two-thirds of the voting power of all the then outstanding shares of
capital stock of Network Associates entitled to vote generally in the election
of directors, voting together as a single class.
SHAREHOLDERS' VOTES ON CERTAIN TRANSACTIONS
Under the Companies Act, fundamental corporate changes, such as the passing
of a resolution for winding up, non pro rata issues of shares for cash,
reductions of capital (subject to sanction by the court) and certain repurchases
of shares may be authorized by a special resolution passed at a general meeting
of shareholders. Subject to the provisions of the Companies Act, if at such
time, the capital of Dr Solomon's is divided into different classes of shares
and the amendment or other resolution would cause any of the special rights
attached to any class of shares to be varied or abrogated, the amendment must
also be sanctioned by the holders of at least three-quarters in nominal value of
the class concerned who vote.
The Companies Act provides for schemes of arrangement, which are
arrangements or compromises between a company and any class of its shareholders
(or any class of its creditors) and are used for certain types of
reconstructions, amalgamations, capital reorganizations or takeovers.
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They require the approval at an extraordinary general meeting of the company
convened by order of the court of a majority in number of the shareholders
representing three-fourths in value of the capital or class of creditors or
shareholders or class of shareholders present and voting, either in person or by
proxy, and the sanction of the High Court. Once so approved and sanctioned, all
creditors or shareholders (of the relevant class) are bound by the terms of the
scheme; a dissenting shareholder would have no rights comparable to dissenter's
rights described below. A scheme of reconstruction under Section 110 of the
Insolvency Act may be made when a company is being wound up voluntarily under
which, with the sanction of a special resolution of shareholders in a general
meeting the whole or part of the company's business or property is transferred
to a second company in consideration for the issue or transfer to them of shares
in the second company. Any dissenting shareholder can require the liquidator to
abstain from carrying the resolution into effect or to purchase his interest at
a price agreed or determined by arbitration. The Companies Act also provides
that where a takeover offer (as defined therein) is made for the shares of a
company incorporated in the United Kingdom and, within four months of the date
of the offer the offeror has, by virtue of acceptances of the offer, acquired or
contracted to acquire not less than nine-tenths in value of the shares of any
class to which the offer relates, the offeror may, within two months of reaching
the nine-tenths level, by notice require shareholders who do not accept the
offer to transfer their shares on the terms of the offer. A dissenting
shareholder may apply to the Court within six weeks of the date on which such
notice was given objecting to the transfer or its proposed terms. The Court is
unlikely (absent fraud or oppression) to exercise its discretion to order that
the acquisition not take effect, but it may specify such terms of the transfer
as it finds appropriate. A minority shareholder is also entitled in these
circumstances to require the offeror to acquire his shares on the terms of the
offer. In the United Kingdom, takeovers of public companies, such as Dr
Solomon's, are regulated by the City Code. The City Code is administered by the
Panel, a body comprising representatives of certain City of London financial and
professional institutions which oversees the conduct of such takeovers. One of
the provisions of the City Code is to the effect that: (i) when any person
acquires, whether by a series of transactions over a period of time or not,
shares which (taken together with shares held or acquired by persons acting in
concert with him) carry 30 per cent. or more of the voting rights of a public
company; or (ii) when any person, together with a person acting in concert with
him, holds not less than 30 per cent. but not more than 50 per cent. of the
voting rights and such person acting in concert with him, acquires in any period
of 12 months additional shares carrying more than 1 per cent. of the voting
rights such person must generally make an offer for all of the equity shares of
the company (whether voting or non-voting) for cash, or accompanied by a cash
alternative, at not less than the highest price paid for the relevant shares
during the 12 months preceding the date of the offer.
Section 203 of the DGCL prohibits a corporation that has securities traded
on a national securities exchange, designated on NASDAQ or held of record by
more than 2,000 stockholders from engaging in certain business combinations,
including a merger, sale of substantial assets, loan or substantial issuance of
stock, with an interested stockholder, or an interested stockholder's affiliates
or associates, for a three-year period beginning on the date the interested
stockholder acquires 15 per cent. or more of the outstanding voting stock of the
corporation. The restrictions on business combinations do not apply if (i) the
board of directors gives prior approval to the transaction in which the 15 per
cent. ownership level is exceeded, (ii) the interested stockholder acquires, in
the transaction pursuant to which the interested stockholder becomes the owner
of 15 per cent. or more of the outstanding stock, 85 per cent. of the
corporation's stock (excluding those shares owned by persons who are directors
and also officers, as well as employee stock plans in which employees do not
have a confidential right to determine whether shares held subject to the plan
will be tendered in a tender or exchange offer) or (iii) the business
combination is approved by the board of directors and authorized at a meeting of
stockholders by the holders of at least two-thirds of the outstanding voting
stock, excluding shares owned by the interested stockholder. Although a Delaware
corporation may elect, pursuant to its certificate of incorporation or by-laws,
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not to be governed by this provision, the Network Associates Certificate of
Incorporation and the Network Associates Bylaws contain no such election.
RIGHTS OF INSPECTION
Except when closed in accordance with the provisions of the Companies Act,
the register and index of names of shareholders of a company, together with
certain other registers required to be maintained by such a company, may be
inspected during business hours by its shareholders, including, in the case of
Dr Solomon's, holders of Dr Solomon's ADSs, without charge and by other persons
upon payment of a fee, and copies may be obtained on payment of a fee. The
shareholders of an English public company may, without charge, also inspect the
minutes of meetings of the shareholders during business hours and obtain copies
upon payment of a fee. The published directors' report and audited annual
accounts of a public company are required to be laid before the shareholders in
a general meeting and a shareholder is entitled to a copy of such reports and
accounts. Copies are filed with the Registrar from whom copies are publicly
available upon payment of the appropriate fee. The shareholders of Dr Solomon's,
including holders of Dr Solomon's ADSs, have no rights to inspect its accounting
records or minutes of meetings of its directors. Certain registers required to
be kept by the company are open to public inspection and service contracts of
directors of the company (which have more than 12 months unexpired or require
more than 12 months' notice to terminate) must be available for inspection
during business hours.
The DGCL allows any stockholder, upon written demand under oath stating the
purpose thereof, to have the right, during the usual hours of business, to
inspect, for any proper purpose, the corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose means a purpose reasonably related to such person's
interest as a stockholder.
CLASSIFICATION OF THE BOARD OF DIRECTORS
English law permits a company to provide for the classification of the
board of directors with respect to the time for which directors severally hold
office. The Dr Solomon's Articles of Association provide that unless otherwise
resolved by the shareholders in General Meeting the number of directors shall
not be subject to any maximum but shall be not less than two. They further
provide that at each AGM of Dr Solomon's one-third (or if their number is not
three or a multiple of three, the number nearest to one-third) of the directors
who are subject to retirement by rotation shall retire from office by rotation.
The directors to retire by rotation in every year include first, a director who
wishes to retire and not offer himself for reappointment, and second, those
directors who have been longest in office since their last appointment or
reappointment, but, as between persons who became directors on the same day,
those to retire (unless they otherwise agree among themselves) are determined by
lot. A retiring director is eligible for re-election. A director is required to
retire at the conclusion of the AGM following his attaining the age of 70 unless
shareholders in General Meeting approve his re-election.
Under the DGCL, the certificate of incorporation of a Delaware corporation
may provide for the classification of the board of directors in order to stagger
the terms of directors. The term "classified board" generally means the
specification of selected board seats for a term of more than one year (but not
more than three years), with different classes of board seats coming up for
election each year. The Network Associates Certificate of Incorporation provides
for a classified board of directors consisting of three classes of directors,
with each class elected for a term of three years.
REMOVAL OF DIRECTORS
Under the Companies Act, shareholders have the right to remove a director
without cause by ordinary resolution of which special notice (28 clear days) has
been given to the company, irrespective of the provisions of the articles of
association of the company.
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Under the DGCL, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at the election of directors, unless the certificate of
incorporation provides otherwise. If the shareholders are entitled to cumulative
voting and less than the entire board is to be removed, no individual director
may be removed without cause if the number of votes cast against the resolution
of his removal would be sufficient if cumulatively voted to elect such director
to the board. The Network Associates Certificate of Incorporation provides that
directors may be removed only for due cause by a vote of the record holders of a
majority of the holders of stock entitled to vote thereon. Under the DGCL, the
stockholders of a corporation that has a classified board of directors, such as
Network Associates, may only remove directors for cause.
VACANCIES ON THE BOARD OF DIRECTORS
Under English law, shareholders of an English public company may, by
ordinary resolution at a meeting at which any director retires by rotation,
appoint a person who is willing to be a director either to fill a vacancy or as
an additional director. The board of directors also has the power to appoint a
director to fill a vacancy or as an additional director, subject to such
conditions as may be set out in Dr Solomon's articles of association, provided
that such appointment will only last until the next following annual general
meeting of the company, at which the director concerned may be re-elected.
Under the DGCL, the board of directors of a corporation may fill any
vacancy on the board, including vacancies resulting from an increase in the
number of directors. Under the Network Associates Bylaws, in case of vacancy
among the directors, the remaining directors, even if less than a quorum, by an
affirmative vote of a majority thereof, may fill such vacancy.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
English law does not permit a company to indemnify a director or an officer
of the company or any person employed by the company as an auditor against any
liability that, by virtue of any rule of law, would otherwise attach to him in
respect of negligence, default, breach of duty or breach of trust in relation to
the company, except liability incurred by such director, officer or auditor in
defending any legal proceedings (whether civil or criminal) in which judgment is
given in his favor or in which he is acquitted or in certain instances in which,
although he is liable, a court finds that such director, officer or auditor
acted honestly and reasonably and that, with regard to all the circumstances, he
ought fairly to be excused and relief is granted by the court. Section 310 of
the Companies Act enables companies to purchase and maintain insurance for
directors, officers and auditors against any liability that would otherwise
attach to them in respect of any negligence, default, breach of duty or breach
of trust in relation to the company. Dr Solomon's has purchased and maintains in
force such insurance.
The DGCL provides that a corporation may, and in certain circumstances
must, indemnify its directors, officers, employees and agents for expenses,
judgments or settlements actually and reasonably incurred by them in connection
with suits and other legal actions or proceedings if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
any such suit or action brought by or on behalf of the corporation, such
indemnification is limited to expenses reasonably incurred in defense or
settlement of the suit or action. The DGCL also permits a corporation to adopt
procedures for advancing expenses to directors, officers and others without the
need for a case-by-case determination of eligibility, so long as, in the case of
officers and directors, they undertake to repay the amounts advanced if it is
ultimately determined that the officer or director was not entitled to be
indemnified. The Network Associates Certificate of Incorporation and the Network
Associates Bylaws contain provisions for indemnification of directors and
officers and for the advancement of expenses to any director or officer to the
fullest extent of the law. The DGCL permits corporations to
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purchase and maintain insurance for directors and officers against liability for
expenses, judgments or settlements, whether or not the corporation would have
the power to indemnify such persons therefor. The Network Associates Bylaws
permit Network Associates to purchase such insurance.
The DGCL permits a Delaware corporation to include in its certificate of
incorporation a provision eliminating the personal liability of directors for
monetary damages for certain breaches of fiduciary duty in a lawsuit by or on
behalf of the corporation or in an action by stockholders of the corporation.
The Network Associates Certificate of Incorporation eliminates a director's
monetary liability in a lawsuit by or on behalf of the corporation or in an
action by stockholders of the corporation to the full extent permitted by the
DGCL.
SHAREHOLDERS' SUITS
In addition to having the right to institute a lawsuit on behalf of the
company in certain limited circumstances under English law, Section 459 of the
Companies Act permits a shareholder whose name is on the register of members of
the company (including U.S. persons) to apply for a court order when the
company's affairs are being or have been conducted in a manner unfairly
prejudicial to the interests of the shareholders generally or some part of the
shareholders, including at least the petitioning shareholder, or where any
actual or proposed act or omission of the company is or would be so prejudicial.
A court, when granting relief in an action complaining of unfair prejudice, has
wide discretion, including authorizing civil proceedings to be brought in the
name of the company by a shareholder on such terms as the court may direct.
Except in these limited respects, English law does not permit class-action
lawsuits by shareholders on behalf of the company or on behalf of other
shareholders.
Under Delaware law, a shareholder may institute a lawsuit against one or
more directors, either on his own behalf, or derivatively on behalf of the
corporation. An individual stockholder may also commence a lawsuit on behalf of
himself and other similarly situated stockholders when the requirements for
maintaining a class action under Delaware law have been met. Section 102(b)(7)
of the DGCL, enables a corporation in its certificate of incorporation to
eliminate or limit the personal liability of a director for monetary damages for
violations of the director's fiduciary duty, except (i) for any breach of a
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) for liability pursuant to Section 174 of the
DGCL (providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions) or (iv) for any transaction from which
a director derived an improper personal benefit.
DISCLOSURE OF INTERESTS
Section 198 of the Companies Act provides that a person (including a
company and other legal entities) who acquires an interest or becomes aware that
he has acquired an interest of 3 per cent. or more of any class of shares
comprised in a public company's "relevant share capital" (which, for these
purposes, means that company's issued share capital carrying rights to vote in
all circumstances at general meetings of the company) is obliged to notify that
company of his interest within two business days following the day on which the
obligation arises. Thereafter, any changes in respect of whole percent figure
increases or decreases, rounded down to the next whole number or which reduce
such interest below 3 per cent., must be notified to the company. The Dr
Solomon's Ordinary Shares are "relevant share capital" for this purpose.
In addition, the Companies Act provides that a public company may, by
notice in writing (a "Section 212 Notice"), require a person whom the company
knows or has reasonable cause to believe to be, or to have been at any time
during the three years immediately preceding the date on which the notice is
issued, interested in shares comprised in the company's "relevant share capital"
to confirm that fact or (as the case may be) to indicate whether or not that is
the case, and when he holds or has, during relevant time held an interest in
such shares, to give such further information as
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may be required relating to his interest and any other interest in the shares of
which he is aware. The disclosure must be made within such reasonable period as
may be specified in the relevant notice (which may, depending on the
circumstances, be as short as one or two days).
For the purpose of the above obligations, the interest of a person in
shares means any kind of interest in shares, including interests in any shares
(i) in which his spouse, or his child or stepchild under the age of 18, is
interested, (ii) if a corporate body is interested in them and either (a) that
corporate body is or its directors are accustomed to act in accordance with that
person's directions or instructions or (b) that person is entitled to control or
controls one-third or more of the voting power of that corporate body or (iii)
if another party is interested in shares and the person and that other party are
parties to a "concert party" agreement under Section 204 of the Companies Act
(being an agreement that provides for one or more parties to it to acquire
interests in shares of a particular public company, which imposes obligations or
restrictions on any one or more of the parties as to the use, retention or
disposal of such interests acquired pursuant to such agreement and any interest
in the company's shares is in fact acquired by any of the parties pursuant to
the agreement). Such a concert party need not be in writing. The holding of a Dr
Solomon's ADS would generally constitute an interest in the underlying Dr
Solomon's Ordinary Shares.
When a Section 212 Notice is served by a company on a person who is or was
interested in shares of the company and that person fails to give the company
any information required by the notice within the time specified in the notice,
the company may apply to the court for an order directing that the shares in
question be subject to restrictions prohibiting, inter alia, any transfer of
those shares, the exercise of voting rights in respect of such shares, the issue
of further shares in respect of such shares and, other than in a liquidation,
payments, including dividends, in respect of such shares. Such restrictions may
also void any agreement to transfer such shares. In addition, a person who fails
to fulfil the obligations described above is subject to criminal penalties in
the United Kingdom.
Acquirors of Network Associates Common Stock are subject to disclosure
requirements under Section 13(d)(1) of the Exchange Act and Rule 13d-1
thereunder, which provide that any person who becomes the beneficial owner of
more than 5 per cent. of the issued and outstanding Network Associates Common
Stock shall, within 10 days after such acquisition, file a Schedule 13D or 13G,
as the case may be, with the Commission disclosing certain specified
information, and send a copy of the Schedule 13D or 13G, as the case may be, to
Network Associates and to the securities exchange on which the security is
traded.
After the Acquisition, acquirors of Network Associates Common Stock will be
required to comply with, among other things, the provisions of Section 13(d) of
the Exchange Act and Rule 13d-1 thereunder.
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APPENDIX 11
GENERAL INFORMATION
1. RESPONSIBILITY
The directors of Network Associates, whose names appear in paragraph
2(b)(i) below, accept responsibility for the information contained in this
document other than that relating to the Dr Solomon's Group, the directors of Dr
Solomon's and the connected persons of the directors of Dr Solomon's. To the
best of the knowledge and belief of the directors of Network Associates (who
have taken all reasonable care to ensure that such is the case), the information
contained in this document for which they are responsible is in accordance with
the facts and does not omit anything likely to affect the import of such
information.
The directors of Dr Solomon's, whose names are set out in paragraph 2(a)(i)
below, accept responsibility for the information contained in this document
relating to the Dr Solomon's Group, the directors of Dr Solomon's and connected
persons of the directors of Dr Solomon's. To the best of the knowledge and
belief of the directors of Dr Solomon's (who have taken all reasonable care to
ensure that such is the case), the information contained in this document for
which they are responsible is in accordance with the facts and does not omit
anything likely to affect the import of such information.
2. SHAREHOLDINGS AND DEALINGS
In this paragraph 2, reference to the "Disclosure Period" is to that period
commencing on 9 June 1997 (being twelve months prior to the commencement of the
Offer period) and ending at close of business (New York City time) on 23 June
1998.
