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As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NETWORKS ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0316593
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3965 FREEDOM CIRCLE
SANTA CLARA, CA 95054
(408) 988-3932
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
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WILLIAM L. LARSON
CHIEF EXECUTIVE OFFICER
3965 FREEDOM CIRCLE
SANTA CLARA, CA 95054
(408) 988-3932
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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Copies to:
JEFFREY D. SAPER, ESQ.
KURT J. BERNEY, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
FAX: (650) 493-6811
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Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share...................... 483,575 shares $13.44 $6,499,248 $1,806.79
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(1) The Price of $13.44 per share, which was the average of the high and low
prices of the Registrant's Common Stock on the Nasdaq National Market on
May 18, 1999, is set forth solely for the purposes of calculating the
registration fee in accordance with Rule 457(c) of the Securities Act of
1933, as amended.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not any
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
(Subject to completion, dated May 28, 1999)
483,575 SHARES
NETWORKS ASSOCIATES, INC.
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COMMON STOCK
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This prospectus relates to the public offering, which is not being underwritten,
of up to 483,575 shares of our common stock which is held by some of our current
stockholders.
The prices at which such stockholders may sell the shares will be determined by
the prevailing market price for the shares or in negotiated transactions. We
will not receive any of the proceeds from the sale of the shares.
Our common stock is listed on the Nasdaq National Market under the symbol
"NETA." On May 18, 1999, the average of the high and low price for our common
stock was $13.44 per share.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this prospectus is May 28, 1999.
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No person has been authorized to give any information or to make any
representations other than those contained in this prospectus in connection with
the offering made hereby, and if given or made, such information or
representations must not be relied upon as having been authorized by Network
Associates, Inc. (referred to in this prospectus as "Network Associates" and
"we"), any selling stockholder or by any other person. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that information herein is correct as of any time
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any security other than the securities
covered by this prospectus, nor does it constitute an offer to or solicitation
of any person in any jurisdiction in which such offer or solicitation may not
lawfully be made.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public conference rooms. Our SEC filings are also available to the public
from the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13a, 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until our
offering is completed.
(1) Our Quarterly Report on Form 10-Q for the quarter ended March
31, 1999;
(2) Our Annual Report on Form 10-K for the year ended December 31,
1998; as amended on Form 10-K/A, filed with the Commission on
April 30, 1998;
(3) Our Quarterly Report on Form 10-Q for the quarter ended September
30, 1998; as amended on Form 10-Q/A, filed with the Commission on
April 15, 1999;
(4) Our Quarterly Report on Form 10-Q for the quarter ended June 30,
1998; as amended on Form 10-Q/A, filed with the Commission on
April 15, 1999;