(A) DR SOLOMON'S SHARES
(i) The shareholdings of the directors of Dr Solomon's and their beneficial
interests in Dr Solomon's Shares together with those of their immediate families
shown in the register maintained in accordance with section 325 of the Companies
Act 1985 at close of business (New York City time) on 23 June 1998 are set out
below:
<TABLE>
<CAPTION>
OPTIONS EXERCISE
TO ACQUIRE PRICE
DR DR PER DR
SOLOMON'S SOLOMON'S SOLOMON'S
ORDINARY ORDINARY EXPIRY ORDINARY
NAME SHARES SHARES TYPE OF OPTIONS DATE SHARE
---- --------- ---------- -------------------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
T.H. Osborne -- 225,000 Group Scheme 05.09.2003 1p
G.M. Leary 3,375,002 -- -- -- --
Dr A.M. Solomon -- 750,010 Group Scheme 06.11.2003 1p
D.R. Stephens 3,374,999 -- -- -- --
K.E. Perrett 3,374,999 -- -- -- --
</TABLE>
The above options comprise options to acquire Dr Solomon's Shares granted
to directors under the terms of the Dr Solomon's Share Option Schemes.
Apax Funds Nominees Limited (as custodian for Apax UK V-A LP and Apax UK
V-B) and Apax Scotland PIC LP hold a total of 945,037 Dr Solomon's Ordinary
Shares. Dr P. Englander is a partner and holds a partnership interest in Apax
Scotland V LP, which is a partner in Apax UK V-A LP. He is also a director of
Apax Partners & Co Ventures Holdings Limited, the parent company of Apax
Partners & Co Ventures Limited, which is the Fund Manager of Apax UK V-A LP and
Apax UK V-B. Dr P. Englander is a partner and holds a partnership interest in
Apax Scotland PIC LP.
As at 23 June 1998, Mr. T.H. Osborne and Dr A.M. Solomon had unvested
options under the Group Scheme in respect of 150,000 and 500,000 Dr Solomon's
Ordinary Shares, respectively.
159
<PAGE> 160
These unvested options ordinarily would vest in equal amounts on 26 November
1998 and 1999. As a result of the Acquisition, all outstanding options
(including those held by Mr. T.H. Osborne and Dr A.M. Solomon) will accelerate
and become immediately exercisable.
(ii) During the Disclosure Period, the following directors of Dr Solomon's
have dealt for value in Dr Solomon's Shares as follows:
<TABLE>
<CAPTION>
DEALING
NUMBER OF PRICE PER
DR SOLOMON'S DR SOLOMON'S
ORDINARY ORDINARY
NAME DATE TRANSACTION SHARES SHARE/ADS
---- ---- ----------- ------------ ------------
<S> <C> <C> <C> <C>
T. H. Osborne................... 25.06.97 Exercise of Option 75,000 1p
25.06.97 Sale 75,000 $7.167
G. M. Leary..................... 25.06.97 Sale 1,125,000 $7.167
Dr. A. M. Solomon............... 25.06.97 Exercise of Option 249,990 1p
25.06.97 Sale 249,990 $7.167
D. R. Stephens.................. 25.06.97 Sale 1,125,000 $7.167
K. E. Perrett................... 25.06.97 Sale 1,125,000 $7.167
</TABLE>
(iii) In addition to their individual interests in Dr Solomon's Shares, the
directors of Dr Solomon's are, for Companies Act purposes, regarded as
interested in all the 6,128,498 Dr Solomon's Ordinary Shares held in the Dr
Solomon's Trust at close of business (New York City time) on 23 June 1998.
(iv) As at close of business (New York City time) on 23 June 1998, Dr
Solomon's Trust held 6,128,498 Dr Solomon's Ordinary Shares. During the
Disclosure Period, the Trustee has dealt for value in such shares in order to
satisfy exercise of options granted under the Group Scheme as follows:
<TABLE>
<CAPTION>
NUMBER OF DR SOLOMON'S
DATE TRANSACTION ORDINARY SHARES PRICE PER SHARE
---- ----------- ---------------------- ---------------
<S> <C> <C> <C>
17.06.97 Sale 30,000 1p
25.06.97 Sale 2,519,922 1p
25.06.97 Sale 54,243 1p
1.08.97 Sale 28,146 1p
20.08.97 Sale 27,996 1p
24.10.97 Sale 4,503 1p
30.12.97 Sale 42,498 1p
21.01.98 Sale 1,711,086 1p
21.01.98 Sale 47,247 1p
29.01.98 Sale 115,251 1p
27.03.98 Sale 9,999 1p
16.04.98 Sale 163,860 1p
22.04.98 Sale 55,500 1p
29.04.98 Sale 1,251 1p
</TABLE>
160
<PAGE> 161
(v) As at close of business (New York City time) on 23 June 1998,
associated group companies of Goldman Sachs own or control the following Dr
Solomon's ADSs and shares of Network Associates Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
SHARES IN
NETWORK
ASSOCIATES NUMBER OF
NAME COMMON STOCK DR SOLOMON'S ADSS
---- --------------- -----------------
<S> <C> <C>
Goldman, Sachs & Co., discretionary customers..... 124,844 156,270
Goldman Sachs Asset Management International,
funds managed................................... -- 178,400
</TABLE>
The above holdings exclude proprietary holdings in shares, options or
convertible bonds held by Goldman, Sachs & Co., which is being treated as an
exempt market maker.
(vi) Goldman Sachs and its associated group companies have dealt for value
in Dr Solomon's ADSs during the period commencing on 9 June 1998 (the date of
the announcement of the Scheme) and ending at close of business (New York City
time) on 23 June 1998:
<TABLE>
<CAPTION>
NUMBER OF DR SOLOMON'S
ADSS
----------------------- DEALING PRICE
NAME DATE PURCHASED SOLD ($)
---- ---- --------- ---- -------------
<S> <C> <C> <C> <C>
Goldman, Sachs & Co., Discretionary
Account................................ 9.6.98 -- 20,700 34.3656
Goldman, Sachs & Co., Discretionary
Account................................ 9.6.98 -- 9,600 35.4036
Goldman, Sachs & Co., Discretionary
Account................................ 9.6.98 -- 18,300 33.844
Goldman Sachs International,............. 9.6.98 -- 5,000 34.00
Goldman Sachs International,
Discretionary Account.................. 12.6.98 -- 6,600 33.16
Goldman Sachs International,
Discretionary Account.................. 15.6.98 -- 31,200 32.34
Goldman Sachs International,
Discretionary Account.................. 16.6.98 -- 31,000 32.60
Goldman Sachs International,
Discretionary Account.................. 17.6.98 -- 85,000 32.48
Goldman Sachs International,
Discretionary Account.................. 18.6.98 -- 6,000 31.983
Goldman, Sachs & Co., Discretionary
Account................................ 23.6.98 -- 4,050 33.225
</TABLE>
The above dealings exclude any proprietary transactions executed by
Goldman, Sachs & Co., which is being treated as an exempt market maker.
(vii) The following persons acting in concert with Network Associates
(other than exempt market makers and exempt fund managers) own or control the
following Dr Solomon's Ordinary Shares and Dr Solomon's ADSs as at close of
business (New York City time) on 23 June 1998:
<TABLE>
<CAPTION>
NO. OF DR SOLOMON'S NO. OF DR SOLOMON'S
NAME ORDINARY SHARES ADSS
- ---- ------------------- -------------------
<S> <C> <C>
Morgan Stanley & Co. Inc. ............................. Nil 2,000
</TABLE>
161
<PAGE> 162
(viii) The following persons acting in concert with Network Associates
(other than exempt market makers and exempt fund managers) have dealt for value
in Dr Solomon's ADSs during the Disclosure Period:
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE ($)
---- ----------- ------------- ---------
<S> <C> <C> <C>
MORGAN STANLEY & CO. INC.
30 June 1997........................................... S 2,000 25.75
24 July 1997........................................... B 2,000 26.81
30 July 1997........................................... B 2,000 23.69
30 July 1997........................................... B 2,300 23.44
6 August 1997......................................... S 2,000 25.75
9 September 1997...................................... S 4,300 26.13
9 September 1997...................................... S 4,500 28.31
9 September 1997...................................... S 300 28.38
12 September 1997...................................... B 1,500 26.81
18 September 1997...................................... B 1,500 26.75
18 September 1997...................................... B 800 26.25
18 September 1997...................................... B 1,500 26.88
13 October 1997........................................ S 200 29.63
23 October 1997........................................ B 800 27.69
18 February 1998....................................... B 900 37.13
25 February 1998....................................... S 300 29.69
27 February 1998....................................... S 800 31.19
27 February 1998....................................... S 900 39.75
27 February 1998....................................... S 1,000 39.00
3 March 1998.......................................... B 300 38.72
5 March 1998.......................................... B 700 39.13
9 March 1998.......................................... B 900 38.88
9 March 1998.......................................... B 100 39.63
9 March 1998.......................................... B 100 38.75
16 March 1998.......................................... S 200 39.00
16 March 1998.......................................... S 800 39.75
17 March 1998.......................................... S 100 39.75
17 March 1998.......................................... S 800 42.88
17 March 1998.......................................... S 800 43.13
17 March 1998.......................................... S 900 43.38
17 March 1998.......................................... S 1,100 43.44
17 March 1998.......................................... S 1,000 43.50
17 March 1998.......................................... S 1,200 43.69
17 March 1998.......................................... S 900 44.81
17 March 1998.......................................... S 300 45.13
18 March 1998.......................................... S 300 44.13
20 March 1998.......................................... B 100 36.13
20 March 1998.......................................... B 200 36.13
20 March 1998.......................................... B 700 35.88
23 March 1998.......................................... B 1,900 34.94
23 March 1998.......................................... B 800 35.06
23 March 1998.......................................... B 200 35.19
23 March 1998.......................................... B 800 35.22
</TABLE>
162
<PAGE> 163
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE ($)
---- ----------- ------------- ---------
<S> <C> <C> <C>
23 March 1998.......................................... B 1,900 35.31
23 March 1998.......................................... B 1,200 35.59
24 March 1998.......................................... B 1,000 35.00
24 March 1998.......................................... B 2,800 35.06
24 March 1998.......................................... B 1,400 35.13
27 March 1998.......................................... B 600 36.19
27 March 1998.......................................... B 700 36.13
27 March 1998.......................................... B 1,400 35.88
31 March 1998.......................................... B 1,100 33.13
1 April 1998.......................................... B 500 33.06
1 April 1998.......................................... B 4,800 33.13
1 April 1998.......................................... B 1,000 33.19
1 April 1998.......................................... B 3,700 33.50
1 April 1998.......................................... B 1,100 33.75
7 April 1998.......................................... B 800 31.75
8 April 1998.......................................... B 1,500 31.00
12 April 1998.......................................... S 1,300 44.13
14 April 1998.......................................... B 900 29.50
17 April 1998.......................................... B 200 29.75
17 April 1998.......................................... B 1,000 29.72
22 April 1998.......................................... B 1,100 34.13
23 April 1998.......................................... S 500 34.56
23 April 1998.......................................... S 1,000 34.56
23 April 1998.......................................... S 1,000 35.13
23 April 1998.......................................... S 2,000 35.19
23 April 1998.......................................... S 1,300 35.50
23 April 1998.......................................... S 600 35.75
23 April 1998.......................................... S 900 35.81
23 April 1998.......................................... S 600 35.88
23 April 1998.......................................... S 1,000 36.06
23 April 1998.......................................... S 1,800 36.69
23 April 1998.......................................... S 1,200 42.31
23 April 1998.......................................... S 1,000 44.13
30 April 1998.......................................... B 1,800 30.88
30 April 1998.......................................... B 200 32.00
30 April 1998.......................................... B 1,400 32.06
30 April 1998.......................................... B 2,100 32.69
30 April 1998.......................................... B 1,400 32.75
30 April 1998.......................................... B 1,300 33.06
30 April 1998.......................................... B 800 33.13
30 April 1998.......................................... B 800 33.50
1 May 1998............................................ B 100 28.31
1 May 1998............................................ B 3,700 28.38
1 May 1998............................................ B 2,000 28.63
4 May 1998............................................ B 2,300 29.75
5 May 1998............................................ B 1,600 29.81
19 May 1998............................................ B 200 28.56
19 May 1998............................................ B 200 28.75
</TABLE>
163
<PAGE> 164
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE ($)
---- ----------- ------------- ---------
<S> <C> <C> <C>
20 May 1998............................................ B 200 28.06
20 May 1998............................................ B 200 28.38
20 May 1998............................................ B 500 28.88
21 May 1998............................................ B 800 27.81
22 May 1998............................................ B 200 28.00
28 May 1998............................................ S 1,200 35.44
29 May 1998............................................ S 100 29.19
29 May 1998............................................ S 1,300 29.56
1 June 1998........................................... S 1,200 29.88
5 June 1998........................................... S 100 29.50
5 June 1998........................................... S 600 32.44
5 June 1998........................................... S 800 32.50
5 June 1998........................................... S 400 32.56
5 June 1998........................................... S 2,100 32.63
5 June 1998........................................... S 1,100 32.75
5 June 1998........................................... S 1,800 32.88
5 June 1998........................................... S 1,700 32.94
5 June 1998........................................... S 1,700 33.00
5 June 1998........................................... S 2,200 33.06
5 June 1998........................................... S 2,000 33.38
5 June 1998........................................... S 100 33.44
8 June 1998........................................... S 1,800 31.44
8 June 1998........................................... S 600 31.63
8 June 1998........................................... S 1,500 32.11
8 June 1998........................................... S 600 32.13
8 June 1998........................................... S 2,100 32.16
8 June 1998........................................... S 1,400 32.19
8 June 1998........................................... S 1,900 32.25
8 June 1998........................................... S 1,600 32.28
8 June 1998........................................... S 2,000 32.50
DEAN WITTER INTER CAPITAL INC.
13 October 1997...................................... B 7,500 31.25
14 October 1997...................................... B 22,500 32.22
4 November 1997....................................... B 20,000 32.71
5 November 1997....................................... B 1,000 33.12
5 November 1997....................................... B 11,000 33.93
6 November 1997....................................... B 48,250 33.50
7 November 1997....................................... B 12,000 33.12
10 November 1997....................................... B 11,000 34.34
11 November 1997....................................... B 10,250 34.50
17 November 1997....................................... B 10,000 36.37
21 November 1997....................................... B 25,000 35.68
1 December 1997....................................... B 15,000 34.87
5 January 1998...................................... B 3,500 31.75
2 February 1998...................................... B 15,000 35.87
25 February 1998...................................... S 20,000 40.37
</TABLE>
164
<PAGE> 165
(ix) On 8 June 1998, Network Associates acquired 200 Dr Solomon's ADSs at a
price of US$32.375 per Dr Solomon's ADS. Network Associates intends to make
further purchases (subject to applicable securities laws) of a small number of
Dr Solomon's Ordinary Shares and/or Dr Solomon's ADSs (representing no more than
600 underlying Dr. Solomon's Ordinary Shares) prior to the Effective Date.
(B) NETWORK ASSOCIATES COMMON STOCK
(i) The shareholdings of directors of Network Associates and their
beneficial interests in Network Associates Common Stock as at close of business
(New York City time) on 23 June 1998 are set out below and have been adjusted to
give effect to the Network Associates 3-for-2 Stock Split.
<TABLE>
<CAPTION>
OPTIONS OVER
NETWORK NETWORK
ASSOCIATES ASSOCIATES EXERCISE PERIOD EXERCISE PRICE
NAME COMMON STOCK COMMON STOCK (GRANT DATE) ($)
---- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
William L. Larson.................. 939 * 1.14
6,564 20.1.1995** 3.66
1,243,125 14.7.1995** 6.47
1,200,000 20.3.1995*** 26.67
300,000 12.1.98 31.34
Leslie G. Denend................... 16,875 **** 41.17
25,312 **** 22.00
25,312 **** 5.93
212,517 * 32.00
121,278 * 24.20
240,000 12.1.98 31.34
Virginia Gemmell................... 16,875 23.9.1997**** 35.59
66,750 23.9.1996**** 29.78
Edwin L. Harper.................... 16,875 16.6.1997**** 41.17
25,312 14.6.1996**** 22.00
25,312 14.6.1995**** 5.93
20,925 * 1.58
Harry J. Saal...................... 989,215
6,250 * 21.80
6,250 * 31.60
3,126 * 35.00
</TABLE>
- ---------------
* Options are completely vested and exercisable.
** Options vest and become exercisable at a rate of 25 per cent. on the first
anniversary of the date of grant, with an additional 2.08 per cent. vesting
each month thereafter.
*** Options vest and become exercisable at a rate of 50 per cent. on 20.9.99
and 50 per cent. on 20.3.02. However, options vest and become exercisable
at a rate of 35 per cent. on 20.3.98, 35 per cent. on 20.3.99 and 30 per
cent. on 20.3.00 if certain financial targets are not met.
**** Options vest and become exercisable at a rate of 33.3 per cent. per annum
with vesting to commence on the first anniversary of the date of grant.
The above options comprise options to acquire Network Associates Common Stock
allocated to directors under the terms of the 1997 Stock Incentive Plan and the
1995 Stock Incentive Plan and the 1994 Employee Stock Purchase Plan.
165
<PAGE> 166
(ii) During the Disclosure Period, the following directors of Network
Associates have dealt for value in Network Associates Common Stock, solely by
exercising options over Network Associates Common Stock. These dealings (all of
which occurred prior to the Network Associates 3-for-2 Stock Split) are as
follows:
<TABLE>
<CAPTION>
NUMBER OF
NAME SALE DATE OPTIONS EXERCISE PRICE SALE PRICE
---- --------- --------- -------------- ----------
($) ($)
<S> <C> <C> <C> <C>
William L. Larson.......................... 26.8.97 140,000 1.7037 57.2500
26.8.97 20,000 5.4815 57.3750
26.8.97 20,000 5.4815 57.0000
26.8.97 10,000 5.4815 57.5000
26.8.97 10,000 5.4815 57.1250
23.1.98 25,000 5.4815 53.8750
23.1.98 25,000 5.4815 53.7500
27.1.98 5,000 5.4815 51.5000
28.1.98 25,000 5.4815 53.0000
28.1.98 25,000 5.4815 52.1250
28.1.98 20,000 5.4815 51.8750
28.1.98 15,000 5.4815 53.7500
29.1.98 2,000 5.4815 55.0000
29.1.98 8,000 5.4815 54.2500
29.1.98 5,000 5.4815 53.6250
29.1.98 10,000 5.4815 53.7500
30.1.98 10,000 5.4815 53.7500
30.1.98 10,000 5.4815 53.8750
30.1.98 15,000 9.7037 54.3750
Edwin L. Harper............................ 27.8.97 925 2.3703 57.1250
22.1.98 2,000 2.3703 52.0625
Leslie G. Denend........................... 25.7.97 5,000 8.8889 60.8750
25.7.97 5,000 8.8889 61.0000
25.7.97 5,000 8.8889 63.7500
22.1.98 3,750 8.8889 53.0100
1.8.97 4,167 10.95 37.6500
22.1.98 16,667 10.9500 53.0100
22.1.98 4,583 14.5500 53.0100
22.1.98 25,000 14.5500 52.0100
22.1.98 10,000 14.5500 51.5120
22.1.98 12,503 14.5500 53.7750
22.1.98 12,497 22.8000 53.7750
23.1.98 29,173 22.8000 53.9330
23.1.98 827 36.3000 53.9330
26.1.98 9,000 36.3000 53.0230
28.1.98 26,000 36.3000 53.7780
28.1.98 50,000 36.3000 53.4460
Virginia Gemmell........................... 4.2.98 1,125 44.6667 58.5000
22.1.98 2,000 44.6667 52.0625
28.1.98 1,000 44.6667 53.5000
28.1.98 1,000 44.6667 52.0000
30.1.98 1,000 44.6667 55.0000
</TABLE>
166
<PAGE> 167
(iii) As at the close of business (New York City time) on 23 June 1998, the
following persons acting in concert with Network Associates (other than exempt
market makers and exempt fund managers) own or control the following shares in
Network Associates Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES IN NETWORK
NAME ASSOCIATES COMMON STOCK
---- ---------------------------
<S> <C>
Miller Anderson & Sherrard LLP 2,369,116
Morgan Stanley Asset Management Inc. 24,450
Morgan Stanley & Co. Inc. 62,039
Van Kampen 1,129,150
Dean Witter Inter Capital Inc. 1,143,200
</TABLE>
(iv) As at the close of business (New York City time) on 23 June 1998,
Morgan Stanley & Co. International Limited own or control the following OTC
options referenced to Network Associates Common Stock:
<TABLE>
<CAPTION>
RELEVANT
NUMBER OF
NETWORK
AMERICAN/ PREMIUM STRIKE ASSOCIATES
EUROPEAN PAID PRICE COMMON
TRADE DATE BUY/SELL CALL/PUT EXERCISE PERIOD $ EXPIRY $ STOCK
- ---------- -------- -------- --------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
13.3.98 S P E 457,500 14.3.2000 39.70 5,000,000
13.3.98 B C E 457,500 14.3.2000 65.9733 5,000,000
16.4.98 B C E 678,960 17.6.98 42.3333 138,000
21.4.98 B C E 804,000 22.6.98 47.0833 150,000
1.6.98 B C E 879,000 3.3.98 38.375 300,000
</TABLE>
As at the close of business (New York City time) on 23 June 1998, Morgan
Stanley & Co. International Limited own or control the following listed options
referenced to Network Associates Common Stock:
<TABLE>
<CAPTION>
RELEVANT
NUMBER OF
NETWORK
AMERICAN/ PREMIUM STRIKE ASSOCIATES
EUROPEAN PAID PRICE COMMON
TRADE DATE BUY/SELL CALL/PUT EXERCISE PERIOD $ EXPIRY $ STOCK
- ---------- -------- -------- --------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
16.4.98 S P A 118,750 19.9.98 30.00 100,000
22.5.98 S P A 131,250 20.6.98 43.375 211,500
26.5.98 S P A 200,000 20.6.98 40.00 100,000
</TABLE>
(v) During the Disclosure Period the following persons acting in concert
with Network Associates (except for exempt market makers, exempt fund managers,
Morgan Stanley & Co. Inc., Miller Anderson & Sherrard LLP and Van Kampen) have
dealt for value in Network Associates Common Stock as follows:
167
<PAGE> 168
MORGAN STANLEY ASSET MANAGEMENT & CO. INC.
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
---- ----------- ------------- --------
<S> <C> <C> <C>
11 February 1998 S 20,000 55.58
17 March 1998 S 8,000 71.98
24 March 1998 B 5,000 62.90
2 April 1998 S 10,000 64.37
14 April 1998 S 10,000 60.39
5 May 1998 S 700 70.24
6 May 1998 S 10,000 70.21
6 May 1998 S 20,000 70.46
8 May 1998 S 10,000 69.03
12 May 1998 S 700 66.30
13 May 1998 S 100 68.31
20 May 1998 S 15,000 66.12
23 May 1998 S 15,000 63.51
</TABLE>
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
- ---- ----------- ------------- --------
<S> <C> <C> <C>
16 December 1997 B 11,700 48.50
16 December 1997 B 3,000 48.75
22 December 1997 S 1,000 50.63
23 December 1997 S 1,000 53.25
29 December 1997 B 4,000 51.00
29 December 1997 B 20,200 51.38
5 January 1998 S 2,000 53.25
9 January 1998 B 1,100 49.81
9 January 1998 B 1,000 50.25
9 January 1998 B 2,900 50.88
9 January 1998 B 5,000 50.94
12 January 1998 B 7,000 47.00
12 January 1998 B 2,000 47.13
16 January 1998 S 33,900 50.75
20 January 1998 S 1,400 52.38
20 January 1998 S 2,000 52.38
22 January 1998 S 2,000 53.75
22 January 1998 S 4,900 53.81
22 January 1998 S 1,000 53.88
22 January 1998 S 900 54.00
28 January 1998 B 4,800 52.63
4 February 1998 S 32,800 58.50
5 February 1998 S 7,400 57.50
5 February 1998 S 5,700 57.88
5 February 1998 S 45,000 58.63
9 February 1998 B 8,500 56.50
9 February 1998 B 8,900 57.50
9 February 1998 B 100 57.56
9 February 1998 B 1,000 57.59
9 February 1998 S 25,000 57.94
9 February 1998 S 20,000 58.10
</TABLE>
168
<PAGE> 169
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
- ---- ----------- ------------- --------
<S> <C> <C> <C>
10 February 1998 B 10,000 55.81
10 February 1998 B 21,000 55.94
10 February 1998 B 4,000 56.00
10 February 1998 B 300 56.19
10 February 1998 B 1,700 56.25
10 February 1998 B 9,800 56.50
11 February 1998 S 15,000 58.44
11 February 1998 B 10,000 58.94
11 February 1998 S 10,000 59.13
11 February 1998 S 51,000 61.00
11 February 1998 S 18,200 61.25
12 February 1998 B 4,000 62.94
12 February 1998 B 1,100 63.00
13 February 1998 S 50,000 64.50
17 February 1998 S 12,500 63.75
17 February 1998 S 25,000 64.00
18 February 1998 S 11,500 62.45
23 February 1998 S 15,000 61.94
23 February 1998 S 5,000 62.00
23 February 1998 S 15,000 62.25
23 February 1998 S 20,000 62.31
24 February 1998 B 1,600 64.63
24 February 1998 B 400 64.50
24 February 1998 B 3,000 63.75
24 February 1998 B 800 63.63
24 February 1998 B 2,500 63.56
24 February 1998 B 1,200 63.75
25 February 1998 B 10,400 65.44
25 February 1998 B 2,600 65.25
25 February 1998 B 3,000 65.25
25 February 1998 S 20,000 65.00
25 February 1998 S 6,000 65.06
25 February 1998 S 20,000 64.20
25 February 1998 S 70,000 64.35
25 February 1998 S 1,000 65.00
10 March 1998 S 35,100 64.44
10 March 1998 S 800 64.50
10 March 1998 S 100 64.53
10 March 1998 S 3,000 64.56
20 March 1998 B 23,400 62.44
20 March 1998 B 1,000 63.19
20 March 1998 B 15,600 63.25
20 March 1998 B 2,700 65.19
20 March 1998 B 47,300 65.25
24 March 1998 B 35,000 65.40
2 April 1998 B 118,500 64.47
3 April 1998 B 85,000 65.13
6 April 1998 S 10,000 66.44
6 April 1998 S 20,000 66.45
6 April 1998 S 15,000 66.69
6 April 1998 S 2,500 66.75
6 April 1998 S 1,000 66.94
</TABLE>
169
<PAGE> 170
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
- ---- ----------- ------------- --------
<S> <C> <C> <C>
6 April 1998 S 1,000 67.00
7 April 1998 S 20,000 66.01
8 April 1998 S 100,000 64.00
9 April 1998 S 10,000 64.38
13 April 1998 B 20,000 60.73
13 April 1998 B 40,000 60.74
13 April 1998 B 10,000 61.32
13 April 1998 B 48,000 61.50
13 April 1998 B 15,000 62.62
14 April 1998 B 30,000 60.80
14 April 1998 B 2,500 65.00
15 April 1998 S 40,000 62.37
15 April 1998 S 50,000 63.39
15 April 1998 S 20,000 63.50
16 April 1998 B 30,000 63.19
16 April 1998 B 25,000 63.26
16 April 1998 B 15,000 63.36
16 April 1998 B 25,000 64.23
16 April 1998 B 20,000 64.44
16 April 1998 B 7,500 64.45
20 April 1998 B 13,000 65.00
21 April 1998 S 10,000 68.13
22 April 1998 B 45,000 69.50
22 April 1998 S 20,000 70.86
23 April 1998 B 50,000 68.83
27 April 1998 B 20,000 66.16
27 April 1998 S 20,000 66.85
30 April 1998 S 25,000 68.35
1 May 1998 S 25,000 70.10
6 May 1998 B 2,700 70.25
6 May 1998 S 20,000 71.11
6 May 1998 S 2,700 70.69
7 May 1998 B 25,000 68.99
10 May 1998 B 20,000 42.46
11 May 1998 B 10,000 66.38
11 May 1998 B 17,000 66.53
11 May 1998 B 20,000 67.30
13 May 1998 S 25,000 68.09
14 May 1998 S 25,000 69.38
18 May 1998 S 50,000 65.00
18 May 1998 B 20,000 67.13
18 May 1998 B 1,500 70.00
19 May 1998 B 20,000 66.04
22 May 1998 B 20,000 63.38
3 June 1998 B 7,500 38.94
3 June 1998 B 13,900 39.00
3 June 1998 B 20,000 39.71
4 June 1998 B 18,900 41.90
9 June 1998 S 50,000 43.45
11 June 1998 B 10,000 42.50
11 June 1998 B 5,000 42.62
12 June 1998 B 25,000 41.06
</TABLE>
170
<PAGE> 171
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
- ---- ----------- ------------- --------
<S> <C> <C> <C>
12 June 1998 B 55,000 41.00
12 June 1998 B 10,000 41.02
12 June 1998 B 35,000 41.12
12 June 1998 B 15,000 41.87
12 June 1998 B 5,000 41.75
12 June 1998 B 5,000 41.62
12 June 1998 B 25,000 42.37
17 June 1998 B 50,000 41.15
17 June 1998 B 30,000 41.52
17 June 1998 B 120,000 41.67
19 June 1998 S 50,000 42.19
22 June 1998 B 317,250 43.37
23 June 1998 S 25,000 44.96
</TABLE>
DEAN WITTER INTER CAPITAL
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
- ---- ----------- ------------- --------
<S> <C> <C> <C>
14 October 1997 B 20,000 59.93
14 October 1997 B 100,000 61.99
22 October 1997 B 60,000 55.03
22 January 1998 B 40,000 53.87
23 January 1998 B 6,000 54.00
11 February 1998 B 141,900 60.16
12 February 1998 B 10,000 60.75
12 February 1998 B 12,200 62.50
13 February 1998 B 5,000 64.68
13 February 1998 B 10,000 65.56
13 February 1998 B 5,200 64.68
17 February 1998 B 14,450 64.08
23 February 1998 B 32,450 62.41
24 February 1998 B 25,000 63.10
25 February 1998 B 10,000 65.00
25 February 1998 B 26,800 65.04
26 February 1998 B 2,400 65.00
27 February 1998 B 13,550 65.50
2 March 1998 B 29,150 65.25
4 March 1998 B 10,000 65.37
4 March 1998 B 3,000 65.25
4 March 1998 B 5,000 65.50
5 March 1998 B 5,000 65.92
5 March 1998 B 12,600 65.92
6 March 1998 B 10,000 67.87
10 March 1998 B 33,700 65.24
11 March 1998 B 17,600 68.06
13 March 1998 B 10,000 70.75
13 March 1998 B 7,000 70.87
20 March 1998 B 30,400 65.87
27 March 1998 B 1,000 65.50
20 April 1998 S 20,000 63.75
20 April 1998 S 20,000 68.50
21 April 1998 B 26,000 68.62
24 April 1998 S 20,000 68.50
</TABLE>
171
<PAGE> 172
<TABLE>
<CAPTION>
DATE TRANSACTION NO. OF SHARES PRICE($)
- ---- ----------- ------------- --------
<S> <C> <C> <C>
24 April 1998 S 20,000 69.97
29 April 1998 B 30,000 68.62
30 April 1998 B 17,500 68.62
30 April 1998 B 2,000 68.62
30 April 1998 B 500 68.62
30 April 1998 B 100 69.97
30 April 1998 B 55,100 68.62
30 April 1998 B 100 69.97
1 May 1998 S 70,000 69.68
1 May 1998 S 40,000 68.62
14 May 1998 S 10,000 65.25
14 May 1998 S 10,000 68.75
21 May 1998 S 30,000 65.25
</TABLE>
(vi) On 9 June 1997 and 9 June 1998, Morgan Stanley & Co. Inc. owned or
controlled 44,900 and 62,039 shares of Network Associates Common Stock
respectively. A list of the dealings for value by Morgan Stanley & Co. Inc. in
the shares of Network Associates Common Stock during the period 9 May 1998 to 8
June 1998 is on display as provided for in paragraph 7 below. During the period
9 June 1998 to 23 June 1998, Morgan Stanley & Co. Inc. did not deal for value in
Network Associates Common Stock.
On 9 June 1997 and 9 June 1998, Miller Anderson & Sherrard LLP owned or
controlled 186,898 and 2,369,116 shares of Network Associates Common Stock
respectively. A list of the dealings for value by Miller Anderson & Sherrard LLP
in the shares of Network Associates Common Stock during the period 9 May 1998 to
8 June 1998 is on display as provided for in paragraph 7 below. During the
period 9 June 1998 to 23 June 1998, Miller Anderson & Sherrard LLP did not deal
for value in Network Associates Common Stock.
On 9 June 1997 and 9 June 1998, Van Kampen owned or controlled 993,300 and
1,129,150 shares of Network Associates Common Stock respectively. A list of the
dealings for value by Van Kampen in the shares of Network Associates Common
Stock during the period 9 May 1998 to 8 June 1998 is on display as provided for
in paragraph 7 below. During the period 9 June 1998 to 23 June 1998, Van Kampen
did not deal for value in Network Associates Common Stock.
(vii) The following OTC options were entered into by Morgan Stanley & Co.
International Limited during the period from 9 June 1997 to 8 June 1998 but had
been closed out or expired before 9 June 1998:
<TABLE>
<CAPTION>
RELEVANT
NUMBER OF
NETWORK
AMERICAN/ PREMIUM STRIKE ASSOCIATES
TRADE EUROPEAN PAID PRICE COMMON
DATE BUY/SELL CALL/PUT EXERCISE PERIOD $ EXPIRY $ STOCK
- -------- -------- -------- --------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
4.12.97 B C E 1,112,500 29.1.98 49.875 250,000
15.12.97 B C E 1,022,500 5.2.98 46.00 250,000
22.12.97 B C E 1,010,000 26.2.98 50.25 200,000
23.12.97 B C E 1,554,000 2.3.98 50.375 300,000
29.12.97 B C E 1,016,000 5.3.98 51.375 200,000
7.1.98 B C E 480,000 13.3.98 53.625 100,000
15.1.98 B C E 880,000 18.3.98 50.50 200,000
29.1.98 B C E 1,087,500 2.4.98 54.50 250,000
11.2.98 B C E 902,000 16.4.98 61.125 200,000
2.4.98 B C E 750,000 3.6.98 43.00 150,000
</TABLE>
172
<PAGE> 173
The following listed option contracts were entered into during the period 9
June 1997 to 8 June 1998 but had been closed out or expired before 9 June 1998.
All such contracts were entered into by Morgan Stanley & Co. International
Limited, except for those entered into on 20 May 1998 alone which were entered
into by Morgan Stanley & Co. Inc.:
<TABLE>
<CAPTION>
RELEVANT
NUMBER OF
NETWORK
AMERICAN/ PREMIUM STRIKE ASSOCIATES
EUROPEAN PAID PRICE COMMON
TRADE DATE BUY/SELL CALL/PUT EXERCISE PERIOD $ EXPIRY $ STOCK
- ---------- -------- -------- --------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
10.6.97 B C A 19,375 19.7.97 70.00 10,000
24.7.97 S P A 10,688 16.8.97 75.00 9,000
9.12.97 S C A 59,063 20.12.97 50.00 27,000
31.12.97 S P A 14,063 17.1.98 50.00 12,500
13.1.98 S C A 61,625 17.1.98 45.00 17,000
22.1.98 B C A 12,500 21.2.98 55.00 5,000
2.2.98 S P A 67,500 21.2.98 55.00 40,000
4.3.98 S P A 3,125 21.3.98 55.00 10,000
17.3.98 S P A 29,600 21.3.98 70.00 29,600
8.4.98 S P A 412,500 16.5.98 65.00 100,000
9.4.98 S P A 31,000 18.4.98 65.00 15,500
9.4.98 S P A 98,000 16.5.98 70.00 14,000
13.4.98 S P A 46,875 18.4.98 60.00 50,000
16.4.98 S C A 168,750 16.5.98 65.00 50,000
21.4.98 B C A 278,125 16.5.98 60.00 25,000
20.5.98 B C A 60,938 19.9.98 70.00 12,500
20.5.98 S P A 96,875 19.9.98 60.00 25,000
1.6.98 B C A 18,000 18.7.98 40.00 6,000
</TABLE>
(viii) Goldman Sachs, financial adviser to Dr Solomon's, and its associated
group companies (other than as exempt market makers and exempt fund managers)
have dealt for value in Network Associates Common Stock during the period
commencing on 9 June 1998 (the date of the announcement of the Acquisition) and
ending at the close of business (New York City time) on 23 June 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES IN
NETWORK ASSOCIATES DEALING PRICE
NAME DATE COMMON STOCK ($)
---- -------- ------------------- -------------
PURCHASED SOLD
<S> <C> <C> <C>
Goldman, Sachs & Co. -- Discretionary
Account 9.6.98 1,500 91.875
Goldman, Sachs & Co. -- Discretionary
Account 9.6.98 3,500 40.4375
Goldman, Sachs & Co. -- Discretionary
Account 9.6.98 38 40.625
</TABLE>
- ---------------
Note: the above schedule excludes any Goldman Sachs' client trades executed
with brokers on the floor of NASDAQ by Goldman, Sachs & Co. acting as agent.
(C) GENERAL
(i) Save as disclosed herein, neither Network Associates, nor the directors
of Network Associates or any members of their immediate families and related
trusts or any pension fund of Network Associates or any of its subsidiaries or
any bank, stockbroker, financial or other adviser of Network Associates or any
person controlling, controlled by or under the same control as any such
173
<PAGE> 174
adviser (other than an exempt market maker or an exempt fund manager) or any
person whose investments are managed on a discretionary basis by fund managers
(other than exempt fund managers) connected with Network Associates owns or
controls, or is interested in any Network Associates Common Stock or any
securities convertible into, rights to subscribe for, or options in respect of,
or derivatives referenced to, any Network Associates Common Stock, neither has
any such person (other than Morgan Stanley & Co. Inc., Miller Anderson &
Sherrard LLP and Van Kampen) dealt therein for value during the Disclosure
Period. This statement applies only to interests and dealings in securities of
Network Associates required to be disclosed in accordance with the City Code.
(ii) Save as disclosed herein, none of Dr Solomon's, its subsidiaries, its
directors or any member of their immediate families and related trusts or any
pension fund of Dr Solomon's or any of its subsidiaries or any bank,
stockbroker, financial or other professional adviser of Dr Solomon's or any
person controlling, controlled by or under the same control as any such adviser
(other than an exempt market maker) or any person whose investments are managed
on a discretionary basis by fund managers (other than exempt fund managers)
connected with Dr Solomon's owns or controls, or is interested in any Network
Associates Common Stock or any securities convertible into, rights to subscribe
for or options in respect of or derivatives referenced to any Network Associates
Common Stock, neither has Dr Solomon's nor any of its directors dealt therein
for value during the Disclosure Period nor has any other such person dealt
therein for value between 9 June 1998 and close of business (New York City time)
on 23 June 1998. This statement applies only to interests and dealings in
securities of Network Associates required to be disclosed in accordance with the
City Code.
(iii) Save as disclosed herein, neither Network Associates nor the
directors of Network Associates or any members of their immediate families and
related trusts or any pension fund of Network Associates or any of its
subsidiaries or any bank, stockbroker, financial or other adviser of Network
Associates or any person controlling, controlled by or under the same control as
any such adviser (other than an exempt market maker or an exempt fund manager)
or any person whose investments are managed on a discretionary basis by fund
managers (other than exempt fund managers) connected with Network Associates
owns or controls, or is interested in any Dr Solomon's Shares or any securities
convertible into, rights to subscribe for, or options in respect of, or
derivatives referenced to, any Dr Solomon's Shares, neither has any such person
dealt therein for value during the Disclosure Period. This statement applies
only to interests and dealings in securities of Dr Solomon's required to be
disclosed in accordance with the City Code.
(iv) Save as disclosed herein, none of the subsidiaries of Dr Solomon's,
nor any pension fund of Dr Solomon's or of any such subsidiary nor the directors
of Dr Solomon's and members of their immediate families and related trusts, nor
any bank, stockbroker, financial or other professional adviser of Dr Solomon's,
nor any person controlling, controlled by or under the same control as any such
adviser (other than an exempt market maker) nor any person whose investments are
managed on a discretionary basis by fund managers (other than exempt fund
managers) connected with Dr Solomon's owns or controls, or is interested in any
Dr Solomon's Shares or any securities convertible into, rights to subscribe for,
or options in respect of, or derivatives referenced to, any Dr Solomon's Shares,
neither has Dr Solomon's nor any of its directors dealt therein for value in the
Disclosure Period, nor has any other such person dealt therein for value between
9 June 1998 and close of business (New York City time) on 23 June 1998. This
statement applies only to interests and dealings in securities of Dr Solomon's
required to be disclosed in accordance with the City Code.
(v) No arrangement exists between any person and Network Associates or any
associate of Network Associates or any person acting in concert with Network
Associates in relation to relevant securities, including, in addition to
indemnity and option arrangements, any agreement or understanding, formal or
informal, of whatever nature, which may be an inducement to deal or refrain from
dealing.
174
<PAGE> 175
(vi) No arrangement exists between any person and Dr Solomon's or any
associate of Dr Solomon's in relation to relevant securities including in
addition to indemnity and option arrangements, any agreement or understanding,
formal or informal, of whatever nature, which may be an inducement to deal or
refrain from dealing.
(vii) No person has undertaken to Network Associates to vote, or to
instruct the Depositary to vote, in favour of any resolution to approve the
Acquisition or the Scheme.
In this paragraph (c):
an "associate" means any of:
(i) the subsidiaries or associated companies of Network Associates or Dr
Solomon's (as the case may be) and companies of which any such subsidiaries or
associated companies are associated companies;
(ii) the banks, financial and other professional advisers (including
stockbrokers) to Network Associates or Dr Solomon's (as the case may be) or any
company referred to in paragraph (i) above, including persons controlling,
controlled by or under the same control as such banks, financial or other
professional advisers;
(iii) the directors, together with their close relatives and related trusts
of Network Associates or Dr Solomon's (as the case may be) or of any company
referred to in paragraph (i) above; and
(iv) the pension funds of Network Associates or Dr Solomon's (as the case
may be) or any company referred to in (i) above;
ownership or control of 20 per cent. or more of the equity share capital is
regarded as the test of associated company status and "control" means a holding,
or aggregate holdings, of shares carrying 30 per cent. or more of the voting
rights attributable to the share capital of a company which are currently
exercisable at a general meeting, irrespective of whether the holding or
aggregate holding gives de facto control;
references to a "bank" do not include a bank whose sole relationship with Dr
Solomon's or Network Associates is the provision of normal commercial banking
services or such activities in connection with the Acquisition or the Scheme as
handling acceptances and other registration work; and
"relevant securities" means Network Associates Common Stock, Dr Solomon's Shares
and securities convertible into, rights to subscribe for, options (including
trade options) in respect of, and derivatives referenced to, any of the
foregoing.
3. OPTION ARRANGEMENTS
As at close of business (New York City time) on 23 June 1998, the number of
options outstanding under the Dr Solomon's Share Option Schemes was as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
SHARE SCHEME OUTSTANDING
------------ -----------------
<S> <C>
Dr Solomon's Group Share Option Scheme..................... 6,128,498
Dr Solomon's Company Share Option Scheme................... 605,277
Executive Share Option Scheme 1996......................... 1,302,411
Savings Related Option Scheme.............................. NIL
</TABLE>
4. MARKET QUOTATIONS
The following table sets out the last sale prices for a Dr Solomon's ADS as
reported on NASDAQ and EASDAQ and for a share of Network Associates Common Stock
as reported on NASDAQ on the first Business Day of each month from January 1998
to June 1998 inclusive, on
175
<PAGE> 176
8 June 1998 (being the last Business Day prior to the announcement of the
Acquisition) and on 23 June 1998:
<TABLE>
<CAPTION>
DR SOLOMON'S ADS ON DR SOLOMON'S ADS ON NETWORK ASSOCIATES
NASDAQ EASDAQ COMMON STOCK
DATE ($) ($) ($)
---- ------------------- ------------------- ------------------
<S> <C> <C> <C>
2 January 1998........... 31.63 31.02 35.67
2 February 1998.......... 35.63 35.25 38.17
2 March 1998............. 38.00 39.63 42.75
1 April 1998............. 34.00 32.88 43.80
1 May 1998............... 28.69 32.50 46.67
1 June 1998.............. 29.00 30.00 38.81
8 June 1998.............. 32.13 31.50 42.00
23 June 1998............. 33.25 32.75 45.31
</TABLE>
Per share amounts for Network Associates Common Stock have been restated to
give retroactive effect to the Network Associates 3-for-2 Stock Split.
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 holders of Dr Solomon's Shares pursuant to the
Scheme. Dr Solomon's Shareholders should obtain current market quotations for
Network Associates Common Stock and Dr Solomon's ADSs prior to the Extraordinary
General Meeting.
Neither Network Associates nor Dr Solomon's has paid any cash dividends
since October 1992 and November 1996 respectively. Network Associates currently
intends that, for the foreseeable future following the Effective Date, Network
Associates will retain earnings for development of its business and not
distribute earnings to stockholders as dividends. The declaration and payment by
Network Associates following the Effective Date of future dividends, if any, and
the amount thereof will depend upon Network Associates' results of operations,
financial condition, cash requirements, future prospects, limitations imposed by
credit agreements or senior securities and other factors deemed relevant by the
Network Associates Board.
5. COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Network
Associates Common Stock and Dr Solomon's Ordinary Shares and combined per share
data on an unaudited pro forma basis after giving effect to the Acquisition on a
pooling of interests basis of accounting, assuming that 0.27625 of a share of
Network Associates Common Stock is issued in exchange for one Dr Solomon's
Ordinary Share (or 0.82875 per Dr Solomon's ADS). 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 Dr Solomon's and notes thereto (which are included in
Appendices 2, 3 and 6 of this document). The pro forma combined financial data
is not necessarily indicative of the operating results that would have been
achieved had the Acquisition been consummated as of the beginning of the periods
presented and should not be construed as representative of future performance or
results of operations. Per share information set forth in the historical
financial statements of Network Associates for the years
176
<PAGE> 177
ended 31 December 1995, 1996 and 1997 have been restated in the following table
to reflect the Network Associates 3-for-2 Stock Split.
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER THREE MONTHS
-------------------------- ENDED
1995 1996 1997 31 MARCH 1998
----- ------ ------- ----------------
<S> <C> <C> <C> <C>
HISTORICAL -- NETWORK ASSOCIATES
Net income (loss) per share of Network
Associates Common Stock............... $0.44 $ 0.65 $ (0.28) $0.39
Book value per share(1)................. $3.52 $ 3.29 $ 3.43 $4.32
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 30 NOVEMBER THREE MONTHS
-------------------------- ENDED
1995 1996 1997 28 FEBRUARY 1998
----- ------ ------- ----------------
<S> <C> <C> <C> <C>
HISTORICAL -- DR SOLOMON'S
Net income (loss) per Ordinary Share.... $0.10 $(6.34) $ 0.00 $0.23
Book value per Ordinary Share(1)........ $0.11 $ 2.11 $ 2.10 $2.29
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER THREE MONTHS
-------------------------- ENDED
1995 1996 1997 31 MARCH 1998
----- ------ ------- ----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED NET INCOME (LOSS) PER
SHARE(2)
Per share of Network Associates Common
Stock................................. $0.39 $ 0.07 $ (0.24) $0.37
Equivalent Dr Solomon's Ordinary
Share(3).............................. $0.11 $ 0.02 $ (0.07) $0.10
</TABLE>
<TABLE>
<CAPTION>
31 DECEMBER 1997 31 MARCH 1998
---------------- -------------
<S> <C> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(4)
Per share of Network Associates Common Stock........ $3.26 $4.07
Equivalent Dr Solomon's Ordinary Share(3)........... $0.90 $1.12
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and preferred stock, on an as
if converted basis outstanding at the end of each period.
(2) The pro forma combined net income per share for the years ended 31 December
1995, 1996 and 1997 include Dr Solomon's net income per share based on the
aggregation of unaudited quarterly information for the years ended 30
November 1995, 1996 and 1997, respectively. The pro forma combined net
income per share for the three months ended 31 March 1998 includes Dr
Solomon's income per share for the quarter ended 28 February 1998.
(3) The Dr Solomon's equivalent pro forma combined per share amounts are
calculated by multiplying the combined pro forma per share amounts by the
exchange ratio of 0.27625 of a share of Network Associates Common Stock for
each Dr Solomon's Ordinary Share.
(4) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of each period.
6. MISCELLANEOUS
(a) Save as disclosed herein, no agreement, arrangement or understanding
(including any compensation arrangement) exists between Network Associates or
any person acting in concert with it and any of the directors or recent
directors, shareholders or recent shareholders of Dr Solomon's having any
connection with or dependence on or which is conditional on the outcome of the
Scheme.
(b) Network Associates will be the ultimate holder of the Dr Solomon's
Ordinary Shares acquired by it under the Scheme. There is no agreement,
arrangement or understanding whereby
177
<PAGE> 178
the beneficial ownership of any of the Dr Solomon's Ordinary Shares to be
acquired pursuant to the Scheme will be transferred to any other person, except
that Network Associates intends that immediately following the Effective Date it
will transfer all or a portion of the Dr Solomon's Ordinary Shares owned by it
to a direct or indirect subsidiary.
(c) It is not proposed in connection with the Scheme that any payment or
other benefit shall be made or given to any director or recent director of Dr
Solomon's or Network Associates as compensation for loss of office or as
consideration for, or in connection with, his retirement from office.
(d) The total emoluments receivable by the directors of Network Associates
will not be varied as a result of the Scheme becoming effective.
(e) Except with the consent of the Panel, settlement of the consideration
to which any holder of Dr Solomon's Ordinary Shares is entitled under the terms
of the Scheme will be implemented in full in accordance with the terms of the
Scheme without regard to any lien, right of set-off, counterclaim or other
analogous right to which Network Associates may otherwise be, or claim to be,
entitled as against any holder of Dr Solomon's Ordinary Shares.
(f) Goldman Sachs has given and has not withdrawn its written consent to
the issue of this document with the references to its name and to the inclusion
of its joint letter, in the form and context in which they appear.
(g) Goldman Sachs, which is regulated by The Securities and Futures
Authority Limited, is acting for Dr Solomon's in connection with the Scheme and
the Acquisition and for no-one else and will not be responsible to anyone other
than Dr Solomon's for providing the protections afforded to customers of Goldman
Sachs or for providing advice in relation to the Scheme or the Acquisition.
(h) In consideration for Goldman Sachs' services, Dr Solomon's has agreed
to pay Goldman Sachs an advisory fee upon completion of the Acquisition.
(i) Morgan Stanley has given and has not withdrawn its written consent to
the issue of this document with the references to its name and to the inclusion
of its joint letter, in the form and context in which they appear.
(j) Morgan Stanley, which is regulated by The Securities and Futures
Authorities Limited, is acting for Network Associates in connection with the
Scheme and the Acquisition and for no-one else and will not be responsible to
anyone other than Network Associates for providing the protections afforded to
the customers of Morgan Stanley or for providing advice in relation to the
Scheme or the Acquisition.
(k) Coopers & Lybrand L.L.P. and Deloitte & Touche have given and not
withdrawn their written consents to the issue of this document with references
to their respective names in the form and context in which they appear.
7. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection from
9.30 a.m. to 5.30 p.m. (London time) on any weekday (Saturdays and public
holidays excepted) at the offices of Macfarlanes at 10 Norwich Street, London
EC4A 1BD until the Effective Date:
(a) the Memorandum and Articles of Association of Dr Solomon's as
currently in force and the proposed amended Articles of Association of Dr
Solomon's and the Second Restated Certificate of Incorporation and Bylaws
(as amended) of Network Associates;
(b) the audited financial statements of Dr Solomon's for the period 7
February 1996 to 31 May 1996 and the financial year ended 31 May 1997, the
interim results of Dr Solomon's for the nine months ended 28 February 1998,
the audited results of S&S International (the former holding company of Dr
Solomon's businesses) for the period 1 June 1995 to 6 February 1996
178
<PAGE> 179
(the date of the management buyout) and the audited accounts for S&S
International for the two financial years ended 31 May 1995;
(c) the audited consolidated accounts of Network Associates for the
three financial years ended 31 December 1997 and the unaudited published
financial statements of Network Associates for the quarter ended 31 March
1998.
(d) the lists of dealings referred to in paragraph 2(vi) of Appendix
11 of this document;
(e) the material contracts referred to in paragraph 3 of Appendix 8
and paragraph 4 of Appendix 9 of this document;
(f) the rules of the Dr Solomon's Share Option Schemes and the trust
deed of the Dr Solomon's Trust;
(g) the letters of consent referred to in paragraph 6 of Appendix 11
of this document;
(h) the service contracts of the directors of Dr Solomon's referred to
in paragraph 4 of Appendix 8 of this document;
(i) a full list of the dealings shown in aggregated form in paragraph
2 of Appendix 11 of this document; and
(j) this document.
179
<PAGE> 180
IN THE HIGH COURT OF JUSTICE No. 003290 of 1998
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF DR SOLOMON'S GROUP PLC
AND
IN THE MATTER OF THE COMPANIES ACT 1985
SCHEME OF ARRANGEMENT
(UNDER SECTION 425 OF THE COMPANIES ACT 1985)
BETWEEN
DR SOLOMON'S GROUP PLC
AND
THE HOLDERS OF THE SCHEME SHARES
(AS HEREINAFTER DEFINED)
PRELIMINARY
(a) In this Scheme, unless inconsistent with the subject or context, the
following expressions bear the following meanings:
"BUSINESS DAY" means a day (excluding Saturdays and Sundays) on which banks
generally are open in London for the transaction of normal banking business;
"COURT" means the High Court of Justice of England and Wales;
"EFFECTIVE DATE" means the day on which the Scheme becomes effective in
accordance with Clause 4 of this Scheme;
"HOLDER" includes any person entitled by transmission;
"HEARING DATE" means the date of the hearing by the Court of the petition
to sanction the Scheme;
"NETWORK ASSOCIATES" means Networks Associates, Inc.;
"NETWORK ASSOCIATES COMMON STOCK" means shares of common stock, par value
U.S.$0.01 each, in the capital of Network Associates to be issued fully paid and
non-assessable by Network Associates pursuant to Clause 2(a) of this Scheme;
"RECORD DATE" means 10.00 p.m. (London time) on the business day
immediately preceding the Hearing Date;
"SCHEME SHARES" means the ordinary shares of 1p each in the capital of Dr
Solomon's in issue at the date hereof, together with all (if any) additional
ordinary shares issued after the date hereof and up until the Record Date on
terms that the original or any subsequent holder thereof shall be bound by the
Scheme, but excluding any such ordinary shares held by Network Associates or any
person identified by written notice to Dr Solomon's from Network Associates as
its subsidiary or nominee;
"DR SOLOMON'S" means Dr Solomon's Group PLC;
"THIS SCHEME" means this Scheme in its present form or with or subject to
any modification, addition or condition approved or imposed by the Court;
180
<PAGE> 181
(b) The authorised share capital of Dr Solomon's is L582,318 divided into
58,231,800 ordinary shares of 1p each of which, as at 23 June 1998, 55,310,000
ordinary shares have been issued and are fully paid and the remainder are
unissued. Of such issued ordinary shares, 38,111,465 were on 23 June 1998 in
American Depositary Receipt ("ADR") form, each ADR representing an American
Depositary Share which represents three ordinary shares.
(c) Network Associates was incorporated in the State of Delaware in the
United States of America on 14 August 1992. The present authorised share capital
of Network Associates is 300,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock, of which as at 31 May 1998 130,333,155 shares of Network
Associates Common Stock and one share of Series A Preferred Stock are fully paid
and non-assessable and in issue. The remaining shares are unissued.
(d) Network Associates has agreed to appear by Counsel on the hearing of
the petition to sanction this Scheme to consent thereto and to undertake to the
Court to be bound thereby and to execute and do or procure to be executed and
done all such documents, acts and things as may be necessary or desirable to be
executed or done by it for the purpose of giving effect to this Scheme.
THE SCHEME
1. CANCELLATION OF SCHEME SHARES
(a) The share capital of Dr Solomon's shall be reduced by the cancellation
of the Scheme Shares.
(b) Forthwith and contingently upon the said reduction of capital taking
effect:
(i) the share capital of Dr Solomon's shall be increased to its former
amount by the creation of such number of ordinary shares of 1p each as
shall be equal to the number of Scheme Shares cancelled as aforesaid; and
(ii) Dr Solomon's shall apply the reserve arising as a result of such
reduction of capital in paying up in full at par the ordinary shares of 1p
each created pursuant to sub-clause (b)(i) of this Clause 1 which shall be
allotted and issued credited as fully paid to Network Associates and/or its
nominee(s).
2. CONSIDERATION FOR THE CANCELLATION OF SCHEME SHARES
(a) In consideration of the cancellation of the Scheme Shares, Network
Associates shall issue fully paid and non-assessable to each person who at the
Record Date is the registered holder of Scheme Shares, 0.27625 shares of Network
Associates Common Stock in respect of each Scheme Share then held by such
persons save that no fraction of a share of Network Associates Common Stock
shall be issued pursuant to this Scheme, but in lieu thereof each holder of
Scheme Shares on the Record Date who would otherwise be entitled to such a
fraction of a share (after aggregating all fractions of shares of Network
Associates Common Stock to be received by such a person) shall instead be paid
by Network Associates an amount in cash payable in United States dollars
(rounded to the nearest whole U.S. cent) equal to such fraction multiplied by
the last sale price as reported on The NASDAQ National Market ("NASDAQ") of a
share of Network Associates Common Stock as reported on NASDAQ on the Business
Day following the Effective Date.
(b) Network Associates shall issue such shares of Network Associates Common
Stock as are required to be issued by it to give effect to this Scheme and shall
deliver documents of title for the shares of Network Associates Common Stock so
issued and cheques (in the case of joint holders of Scheme Shares, made payable
to the first named joint holder) in respect of any fractional entitlements to
the persons respectively entitled thereto.
(c) All deliveries of notices, documents of title and cheques required to
be made pursuant to this Scheme shall be effected by posting the same in
pre-paid envelopes addressed to the persons
181
<PAGE> 182
respectively entitled thereto at their respective addresses as appearing in the
Register of Members of Dr Solomon's at the Record Date (or, in the case of joint
holders, to the address of that one of the joint holders whose name stands first
in the said Register of Members in respect of the joint holding) or to such
other addresses (if any) as such persons may respectively direct in writing.
(d) Neither Network Associates nor Dr Solomon's shall be responsible for
any loss or delay in the transmission of the documents of title or cheques
posted in accordance with sub-clause (c) of this Clause 2 and the encashment of
any such cheque shall be a complete discharge to Network Associates for the
money represented thereby.
(e) As from the Effective Date, each existing certificate representing a
holding of Scheme Shares shall cease to be of value and every holder of such
Scheme Shares shall be bound on the request of Dr Solomon's to deliver up to Dr
Solomon's the certificate(s) for such Scheme Shares for cancellation.
(f) The provisions of this Clause 2 shall be subject to any prohibition or
condition imposed by law.
3. DIVIDEND MANDATES
Each mandate or other instruction in force on the Effective Date relating
to the payment of dividends on any Scheme Shares shall, unless and until
revoked, be deemed as from the Effective Date to be an effective mandate or
instruction to Network Associates in relation to the shares of Network
Associates Common Stock to be issued pursuant to this Scheme.
4. OPERATION OF THIS SCHEME
(a) This Scheme shall become effective as soon as an office copy of the
Order of the Court sanctioning this Scheme under Section 425 of the Companies
Act 1985 and confirming under Section 137 of the said Act the reduction of
capital provided for by this Scheme shall have been duly delivered to the
Registrar of Companies for registration and registered by him.
(b) Unless this Scheme shall become effective on or before 31 August 1998,
or such later date, if any, as the parties may agree and the Court may allow,
not being later than 31 December 1998 this Scheme shall never become effective.
(c) Dr Solomon's and Network Associates may jointly consent on behalf of
all persons concerned to any modification of or addition to this Scheme or to
any condition which the Court may approve or impose.
5. COSTS
Dr Solomon's is authorised and permitted to pay all the costs and expenses
relating to the negotiation, preparation and implementation of this Scheme.
Dated: 26 June 1998
182
<PAGE> 183
IN THE HIGH COURT OF JUSTICE No. 003290 of 1998
CHANCERY DIVISION
COMPANIES COURT
Mr Registrar Buckley
IN THE MATTER OF DR SOLOMON'S GROUP PLC
AND
IN THE MATTER OF THE COMPANIES ACT 1985
NOTICE IS HEREBY GIVEN that by an Order dated the 25th day of June 1998
made in the above matters the Court has directed a Meeting to be convened of the
holders of the Scheme Shares (as defined in the Scheme of Arrangement
hereinafter mentioned) for the purpose of considering and, if thought fit,
approving (with or without modification) a Scheme of Arrangement proposed to be
made between Dr. Solomon's Group PLC (the "Company") and the holders of the
Scheme Shares (as so defined) and that such meeting be held at the offices of
Shandwick Consultants Limited, Aldermary House, 10-15 Queen Street, London EC4N
1TX at 11.00 a.m. (London time) on 21 July 1998 at which place and time all
holders of Scheme Shares are requested to attend.
A copy of the said Scheme of Arrangement and a copy of the Statement
required to be furnished pursuant to Section 426 of the above-mentioned Act are
incorporated in the document of which this Notice forms part.
THE HOLDERS OF SCHEME SHARES MAY VOTE IN PERSON AT THE SAID MEETING OR THEY
MAY APPOINT ANOTHER PERSON, WHETHER A MEMBER OF THE COMPANY OR NOT, AS THEIR
PROXY TO ATTEND AND VOTE IN THEIR STEAD. A GREEN FORM OF PROXY FOR USE AT SUCH
MEETING IS ENCLOSED WITH THIS NOTICE.
Completion and return of a GREEN form of proxy will not prevent a holder of
Scheme Shares from attending and voting at the Meeting.
In the case of joint holders, the vote of the senior who tenders a vote
whether in person or by proxy will be accepted to the exclusion of the votes of
the other joint holders and for this purpose seniority will be determined by the
order in which the names stand in the Register of Members of the Company in
respect of the joint holding.
IT IS REQUESTED THAT FORMS APPOINTING PROXIES BE LODGED AT 10 NORWICH
STREET, LONDON EC4A 1BD (REFERENCE: BRA/545707) NOT LESS THAN 48 HOURS BEFORE
THE TIME APPOINTED FOR THE SAID MEETING, BUT IF FORMS ARE NOT SO LODGED THEY MAY
BE HANDED TO THE CHAIRMAN AT THE SAID MEETING.
By the said Order the Court has appointed Terence Osborne or failing him
Geoffrey Melvyn Leary or failing him David Roger Stephens to act as Chairman of
the said Meeting and has directed the Chairman to report the results thereof to
the Court.
The said Scheme of Arrangement will be subject to the subsequent approval
of the Court.
Dated: 26 June 1998
MACFARLANES
10 Norwich Street
London EC4A 1BD
Solicitors for the
Company
183
<PAGE> 184
DR SOLOMON'S GROUP PLC
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN THAT AN EXTRAORDINARY GENERAL MEETING of Dr
Solomon's Group PLC will be held at the offices of Shandwick Consultants
Limited, Aldermary House, 10-15 Queen Street, London EC4N 1TX at 11.15 a.m.
(London time) on 21 July 1998 (or as soon thereafter as the Meeting of the
holders of the Company's ordinary shares convened by direction of the High Court
of Justice for the same date and place shall have concluded or been adjourned)
for the purpose of considering and, if thought fit, passing the following
Resolution which will be proposed as a Special Resolution:
SPECIAL RESOLUTION
THAT:
(a) the Transaction Agreement dated 9 June 1998 between the Company and
Networks Associates, Inc. relating to the proposed acquisition of the entire
issued share capital of the Company by Networks Associates, Inc. (with such
modifications or amendments as the directors of the Company shall determine) be
and is hereby approved;
(b) the Scheme of Arrangement dated 26 June 1998 (the "Scheme") proposed to
be made between the Company and the holders of the Scheme Shares (as defined in
the Scheme), a print of which has been produced to this Meeting and signed for
the purpose of identification by the Chairman of the Meeting, be and is hereby
approved;
(c) for the purpose of giving effect to the Scheme in its original form or
with or subject to any modification, addition or condition approved or imposed
by the Court:
(i) the capital of the Company be reduced by the cancellation of the
Scheme Shares (as so defined) and forthwith and contingently upon such
reduction of capital taking effect, the capital of the Company be increased
to its former amount by the creation of such number of new ordinary shares
of 1p each as shall be equal to the number of Scheme Shares cancelled as
aforesaid;
(ii) the reserve arising upon the said reduction of capital be applied
in paying up in full at par the ordinary shares of 1p each created pursuant
to sub-paragraph (c)(i) of this resolution, which shall be allotted and
issued, credited as fully paid up, to Networks Associates, Inc. and/or its
nominee(s);
(d) conditionally upon the Scheme becoming effective, the directors be and
are hereby authorised for the purposes of Section 80 of the Companies Act 1985
to effect the allotment of the shares created pursuant to this Resolution
provided that (i) the maximum nominal amount of shares which may be allotted
hereunder is L582,318; (ii) this authority shall expire on 31 December 1998; and
(iii) this authority shall be without prejudice to any other authority under the
said Section 80 previously granted and in force on the date on which this
Resolution is passed; and
(e) conditionally upon the Scheme becoming effective, the Articles of
Association of the Company shall be amended by:
(i) the adoption and inclusion of the following new Article as Article
9B of the Company:
"SCHEME OF ARRANGEMENT
"9B
(a) In this Article, references to the "Scheme" are to the scheme of
arrangement dated 26 June 1998 under section 425 of the Companies Act 1985,
between the Company and the holders of the Scheme Shares (as defined in the
Scheme), as it may be modified or amended in
184
<PAGE> 185
accordance with its terms and expressions defined in the Scheme shall have
the same meaning in this Article.
(b) If any ordinary shares in the Company are allotted and issued
after 26 June 1998 and prior to the Record Date, such ordinary shares shall
be subject to the terms of the Scheme and the holder or holders thereof
shall be bound by the Scheme accordingly.
(c) If any ordinary shares in the Company are allotted and issued or
transferred to any person (a "new member"), other than Networks Associates,
Inc. ("Network Associates") or any person identified by written notice to
the Company from Network Associates or its subsidiary or nominee, at any
time after the Record Date such ordinary shares will be transferred
immediately to Network Associates (or as Network Associates may direct by
notice in writing to the Company) free from all liens, charges, or
encumbrances of any nature whatsoever.
(d) In consideration for the transfer to or as directed by Network
Associates under Article 9B(c), Network Associates shall issue or transfer
to the new member, or procure the issue or transfer to the new member of,
0.27625 shares of Common Stock, par value US$0.01, of Network Associates
("Network Associates Stock"), fully paid up and non-assessable and free
from all liens, charges or encumbrances of any nature whatsoever, for each
Ordinary Share so transferred, save that no fraction of a Network
Associates Stock will be issued or transferred pursuant to this Article,
but in lieu thereof each new member who would otherwise be so entitled to
such a fraction (after aggregating all fractions of Network Associates
Stock to be received by such a person) shall instead be paid by Network
Associates, or Network Associates shall procure the payment of, an amount
in cash payable in United States dollars (rounded to the nearest whole U.S.
cent) equal to the product of such fraction of a Network Associates Stock
multiplied by the last sale price per share of Network Associates Stock as
reported on NASDAQ on the Business Day immediately following the Effective
Date. Network Associates Stock issued or transferred to the new member will
be fully paid and non-assessable and will rank equally in all respects with
all Network Associates Stock in issue at the time (other than as regards
any dividend or other distribution payable by reference to a record date
preceding the date of issue or transfer, or the Record Date, whichever is
later) and be subject to the Bylaws of Network Associates.
(e) The number of Network Associates Stock to be issued or transferred
to the new member under Article 9B(c) may be adjusted by the directors in
such manner as the auditors may determine on any reorganisation of the
share capital of the Company or of Network Associates effected after the
Record Date save that no fraction of Network Associates Stock will be
issued or transferred pursuant thereto, but in lieu thereof each new member
who would otherwise be so entitled to such a fraction (after aggregating
all fractions of Network Associates Stock to be received by such a person)
shall instead be paid by Network Associates, or Network Associates shall
procure the payment of, an amount in cash payable in U.S. dollars (rounded
to the nearest whole U.S. cent) as the auditors shall (in their absolute
discretion) determine ensures as nearly as may be parity of treatment with
that provided for by Article 9B(d) above.
(f) To give effect to any such transfer required by sub-paragraph(c)
of this Article 9B, the Company may appoint any person to execute and
deliver a form of transfer on behalf of the new member in favour of Network
Associates (or as directed by Network Associates) and to agree for and on
behalf of the new member to become a stockholder in Network Associates.
(g) If the Scheme shall not have become effective by the date referred
to in Clause 4(b) of the Scheme, Article 9B shall be of no effect";
(ii) the renumbering of the existing Article 9 of the Articles of
Association of the Company as Article 9A; and
185
<PAGE> 186
(iii) the insertion of the words "or otherwise in such manner and to
such person(s) as the Company in General Meeting shall resolve" immediately
following the words ". . . partly in the other," where such words appear in
the last line of the first sentence of Article 130 of the Articles of
Association of the Company.
By order of the Board
<TABLE>
<S> <C>
David Stephens Registered office:
Secretary Alton House
Gatehouse Way
Aylesbury
Buckinghamshire
HP19 3XU
</TABLE>
26 June 1998
NOTE:
Any member entitled to attend and vote at the Meeting is entitled to
appoint another person (whether a member or not) as a proxy to attend and vote
on a poll. To be effective, the BLUE form of proxy must be deposited at 10
Norwich Street, London EC4A 1BD (reference: BRA/545707), not later than 11.15
a.m. (London time) on 19 July 1998. A BLUE form of proxy is enclosed for use at
this Meeting.
186
<PAGE> 1
EXHIBIT 23.1
[Deliotte & Touche Letterhead]
INDEPENDENT AUDITORS' CONSENT
We consent to the filing of our report dated July 18, 1997 on our audit of the
consolidated financial statements of Dr. Solomon's Group PLC as at and for the
three years ended May 31, 1997 as part of the filing by Networks Associates,
Inc. on Form 8-K or Form 8-K/A of such financial statements with the U.S.
Securities and Exchange Commission.
/s/ DELOITTE & TOUCHE
- ------------------------
Deloitte & Touche
Chartered Accountants
Bracknell
England
June 26, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statements on Form S-3 (File Nos. 333-49297 dated 6/1/98, 333-51795 dated
5/4/98, 333-49297 dated 4/2/98, 333-41337 dated 12/2/97, 333-33297 dated
8/8/97, 333-11155 dated 8/30/96, 33-96586 dated 9/7/95, 33-80260 dated 6/9/94,
33-80258 dated 6/9/94, 33-80272 dated 6/9/94 and 33-58738 dated 2/26/93) and
Form S-8 (File Nos. 333-53601 dated 5/26/98, 333-51897 dated 5/6/98, 333-46049
dated 2/19/98, 333-46049 dated 2/11/98 and 333-25935 dated 4/25/97) on our
audits of the considated financial statements Networks Associates, Inc.
(formerly McAfee Associates, Inc.) as of December 31, 1997 and 1996, and for
the three years in the period ended December 31, 1997, which report is
included in the Scheme Document related to Recommended Proposal for the
acquisition of Dr. Solomon's Group PLC, dated June 26, 1998, included as an
exhibit to this Current Report on Form 8-K.
/s/PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
July 1, 1998
<PAGE> 1
EXHIBIT 99.1
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
DR SOLOMON'S GROUP PLC
AYLESBURY, ENGLAND
We have audited the accompanying consolidated balance sheets of Dr
Solomon's Group PLC and its subsidiaries (the "Company") as of May 31, 1997 and
May 31, 1996 and the related consolidated profit and loss accounts, cash flow
statements, statements of total recognized gains and losses and reconciliation
of movements in shareholders' funds for the year ended May 31, 1997 and the
period from February 7, 1996 (date of acquisition) until May 31, 1996 and the
consolidated profit and loss accounts, cash flow statements, statements of total
recognized gains and losses and reconciliations of movements in shareholders'
funds of its predecessor, S&S International Limited, and its subsidiaries ("S&S
International") for the period from June 1, 1995 until February 6, 1996, and the
year ended May 31, 1995, all expressed in pounds sterling. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom and the United States of America. 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at May 31, 1997 and May 31, 1996 and the results of its operations and cash
flows for the year ended May 31, 1997 and the period from February 7, 1996 (date
of acquisition) until May 31, 1996 and the results of the operations and its
cash flows of S&S International Limited and its subsidiaries for the year ended
May 31, 1995 and for the period from June 1, 1995 until February 6, 1996 in
conformity with generally accepted accounting principles in the United Kingdom
(which differ in certain significant respects from generally accepted accounting
principles in the United States of America - See note 28).
DELOITTE & TOUCHE
Chartered Accountants and
Registered Auditors
Bracknell
England
July 18, 1997
<PAGE> 2
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, UNTIL 1996 UNTIL MAY 31,
1995 FEBRUARY 6, MAY 31, 1997
1996 1996
NOTE IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
(EXCEPT PER (EXCEPT PER
SHARE DATA) SHARE DATA)
<S> <C> <C> <C> <C> <C>
TURNOVER 2 L. 11,308 L. 12,267 L. 8,631 L. 37,217
Cost of sales (2,324) (2,547) (1,873) (7,976)
-------------------------------------------------------------------
GROSS PROFIT 8,984 9,720 6,758 29,241
Distribution Costs (1,109) (1,283) (493) (4,028)
Administrative expenses (including an
exceptional charge of L. 125,000 in 1995) 3 (6,768) (6,790) (4,553) (16,100)
Other operating income 27 12 8 -
-------------------------------------------------------------------
OPERATING PROFIT 2,5 1,134 1,659 1,720 9,113
Interest receivable 118 124 44 724
Interest payable 6 - - (688) (929)
-------------------------------------------------------------------
PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION 1,252 1,783 1,076 8,908
Tax on profit on ordinary activities 7 (600) (798) (555) (3,650)
-------------------------------------------------------------------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 652 985 521 5,258
Equity dividends 8 (955) (950) - -
Other finance charges in respect
of non-equity shares 16 - - (467) (700)
===================================================================
RETAINED (LOSS) / PROFIT FOR THE FINANCIAL PERIOD 19 L. (303) L. 35 L. 54 L. 4,558
===================================================================
Earnings per ordinary share based on
32,400,000 ordinary shares 0.17 pence
================
Earnings per ordinary share based on
46,353,091 ordinary shares 9.83 pence
================
</TABLE>
All amounts derive from continuing operations.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
COMPANY
NOTE MAY 31, MAY 31,
1996 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets 9 L. 1,967 L. 2,676
----------------------------
CURRENT ASSETS
Stocks 10 265 613
Debtors 11 6,336 12,264
Investments 12 7 7
Cash at bank and in hand 5,223 25,437
----------------------------
11,831 38,321
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 13 (17,271) (25,707)
----------------------------
NET CURRENT (LIABILITIES)/ASSETS (5,440) 12,614
----------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES (3,473) 15,290
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 13 (17,720) (3,584)
PROVISIONS FOR LIABILITIES AND CHARGES 15 (49) (42)
----------------------------
L.(21,242) L.11,664
============================
CAPITAL AND RESERVES
Called up share capital 16 L. 1,053 L. 553
Share premium account 17 6,564 35,855
Other reserves 18 (28,913) (29,356)
Profit and loss account 19 54 4,612
----------------------------
SHAREHOLDERS' (DEFICIT)/FUNDS L.(21,242) L.11,664
============================
Attributable to equity shareholders L.(29,002) L.11,664
Attributable to non-equity shareholders 7,760 -
----------------------------
L.(21,242) L.11,664
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
NOTE IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES 20 L. 3,189 L. 3,728 L. 7,191 L. 14,028
--------------------------------------------------------
RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE
Interest received 118 124 44 724
Interest paid -- -- (688) (929)
--------------------------------------------------------
NET CASH INFLOW/(OUTFLOW) FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE 118 124 (644) (205)
========================================================
TAXATION
Corporation tax paid (including advance
corporation tax) (693) (187) (318) (1,904)
--------------------------------------------------------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Payments to acquire tangible fixed assets (1,378) (1,019) (706) (2,466)
Receipts from sales of tangible fixed assets 31 23 216 19
Receipt from sale of investment -- 200 -- --
--------------------------------------------------------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE
AND FINANCIAL INVESTMENT (1,347) (796) (490) (2,447)
--------------------------------------------------------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertaking
(net of cash acquired) 22 -- -- (22,084) --
========================================================
EQUITY DIVIDENDS PAID 8 (955) -- -- --
--------------------------------------------------------
Net cash inflow/(outflow) before use of
liquid resources and financing 312 2,869 (16,345) 9,472
MANAGEMENT OF LIQUID RESOURCES
Cash on deposit 21 -- -- -- (17,000)
--------------------------------------------------------
FINANCING 21
Issue of ordinary share capital -- -- 324 36,084
Issue/(repayment) of preference share capital -- -- 7,293 (7,293)
Payment of preference share premium -- -- -- (1,167)
New borrowings -- -- 14,293 --
Repayment of borrowings -- -- (350) (16,943)
--------------------------------------------------------
Net cash inflow from financing -- -- 21,560 10,681
--------------------------------------------------------
INCREASE IN CASH 21 L. 312 L. 2,869 L. 5,215 L. 3,153
--------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
Profit attributable to members of the company L.652 L.985 L.521 L.5,258
Foreign exchange translation differences on
foreign currency net investment in subsidiaries 14 (20) (13) 24
---------- ---------- ---------- ----------
Total recognized gains and losses for the period L.666 L.965 L.508 L.5,282
========== ========== ========== ==========
</TABLE>
RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
Profit for the period L.652 L. 985 L. 521 L. 5,258
Dividends (955) (950) -- --
---------- ---------- ---------- ----------
(303) 35 521 5,258
Other recognized gains/(losses) relating to the period 14 (20) (13) 24
Issue of shares -- 950 7,617 36,084
Redemption of preference share capital -- -- -- (7,293)
Preference share premium -- -- -- (1,167)
Goodwill written off -- -- (29,367) --
---------- ---------- ---------- ----------
Net (reduction)/addition to shareholders' funds (289) 965 (21,242) 32,906
Opening shareholders' funds 783 494 -- (21,242)
---------- ---------- ---------- ----------
Closing shareholders' funds L.494 L.1,459 L.(21,242) L.11,664
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are prepared in conformity
with generally accepted accounting principles in the United Kingdom ("U.K.
GAAP"), which differ in certain material respects from generally accepted
accounting principles in the United States of America ("U.S. GAAP") - see note
28.
References to "Company" throughout the consolidated financial
statements are to Dr Solomon's Group PLC and its subsidiaries. References to
"S&S International" are to the predecessor, S&S International Limited, and its
subsidiaries.
BUSINESS
The Company develops, markets and supports anti-virus software
programs for personal computers and PC networks. The Company's products provide
effective and easy to use software solutions to the risks posed by the
proliferation of new and increasingly sophisticated types of computer viruses.
The Company's principal product line is the "Dr Solomon's Anti-Virus Toolkit"
family of software programs (the "Toolkit").
CONSOLIDATION AND GOODWILL
The consolidated financial statements include the accounts of both
the Company and S&S International for the periods specified. The difference
between consideration payable for the acquisition of interests in subsidiary
companies and the fair value of the assets acquired is written off directly to
other reserves in the year of acquisition.
CASH FLOW STATEMENT
The adoption of Financial Reporting Standard ("FRS") no.1, "Cash
Flow Statement", has required the restatement of certain comparative
information.
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost
convention.
FIXED ASSETS
The cost of acquired fixed assets includes the purchase cost,
together with any incidental expenses of acquisition. The cost of purchased
software is capitalised and amortised from the implementation date over its
estimated useful economic life. The cost of software developed for internal use
is expensed in the period in which the cost is incurred.
Depreciation of fixed assets is provided on cost on a straight-line
basis over the estimated useful lives of the respective assets, as follows.
<TABLE>
<S> <C>
Short leasehold property and improvements Over the remaining term of the lease
Motor vehicles Over 4 years
Fixtures, fittings and equipment Between 2 and 5 years
Software Between 2 and 3 years
</TABLE>
STOCKS
Stocks are stated at the lower of cost and net realisable value.
Cost is determined on a first-in first-out basis.
INVESTMENTS
Current assets investments are stated at the lower of cost and,
where materially different, net realisable value.
DEFERRED TAXATION
Deferred taxation is provided on timing differences, arising from
the different treatment of items for accounts and taxation purposes, which are
expected to reverse in the future, calculated at rates at which it is estimated
that tax will arise.
<PAGE> 7
FOREIGN EXCHANGE
Profit and loss accounts in foreign currencies are translated into
sterling at the average rates of exchange prevailing for the relevant financial
period. Monetary assets and liabilities denominated in foreign currencies at the
period end are translated into sterling at the rate prevailing at the balance
sheet date. These differences are dealt with in the profit and loss account.
Exchange differences arising on the translation of the net investment in foreign
subsidiaries are dealt with as adjustments to reserves.
ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reported period. Accounting estimates have been employed
in these consolidated financial statements to determine reported amounts,
including realisability of debtors and other assets and the useful lives of
fixed assets. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues from product licenses and update
services (both of which include post-contract support) on a straight-line basis
over the term of the contracted service (usually one, two or three years in the
case of product licenses and one year in the case of update services).
The Company recognizes 50% of the revenues from the sale of
boxed-products which include an update service at the time of sale and the
remaining 50% evenly over the term of the update service (including
post-contract support) included in a sale (normally one year). For those boxed
products not including an update service, revenue is recognized at time of sale.
LEASES
Operating lease rentals are charged to profit and loss in equal
annual amounts over the lease term.
PENSION COSTS
The Company operates defined contribution pension schemes. The
pension cost charge represents contributions paid by the Company to the funds on
an accruals basis.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development expenditure and software development costs
are charged to the profit and loss account as incurred. Based on the Company's
product development process, technological feasibility is established upon
completion of a working model. Subsequent costs to the point at which the
product is ready for general release have not been significant and none of these
costs have been capitalized.
EARNINGS PER SHARE
Earnings per share have not been computed for periods which relate
to S&S International, the predecessor of the Company, as such information is not
considered meaningful for a period over period comparison due to the different
capital structure of S&S International as compared to the Company.
Earnings per share are based upon the weighted average number of
ordinary shares in issue throughout the period and are calculated on the profit
on ordinary activities after taxation and after other finance charges in respect
of non-equity shares, but before equity dividends.
<PAGE> 8
2. ANALYSES OF TURNOVER, OPERATING PROFIT/(LOSS) AND NET
ASSETS/(LIABILITIES)
Turnover represents amounts derived from product licenses, sales of
boxed-products and providing updates to boxed-product purchasers, and royalty
income.
The geographical analysis of turnover by destination of sales is as
follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom L. 8,570 L. 7,799 L. 5,662 L. 22,404
United States 228 953 295 4,434
Germany 768 1,148 795 3,237
Rest of the World 1,742 2,367 1,879 7,142
---------- ---------- ---------- ----------
L. 11,308 L. 12,267 L. 8,631 L. 37,217
========== ========== ========== ==========
</TABLE>
The geographical analysis of turnover, operating profit/(loss) and
net assets/(liabilities) by origin of sales is as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
TURNOVER IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom L. 10,876 L. 10,992 L. 7,520 L. 29,546
United States 18 376 459 4,434
Germany 414 899 652 3,237
--------- --------- -------- ---------
L. 11,308 L. 12,267 L. 8,631 L. 37,217
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
OPERATING PROFIT/(LOSS) IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom L. 1,647 L. 2,478 L. 2,071 L. 10,099
United States (215) (839) (447) (1,546)
Germany (298) 20 96 560
---------- ---------- ---------- ----------
L. 1,134 L. 1,659 L. 1,720 L. 9,113
========== ========== ========== ==========
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
S&S COMPANY
INTERNATIONAL
MAY 31, 1995 MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C>
NET ASSETS/(LIABILITIES)
United Kingdom L. 434 L. 9,385 43,984
United States 122 (1,530) (3,032)
Germany (62) 270 79
---------- ---------- ----------
494 8,125 41,031
Less goodwill arising on
acquisitions
-- (29,367) (29,367)
---------- ---------- ----------
L. 494 L. (21,242) L. 11,664
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
S&S COMPANY
INTERNATIONAL
IDENTIFIABLE NET ASSETS/(LIABILITIES)
MAY 31, 1995 MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C>
United Kingdom L. 434 L. (19,982) L. 14,617
United States 122 (1,530) (3,032)
Germany (62) 270 79
---------- ---------- ----------
L. 494 L. (21,242) L. 11,664
========== ========== ==========
</TABLE>
3. EXCEPTIONAL CHARGES
The exceptional charge relates to provisions in respect of future
expenses on vacant properties in the year ended May 31, 1995.
4. INFORMATION REGARDING DIRECTORS AND EMPLOYEES
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
DIRECTORS' REMUNERATION
Emoluments L. 323 L. 297 L. 86 L. 325
Gains in respect of share options granted during the year -- -- -- 3,028
Contributions under defined contribution pensions scheme 250 6 3 20
---------- ---------- ---------- ----------
L. 573 L. 303 L. 89 L. 3,373
========== ========== ========== ==========
NO. NO. NO. NO.
Number of directors to whom benefits are accruing under
defined contribution scheme (including highest
paid director) 2 5 3 3
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
HIGHEST PAID DIRECTOR'S REMUNERATION
Emoluments (excluding pension contributions) L. 106 L. 72 L. 30 L. 114
Pension contributions L. 125 L. -- L. 1 L. 9
---------- ---------- ------------------------
AVERAGE NUMBER OF PERSONS EMPLOYED NO. NO. NO. NO.
United Kingdom 136 175 198 250
United States 1 11 13 38
Germany 8 10 11 20
---------- ---------- ------------------------
145 196 222 308
========== ========== ========================
</TABLE>
<TABLE>
<CAPTION>
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
STAFF COSTS DURING THE YEAR (INCLUDING DIRECTORS)
Wages and salaries L. 3,337 L. 3,276 L. 2,147 L. 8,620
Social security costs 415 343 200 856
Pension costs 250 66 64 195
---------- ---------- ------------------------
L. 4,002 L. 3,685 L. 2,411 L. 9,671
========== ========== ========================
</TABLE>
DIRECTORS' INTERESTS IN ORDINARY SHARES
<TABLE>
<CAPTION>
JUNE 1,1996 MAY 31, 1997 JULY 18, 1997
<S> <C> <C> <C>
G M Leary 5,000,000 4,500,002 3,375,002
D R Stephens 5,000,000 4,499,999 3,374,999
K E Perrett 5,000,000 4,499,999 3,374,999
Dr P Englander 57,725 57,725 6,880
</TABLE>
The above interests are beneficial with the exception of 450,000 of G M Leary's
shares which are held in a trust for the benefit of his son.
DIRECTORS' INTERESTS IN OPTIONS OVER ORDINARY SHARES
<TABLE>
<CAPTION>
GRANTED DURING MAY 31, 1997 EXERCISED AFTER MARKET PRICE AT EXPIRY DATE
THE YEAR YEAR END DATE OF EXERCISE
<S> <C> <C> <C> <C> <C>
T H Osborne 300,000 300,000 75,000 L. 4.56 September 5, 2003
Dr A M Solomon 1,000,000 1,000,000 249,990 L. 4.56 November 6, 2003
</TABLE>
The options listed above are exercisable at 1 pence per share. No options lapsed
during the year. The market price of the Company's Ordinary shares on May 30,
1997, the last trading day in the financial year, was equivalent to 416 pence
per share and the range during the period from listing of the shares to the end
of the financial year was 345 pence to 577 pence. The options granted above were
exercisable from May 26, 1997. Further details of the Company's share option
schemes are set out in Note 16 to the financial statements.
<PAGE> 11
5. OPERATING PROFIT
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR JUNE 1, FEBRUARY YEAR
ENDED 1995 UNTIL 7, 1996 ENDED
MAY 31, FEBRUARY UNTIL MAY MAY 31,
1995 6, 1996 31, 1996 1997
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
OPERATING PROFIT IS AFTER CHARGING:
Depreciation of owned assets L. 916 L. 898 L. 470 L. 1,705
Rentals under operating leases
Land and buildings 356 207 140 464
Cars 14 46 25 166
Equipment 11 22 8 25
Auditors' remuneration
Audit fees 20 26 10 42
Other services (UK) 19 19 8 47
Hire of equipment 23 20 7 30
Research & development 660 539 432 4,014
========== ========== ========== ==========
</TABLE>
In addition to the sums noted above, the auditors received, in the period June
1, 1995 until February 6, 1996, L.274,000 relating to the management
buyout of S&S International and, in the year ended May 31, 1997, L.153,000
relating to the initial public offering by the Company.
6. INTEREST PAYABLE
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR JUNE 1, FEBRUARY YEAR
ENDED 1995 UNTIL 7, 1996 ENDED
MAY 31, FEBRUARY UNTIL MAY MAY 31,
1995 6, 1996 31, 1996 1997
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
Investor loan stock L. -- L. -- L. 462 L. 487
Bank Loans -- -- 156 336
Vendor loan notes -- -- 70 106
========== ========== ========== ==========
L. -- L. -- L. 688 L. 929
========== ========== ========== ==========
</TABLE>
7. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR JUNE 1, FEBRUARY YEAR
ENDED 1995 UNTIL 7, 1996 ENDED
MAY 31, FEBRUARY UNTIL MAY MAY 31,
1995 6, 1996 31, 1996 1997
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom corporation tax at 33% L. 600 L. 835 L. 555 L. 3,465
Overseas tax -- -- -- 250
Adjustments in respect of prior periods -- (37) -- (65)
========== ========== ========== ==========
L. 600 L. 798 L. 555 L. 3,650
========== ========== ========== ==========
</TABLE>
The high rates of effective taxation are due primarily to the losses
incurred in the U.S. which could not be offset against U.K. profits for taxation
purposes and to the accelerated depreciation policy relating to fixed assets
compared to allowances for taxation purposes and the timing differences on the
deferred revenue, for which no deferred tax asset is recognized in accordance
with U.K. GAAP.
There are no deferred tax liabilities, provided or unprovided, at
May 31, 1995, 1996 or 1997.
<PAGE> 12
8. EQUITY DIVIDENDS
The total equity dividends during the period June 1, 1995 until
February 6, 1996 in S&S International was L. 950,000, by way of a
scrip issue of 948,353 L. 1 deferred ordinary shares and 50,000 $0.05
ordinary shares (1995 - L. 955,000 cash dividend).
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR JUNE 1, FEBRUARY YEAR
ENDED 1995 UNTIL 7, 1996 ENDED
MAY 31, FEBRUARY UNTIL MAY MAY 31,
1995 6, 1996 31, 1996 1997
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
Equity dividends L. 955 L. 950 -- --
========== ========== ========== ==========
</TABLE>
9. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
SHORT MOTOR FIXTURES, TOTAL
LEASEHOLD VEHICLES FITTINGS AND
PROPERTY & EQUIPMENT
IMPROVEMENTS
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
COST
At June 1, 1996 L. 683 L. 125 L. 3,923 L. 4,731
Effect of exchange rate
movements -- -- (63) (63)
Additions 82 -- 2,384 2,466
Disposals -- (36) (12) (48)
---------- ---------- ---------- ----------
At May 31, 1997 765 89 6,232 7,086
---------- ---------- ---------- ----------
ACCUMULATED DEPRECIATION
At June 1, 1996 227 65 2,472 2,764
Effect of exchange rate
movements -- -- (26) (26)
Charge for the year 174 23 1,508 1,705
Disposals -- (23) (10) (33)
---------- ---------- ---------- ----------
At May 31, 1997 401 65 3,944 4,410
---------- ---------- ---------- ----------
NET BOOK VALUE
At May 31, 1997 L. 364 L. 24 L. 2,288 L. 2,676
========== ========== ========== ==========
At May 31, 1996 L. 456 L. 60 L. 1,451 L. 1,967
========== ========== ========== ==========
CAPITAL COMMITMENTS:
At May 31, 1997 there were no capital commitments (1996 - nil).
</TABLE>
<PAGE> 13
10. STOCKS
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
Raw materials L. 5 L. 4
Goods for resale 260 609
-----------------------------
L. 265 L. 613
=============================
</TABLE>
The replacement cost of stocks is not materially different from the
amounts at which stocks are stated in the balance sheet.
11. DEBTORS
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
Trade debtors (net of allowance - see note 27) L. 5,700 L. 11,086
Other debtors 127 111
Prepayments and accrued income 509 1,067
--------------------------------
L. 6,336 L. 12,264
================================
</TABLE>
All amounts are due within one year.
12. INVESTMENTS HELD AS CURRENT ASSETS
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
Marketable equity securities (at cost) L. 7 L. 7
===========================
</TABLE>
The market value of the securities at May 31, 1997 was L.4,500
(1996-L.8,700)
13. CREDITORS
<TABLE>
<CAPTION>
AMOUNTS FALLING DUE WITHIN AMOUNTS FALLING DUE AFTER
ONE YEAR MORE THAN ONE YEAR
MAY 31, 1996 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
Bank loans (note 14) L. 1,350 L. -- L. 5,300 L. --
Other loans (note 14) -- -- 10,293 --
Trade creditors 1,129 1,843 -- --
Current corporation tax 1,396 3,142 -- --
Other taxes and social security 880 1,133 -- --
Other creditors 884 342 -- --
Accruals 1,102 2,232 -- --
Deferred revenue 10,530 17,015 2,127 3,584
---------- ---------- ---------- ----------
L. 17,271 L. 25,707 L. 17,720 L. 3,584
========== ========== ========== ==========
</TABLE>
<PAGE> 14
14. LONG-TERM DEBT
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
Bank loan L. 6,650 L. --
Less current portion (1,350) --
---------- ----------
5,300 --
---------- ----------
Investor loan stock (unsecured) 7,293 --
Vendor loan notes (unsecured) 3,000 --
---------- ----------
10,293 --
---------- ----------
L. 15,593 L. --
========== ==========
</TABLE>
INVESTOR LOAN STOCK
In connection with the acquisition of S&S International, the Company issued
L.7,293,000 investor loan stock, bearing interest at 19% per annum,
to various institutional shareholders. This loan stock was repaid on the listing
of the shares of the Company on Nasdaq and EASDAQ in December 1996.
VENDOR LOAN NOTES
The vendor loan notes refer to loan notes, bearing interest at 7% per annum,
from former S&S International shareholders totalling L.3 million
made in connection with the acquisition of S&S International. These loan notes
were repaid on the listing of the shares of the Company in December 1996.
15. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
VACANT PROPERTY
At beginning of the year L. 56 L. 49
Transfer to Creditors: amounts falling due within one year (7) (7)
---------- ----------
At end of the year L. 49 L. 42
========== ==========
</TABLE>
16. SHARE CAPITAL
<TABLE>
<CAPTION>
AUTHORISED ISSUED TOTAL
FULLY VALUE
PAID IN
NO. NO. THOUSANDS
<S> <C> <C> <C>
At May 31, 1996
Redeemable preference shares of 10 pence each 7,293,000 7,293,000 L. 729
A Ordinary shares of 1 pence each 17,400,000 17,400,000 174
B Ordinary shares of 1 pence each 15,000,000 15,000,000 150
C Ordinary shares of 1 pence each 11,100,000 -- --
------------ ------------ ------------
50,793,000 39,693,000 L. 1,053
============ ============ ============
At May 31, 1997
Ordinary shares of 1 pence each 58,231,800 55,310,000 L. 553
============ ============ ============
</TABLE>
<PAGE> 15
7,293,000 redeemable preference shares with par value 10 pence each
were authorised and issued on February 6, 1996 in connection with the
acquisition of S&S International. The shares were issued at a subscription price
of L. 1 each, giving rise to a total share premium of L. 6,564,000. These shares
were redeemed on December 2, 1996 at a premium of L. 1,167,000 of which L.
467,000 had been accrued at May 31, 1996.
In September, October and November 1996, a total of 10,940,000 C
Ordinary shares of 1p each were issued to the Trustee, Bank of Scotland Trust
Company (International) Limited in order to satisfy options granted to the
Company's employees and to Dr Alan Solomon pursuant to the Dr Solomon's Group
Share Option Scheme.
On November 25, 1996, by a special resolution at an Extraordinary
General Meeting, the authorised share capital of the Company was increased from
L. 435,000 to L. 582,318 by the creation of 14,731,800
Ordinary shares of 1p each. On December 2, 1996, the Company issued 11,970,000
new Ordinary shares of 1p each which the U.S. and European underwriters placed
with investors in the form of 3,990,000 American Depositary Shares ("ADSs")
(each ADS representing three new Ordinary shares). The public offering price was
$17.00 per ADS. The proceeds, net of expenses including underwriting
commissions, amounted to approximately L. 36.0 million.
On November 25, 1996, all the issued and unissued A, B and C
Ordinary shares were converted into one class of Ordinary shares of 1p each,
ranking parri passu.
At May 31, 1997, options have been granted over the Company's shares
as follows:
Dr Solomon's Group Share Option Scheme ("Group Scheme")
Under the Group Scheme, options have been granted over 10,940,000
Ordinary shares of 1p each at an exercise price of 1p each. Twenty five per cent
of each option became exercisable on May 26, 1997 and an additional 25% will
become exercisable on November 26 of each of 1997, 1998 and 1999. Options lapse
seven years after their date of grant. The shares over which options have been
granted are held by the Trustee of the S&S International Holdings Employee
Benefit Trust. No further options may be granted under the Group Scheme.
Company Share Option Scheme 1996 ("Company Scheme")
The Company Scheme is approved by the U.K. Inland Revenue and is
administered by the Remuneration Committee of the Board of Directors. The
Committee may grant options to any employee of the Company, including full-time
directors, who works at least 25 hours per week. The exercise price may not be
less than the nominal value of the share and the market value as agreed with the
Inland Revenue. Options normally become exercisable on the third anniversary of
the date of grant and lapse on the tenth anniversary of the date of grant and if
the option holder is still an employee of the Company. Options may only be
granted to an individual such that the aggregate market value of options under
Inland Revenue approved schemes (excluding savings related schemes) to that
individual do not exceed L. 30,000.
Options over 163,392 Ordinary shares were granted on April 19, 1997
at an option price of L. 5.17 per Ordinary share.
Executive Share Option Scheme 1996 ("Executive Scheme")
The Executive Scheme is similar to the Company Scheme except that it
is not an Inland Revenue approved scheme and there is no limit on the market
value of the Ordinary shares over which an option may be granted.
Options over 198,483 Ordinary shares were granted on April 19, 1997
at an option price of L. 5.17 per Ordinary share.
Savings Related Option Scheme ("Savings Related Scheme")
The Savings Related Scheme is approved by the U.K. Inland Revenue
and is administered by the Remuneration Committee of the Board of Directors. The
Committee may invite any employee of the Company to participate in a grant of
options. Options are linked to a contractual savings scheme to save between L. 5
and L. 250 per month. Participants may withdraw from the savings contract at any
time and are not obliged to exercise their option. The exercise price shall be
not less than the higher of the nominal value of the share and 80% of the market
value agreed with the Inland Revenue. Options may be exercised in the six month
period following the maturity date of the related savings contract which may be
the third, fifth or seventh anniversary of the commencement of the contract. No
options have been granted under the Savings Related Scheme.
17. SHARE PREMIUM ACCOUNT
<TABLE>
<CAPTION>
IN THOUSANDS
<S> <C>
At February 7, 1996 L. --
Issue of preference shares 6,564
----------
At May 31, 1996 6,564
Redemption of preference shares (6,564)
Issue of Ordinary shares (net of issue costs) 35,855
----------
At May 31, 1997 35,855
==========
</TABLE>
<PAGE> 16
18. OTHER RESERVES
<TABLE>
<CAPTION>
PREFERENCE GOODWILL FOREIGN TOTAL
SHARE EXCHANGE
REDEMPTION TRANSLATION
RESERVE
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
At February 7, 1996 L. -- L. -- L. -- L. --
Movements 467 (29,367) (13) (28,913)
---------- ---------- ---------- ----------
At May 31, 1996 L. 467 L. (29,367) L. (13) L. (28,913)
Movements (net) (467) -- 24 (443)
---------- ---------- ---------- ----------
At May 31, 1997 L. -- L. (29,367) L. 11 L. (29,356)
========== ========== ========== ==========
</TABLE>
19. PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
IN
THOUSANDS
<S> <C>
At February 7, 1996 L. --
Profit retained for the period 54
----------
At May 31, 1996 L. 54
Profit retained for the period 4,558
----------
At May 31,1997 L. 4,612
==========
</TABLE>
20. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
Operating profit L. 1,134 L. 1,659 L. 1,720 L. 9,113
Depreciation of owned assets 916 898 470 1,705
Profit on disposal of tangible fixed assets and investments (2) (21) -- (4)
(Increase)/decrease in stocks (46) (106) 27 (348)
(Increase)/decrease in debtors (1,439) (2,880) 156 (5,928)
Increase in creditors 2,895 4,183 4,820 9,497
Decrease in provisions (269) (5) (2) (7)
----------------------------------------------------------------
L. 3,189 L. 3,728 L. 7,191 L. 14,028
================================================================
</TABLE>
<PAGE> 17
21. ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
CASH AT BANK AND IN HAND
At beginning of period L. 2,518 L. 2,840 L. -- L. 5,223
Cash flow 312 2,869 5,215 3,153
Exchange movement 10 (2) 8 61
----------------------------------------------------------------
L. 2,840 L. 5,707 L. 5,223 L. 8,437
Deposits at end of period -- -- -- 17,000
----------------------------------------------------------------
At end of period L. 2,840 L. 5,707 L. 5,223 L. 25,437
================================================================
BORROWINGS
Bank and other loans at beginning of period (Note 13) L. -- L. -- L. -- L. 16,943
Cash flow -- -- 13,943 (16,943)
Issue of vendor loan notes -- -- 3,000 --
----------------------------------------------------------------
Bank and other loans at end of period L. -- L. -- L. 16,943 L. --
================================================================
SHARE CAPITAL (INCLUDING SHARE PREMIUM) AND PREFERENCE SHARE
REDEMPTION RESERVE
At begining of period L. 50 L. 50 L. -- L. 8,084
Cash flow -- -- 7,617 27,624
Increase in preference share redemption reserve -- -- 467 700
----------------------------------------------------------------
At end of period L. 50 L. 50 L. 8,084 L. 36,408
================================================================
</TABLE>
22. ANALYSIS OF THE NET OUTFLOWS OF CASH AND CASH EQUIVALENTS IN RESPECT
OF THE PURCHASE OF SUBSIDIARY UNDERTAKINGS
<TABLE>
<CAPTION>
S&S INTERNATIONAL OMPANY
JUNE 1,
YEAR ENDED 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31,
1996 1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash consideration L. -- L. -- L. (27,791) L. --
Cash at bank and in hand acquired -- -- 5,707 --
----------------------------------------------------------------
Net cash outflows of cash and cash equivalents in
respect of the purchase of subsidiary undertakings L. -- L. -- L. (22,084) L. --
================================================================
</TABLE>
Details of the acquisitions are provided in note 23 to the consolidated
financial statements.
<PAGE> 18
23. ACQUISITIONS AND GOODWILL
On February 6, 1996 the Company acquired the whole of the share
capital of S&S International for a consideration of L. 30,035,000 plus expenses:
<TABLE>
<CAPTION>
IN
THOUSANDS
<S> <C>
NET ASSETS ACQUIRED
Tangible fixed assets L. 1,943
Stocks 292
Debtors 6,493
Current asset investments 7
Cash at bank and in hand 5,707
Creditors (11,795)
Taxation (1,137)
Provisions (51)
----------
1,459
Goodwill 29,367
----------
L. 30,826
==========
SATISFIED BY:
Cash (including acquisition expenses) 27,791
Loan notes issued 3,000
Assets transferred to vendors at book value 35
----------
L. 30,826
==========
</TABLE>
The goodwill of L. 29,367,000 was charged to reserves at February 7, 1996.
24. FINANCIAL COMMITMENTS
The Company leases all of its facilities and certain of its
equipment and motor vehicles under operating leases that expire at various dates
through 2009. The future fiscal years' minimum operating lease commitments as of
May 31, 1997 are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
YEAR ENDING MAY 31,
<S> <C>
1998 703
1999 705
2000 577
2001 543
2002 396
Thereafter 1,534
---------
Total L. 4,458
=========
</TABLE>
At May 31, 1997, the Company was committed to making the following
payments during the next year in respect of operating leases:
<TABLE>
<CAPTION>
LAND AND OTHER TOTAL
BUILDINGS
1997 1997 1997
IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C>
Leases which expire within:
1 year L. -- L. 34 L. 34
2-5 years 173 195 368
after 5 years 301 -- 301
======== ======== ========
</TABLE>
<PAGE> 19
The comparative figures at May 31, 1996 are set out below:
<TABLE>
<CAPTION>
LAND AND OTHER TOTAL
BUILDINGS
1996 1996 1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C>
Leases which expire within:
1 year L. 6 L. -- L. 6
2-5 years 362 80 442
after 5 years L. 69 L. 8 L. 77
===== ===== =====
</TABLE>
To the extent that provisions have already been made in the accounts
for operating lease commitments relating to vacant properties, these have not
been included in the above analysis.
25. PENSION
The Company operates defined contribution pension schemes for the
directors and employees. The costs recognized by the Company with respect to its
defined contribution plans are as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR JUNE 1, 1995 FEBRUARY 7, YEAR
ENDED UNTIL UNTIL ENDED
MAY 31, FEBRUARY 6, MAY 31, MAY 31,
1995 1996 1996 1997
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
United Kingdom L. 250 L. 48 L. 43 L. 183
United States -- 19 20 12
Germany -- -- -- --
-------- -------- ----------------------
L. 250 L. 67 L. 63 L. 195
======== ======== ======================
</TABLE>
Under the terms of the U.K. pension plan, established in September
1995, all employees are entitled to join after three months' service with the
Company. The Company contributes a minimum of 3 per cent of a participating
employee's annual salary plus additional amounts in accordance with the
Company's flexible benefits plan to an individual personal pension plan for that
employee. For the year ended May 31, 1995 S&S International operated a defined
contribution pension plan under which only the directors of S&S International
were eligible to participate.
The Company's U.S. subsidiary operates 401(k) pension plans for its
employees. Under the terms of these plans, established in January 1996, full
time employees over 21 years old are eligible to participate. The Company
contributes 50 per cent of the amount contributed by the employee up to a
maximum contribution of 3 per cent of an employee's annual salary. The Company's
contributions vest over a 3 year period.
26. RELATED PARTY TRANSACTIONS
The Company was contracted to pay a monitoring fee to Apax Partners
& Co. Ventures Limited, one of its institutional shareholders which is
represented on the Board of the Company by Dr Peter Englander. At May 31, 1996
the fee was at a level of L. 130,000 per annum. This fee reduced proportionately
as the redeemable preference shares and the investor loan stock were repaid and
was cancelled on repayment at December 2, 1996. The monitoring fee in 1997 was
L. 44,680.
The Company is contracted to pay a fee of L. 20,000 p.a. to Apax
Partners & Co. Ventures Limited for the services of Dr Peter Englander as a
director.
On August 20,1996, the Company repaid L. 4,000,000 of the investor
loan stock together with interest to the date of repayment. Portions of this
repayment were made to the following related parties:
<TABLE>
<S> <C>
G M Leary, D R Stephens, K E Perrett (all directors of the Company) L. 667,000 each
Apax Partners & Co. Ventures Limited L. 1,084,000
</TABLE>
<PAGE> 20
On December 2, 1996, the Company repaid the balance of the investor
loan stock, of which a related party, Apax Partners & Co. Ventures Limited,
received L. 1,784,823, together with interest to date of repayment. On December
2, 1996, the Company also redeemed the redeemable preference shares and Apax
Partners & Co. Ventures Limited received repayment of L.3,953,000 plus
redemption premium of L. 632,000.
In September, October and November 1996 the Company granted options
to its employees, to Dr Alan Solomon and to Terence Osborne to purchase up to an
aggregate of 1,300,000 C Ordinary Shares at an exercise price of one pence per
share. These shares were issued to the Trustee of the S&S International Holdings
Employee Benefit Trust.
The Company has an agreement with AuthenTec Consulting Limited, a
company in which Dr Alan Solomon has an interest, to provide the consultancy
services of Dr Solomon for ten days per month at an annual fee of L. 50,000.
Additional days may be contracted by mutual agreement at rates of between L. 750
and L. 2,000 per day. This contract terminates on 6 February 1998. Amounts
invoiced to the Company under this agreement for the year ended May 31, 1997
totalled L. 137,000. The Company also purchased certain services through
AuthenTec to the value of L.12,000 during the year ended May 31, 1997 and as at
the end of the year a balance of L. 10,000 was due to AuthenTec. The Company
also sells to AuthenTec; sales for the year ended May 31, 1997 were L. 81,000
and the year end balance owed to the Company was L. 9,000.
Dr. Alan Solomon and Mrs. Susan Solomon, his wife, were the holders
of the vendor loan notes (see Note 14). These loan notes, principal L.3,000,000,
were repaid on December 2, 1996 together with interest to the date of repayment.
27. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ALLOWANCE CO-OPERATIVE
FOR BAD AND MARKETING
DOUBTFUL PROVISION
ACCOUNTS
IN IN
THOUSANDS THOUSANDS
<S> <C> <C>
S&S INTERNATIONAL
At May 31, 1994 L. 68 L. 66
Provided 8 258
Utilised (1) (44)
---------- ----------
At May 31, 1995 75 280
Provided 33 435
Utilised -- (246)
========== ==========
At February 6, 1996 L. 108 L. 469
========== ==========
COMPANY
At February 7, 1996 L. 108 L. 469
Provided 291 419
Utilised (7) (269)
---------- ----------
At May 31, 1996 392 619
Provided 85 1,371
Utilised (10) (1,095)
At May 31, 1997 L. 467 L. 895
========== ==========
</TABLE>
28. SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN THE UNITED KINGDOM AND THE UNITED STATES
The Consolidated Financial Statements are prepared in accordance
with generally accepted accounting principles in the United Kingdom ("U.K.
GAAP"), which differ in certain significant respects from those generally
accepted in the United States ("U.S. GAAP"). The differences that are
significant to Dr Solomon's Group PLC relate to the following items.
GOODWILL AND INTANGIBLE ASSETS
Under U.K. GAAP, costs of acquisitions in excess of the fair value
of the attributable net assets of acquired businesses at the date of acquisition
may be capitalized or may be written off against shareholders' equity, either in
the financial year of acquisition or in a subsequent financial year. Dr
Solomon's Group PLC has written off such goodwill against shareholders' equity
in the financial year of acquisition.
<PAGE> 21
Under U.S. GAAP, the excess of the purchase price over the net
assets acquired is allocated to goodwill and other intangible assets based on
the requirements of Accounting Principles Board Opinion No. 16 "Business
Combinations" (APB 16). The assets are capitalized and then amortized over a
term not to exceed 40 years.
PREFERENCE SHARES
Under U.K. GAAP, redeemable preference shares are recorded in
shareholders' funds initially at the net proceeds received. This amount is
increased by the finance costs accrued over the life of the instruments and
reduced by dividends or other payments made in connection with the shares. The
total amount is separately disclosed as 'amounts attributable to non-equity
shareholders' at the bottom of the balance sheet.
Under U.S. GAAP, redeemable preference shares are not included under
the general heading 'shareholders equity'. Finance costs accrued over the life
of the instruments are treated in the same manner as dividends on non-redeemable
preference shares and deducted from net income in determining net income
available to common shareholders.
DEFERRED TAXATION
Under U.K. GAAP, deferred taxation is provided at the rates at which
the taxation is expected to become payable. No provision is made for amounts
which are not expected to become payable in the foreseeable future and no
account is taken of deferred tax assets in accordance with Statement of Standard
Accounting Practice 15.
Under U.S. GAAP, deferred taxation is provided on all temporary
differences under the liability method at rates at which the taxation would be
payable in the relevant future year as prescribed by Statement of Financial
Accounting Standard ("SFAS") No. 109 - "Accounting for Income Taxes".
DIVIDENDS
Under U.K. GAAP, dividends are included in the financial statements
when recommended by the Board of Directors to the shareholders.
Under U.S. GAAP, dividends are not included in the financial
statements until declared by the Board of Directors.
EARNINGS PER SHARE
Under U.K. GAAP earnings per share is based on the weighted average
number of ordinary shares in issue throughout the period and are calculated on
the profit on ordinary activities after taxation and after other finance charges
in respect of non-equity shares, but before equity dividends.
Under U.S. GAAP income per share is based on the weighted average
number of ordinary shares in issue throughout the period and is calculated on
the net income for the period.
COMPENSATION EXPENSE
The Company follows the provisions of Accounting Principles Board
Opinion no.25, "Accounting for stock issued to Employees" and is required to
recognize a non-cash compensation expense equal to the difference between the
exercise price of options granted under the Dr Solomon's Group Share Option
Scheme and the fair market value of the options at the time they were granted.
This amounted to L. 17,808 million in the quarter ended November 30, 1996. Under
U.S. GAAP, the Company is also required to recognize a non-cash compensation
expense of L. 2.0 million on the transfer of Investor Loan Stock to the
executive directors in the first quarter of the 1997 financial year.
CASH AND CASH EQUIVALENTS
Under U.K. GAAP, cash is defined as cash in hand and deposits
repayable on demand, less overdrafts repayable on demand. Cash equivalents are
no longer defined. Deposits are classified as liquid investments.
Under U.S. GAAP, cash equivalents consist of all deposits with an
original maturity of three months or less. Cash is not stated net of overdrafts,
instead these are presented within the financing section of the cash flow
statement.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Consolidated Statements of Cash Flows prepared under U.K. GAAP
differ in certain presentational respects from the format required under SFAS
95-"Statement of Cash Flows". Under U.K. GAAP, a reconciliation of profit from
operations to cash
<PAGE> 22
flows from operating activities is presented in a note, and cash paid for
interest and income taxes are presented separately from cash flows from
operating activities. Under SFAS 95, cash flows from operating activities are
based on net profit, include interest and income taxes, and are presented on the
face of the statement. U.K. GAAP requires cash and cash equivalents to be
presented net of overdrafts; SFAS 95 treats overdrafts within financing
activities.
A reconciliation between the consolidated statements of cash flows
presented in accordance with U.K. GAAP and U.S. GAAP is set out below:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, FEBRUARY 7, YEAR ENDED
MAY 31, 1995 1995 UNTIL 1996 UNTIL MAY 31,
FEBRUARY 6, MAY 31, 1996 1997
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net cash inflow from operating activities (U.K. GAAP) L. 3,189 L. 3,728 L. 7,191 L.14,028
Tax paid (693) (187) (318) (1,904)
Interest received 118 124 44 724
Interest paid -- -- (688) (929)
-----------------------------------------------------------
Net cash provided by operating activities (U.S. GAAP) L. 2,614 L. 3,665 L. 6,229 L.11,919
===========================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 1, FEBRUARY 7, YEAR ENDED
MAY 31, 1995 1995 UNTIL 1996 UNTIL MAY 31,
FEBRUARY 6, MAY 31, 1996 1997
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Net cash outflow from capital expenditure and financial
investment (U.K. GAAP) L.(1,347) L. (796) L. (490) L.(2,447)
Purchase of subsidiary undertaking (net of cash acquired) -- -- (22,084) --
-----------------------------------------------------------
Net cash used in investing activities (U.S. GAAP) L.(1,347) L. (796) $(22,574) L.(2,447)
===========================================================
</TABLE>
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, FEBRUARY 7, YEAR ENDED
MAY 31, 1995 1995 UNTIL 1996 UNTIL MAY 31,
FEBRUARY 6, MAY 31, 1996 1997
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net cash inflow from financing activities (U.K. GAAP) L. -- L. -- L.21,560 L.10,681
Equity dividends paid (955) -- -- --
-----------------------------------------------------------
Net cash (used in)/provided by financing activities (U.S. GAAP) L. (955) L. -- L.21,560 L.10,681
===========================================================
</TABLE>
<PAGE> 23
The approximate effects of the differences between U.K. GAAP and
U.S. GAAP on net income, shareholders' equity and total assets are as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, FEBRUARY 7, YEAR ENDED
MAY 31, 1995 1995 UNTIL 1996 UNTIL MAY 31, 1997
FEBRUARY 6, MAY 31, 1996
1996
IN THOUSANDS IN THOUSANDS IN THOUSANDS IN THOUSANDS
(EXCEPT PER (EXCEPT PER
SHARE DATA) SHARE DATA)
<S> <C> <C> <C> <C>
NET INCOME/(LOSS)
Profit on ordinary activities after taxation (U.K. GAAP) L. 652 L. 985 L. 521 L. 5,258
Items increasing/(decreasing) net income:
Amortization of goodwill and intangible assets -- -- (11,941) (8,512)
Amortization of preference share redemption premium -- -- (467) (700)
Compensation expense -- -- -- (19,808)
Recognition of deferred tax asset (8) (26) 28 174
-------------------------------------------------------------
Net income/(loss) (U.S. GAAP) L. 644 L. 959 L. (11,859) L. (23,588)
-------------------------------------------------------------
Net loss per ordinary share based on 43,340,000 ordinary shares (27.4)pence
-------------------------------=============
Net loss per ordinary share based on 49,489,423 ordinary shares (47.7)pence
==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
SHAREHOLDERS' (DEFICIT)/EQUITY
Shareholders' (deficit)/equity (U.K. GAAP) L. (21,242) L. 11,664
Items increasing / (decreasing) shareholders' (deficit)/equity:
Goodwill and intangible assets - net of amortization 17,426 8,914
Recognition of deferred tax asset 417 591
Preference shares included in
Shareholders' deficit under U.K. GAAP (7,760) --
---------------------------
Shareholders' (deficit)/equity (U.S. GAAP) L. (11,159) L. 21,169
===========================
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
TOTAL ASSETS
Total assets (U.K. GAAP) L. 13,798 L. 40,997
Goodwill and intangible assets - net of amortization 17,426 8,914
Recognition of deferred tax asset 417 591
---------------------------
Total assets (U.S. GAAP) L. 31,641 L. 50,502
===========================
</TABLE>
Details of the accounting treatment for income taxes and business
acquisitions under U.S. GAAP are provided below.
<PAGE> 24
INCOME TAXES
The components of income before taxes and income tax expense under
U.S. GAAP are as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL UNTIL MAY 31, 1997
FEBRUARY 6, 1996 MAY 31, 1996
IN IN IN IN
THOUSANDS THOUSANDS THOUSANDS THOUSANDS
<S> <C> <C> <C> <C>
INCOME/(LOSS) BEFORE INCOME TAXES:
United Kingdom L. 1,765 L. 2,573 L. (11,012) L. (19,160)
United States (215) (810) (423) (1,547)
Germany (298) 20 103 595
------------------------------ ------------------------------
Income before taxes L. 1,252 L. 1,783 L. (11,332) L. (20,112)
============================== ==============================
CURRENT TAX:
United Kingdom L. 600 L. 798 L. 555 L. 3,400
Germany -- -- -- 250
------------------------------ ------------------------------
L. 600 L. 798 L. 555 L. 3,650
============================== ==============================
DEFERRED TAX:
United Kingdom L. 98 L. 20 L. (59) L. (159)
United States (86) (344) (191) (732)
Germany (90) 6 31 (15)
------------------------------ ------------------------------
(78) (318) (219) (906)
Valuation allowance 86 344 191 732
------------------------------ ------------------------------
Total deferred tax movement 8 26 (28) (174)
------------------------------ ------------------------------
Total tax provision L. 608 L. 824 L. 527 L. 3,476
============================== ==============================
</TABLE>
The reconciliation of the effective tax rate to the statutory corporate tax rate
in the United Kingdom is as follows:
<TABLE>
<CAPTION>
S&S INTERNATIONAL COMPANY
YEAR ENDED JUNE 1, 1995 FEBRUARY 7, YEAR ENDED
MAY 31, 1995 UNTIL UNTIL MAY 31, 1997
FEBRUARY 6, 1996 MAY 31, 1996
% % % %
<S> <C> <C> <C> <C>
Statutory tax rate (U.K.) 33.0 33.0 33.0 32.7
Tax rate differences:
United States (1.0) (3.0) -- --
Germany 1.0 -- -- 0.1
FASB109 valuation allowance 7.0 19.0 (3.0) (3.2)
Amortization of goodwill and intangible assets
-- -- (35.0) (14.7)
Compensation expense -- -- -- (32.5)
Other differences 8.6 (2.8) 0.3 0.3
--------- ------ ----- ------
Effective tax rate (U.S.) 48.6 46.2 (4.7) (17.3)
========= ===== ===== =====
</TABLE>
For the period February 7, 1996 until May 31, 1996 and for the year
ended May 31, 1997 a tax charge has arisen on the loss for the periods due
mainly to the non-deductibility for U.K. tax purposes of the amortization of
goodwill and intangible assets.
<PAGE> 25
Deferred income tax assets are attributable to the following:
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1997
IN THOUSANDS IN THOUSANDS
<S> <C> <C>
CURRENT DEFERRED TAX ASSET
Short-term provisions L. (95) L. (122)
U.S. temporary differences (192) (705)
German temporary differences -- (117)
========== ==========
Total net current deferred tax assets L. (287) L. (944)
========== ==========
NON-CURRENT DEFERRED TAX ASSET
Loss carry forwards
United States (226) (103)
Germany (102) --
Other U.S. temporary differences (202) (514)
Depreciation (220) (382)
---------- ----------
(750) (999)
---------- ----------
TOTAL DEFERRED TAX ASSET L. (1,037) L. (1,943)
Valuation allowance 620 1,352
---------- ----------
L. (417) L. (591)
========== ==========
</TABLE>
A valuation allowance is provided against the temporary deductible differences
and net operating loss carry-forwards which are not likely to be realized.
During the period from February 7, 1996 until May 31, 1996 and during the year
ended May 31, 1997, the net valuation allowance was increased to provide for the
gross deferred tax assets arising in the U.S.
<PAGE> 26
ACQUISITIONS
As detailed in note 23, on February 6, 1996 the Company acquired the
whole of the share capital of S&S International for a consideration of
L.30,035,000 plus expenses.
The allocation of purchase price is summarised as follows:
<TABLE>
<CAPTION>
BOOK AND
FAIR VALUE
IN
THOUSANDS
<S> <C>
Net assets acquired at cost (including cash of L.5,707) L. 1,459
----------
Purchase price:
Cash paid, including acquisition expenses 27,791
Loan notes issued 3,000
Assets transferred to vendors at book value 35
----------
Total purchase price 30,826
----------
Excess of purchase price over net assets acquired allocated to other
intangibles and goodwill (amortized over 0 to 8 years - see below) 29,367
==========
</TABLE>
The allocation of the purchase price has been determined by
independent appraisers on the requirements of Accounting Principles Board
Opinion No. 16 "Business Combinations" (APB 16). The specific allocation of the
purchase price to identifiable intangible assets was made based on separate
discounted cash flow models. The type of intangible asset, the amounts allocated
to each and the term over which they are to be amortized are summarised below:
<TABLE>
<CAPTION>
ASSET AMOUNT AMORTIZATION
ALLOCATED PERIOD
IN THOUSANDS YEARS
<S> <C> <C>
Software L. 10,600 11 months
In-process research and development 7,500 0 months
Tradename 1,900 8 years
Workforce in place 740 7 years
Covenant not to compete 2,700 4 years
Goodwill 5,927 8 years
---------
L. 29,367
=========
</TABLE>
As at May 31, 1997 the accumulated amortization of goodwill and other
intangibles was L. 20,453,000 (1996 - L. 11,941,000).
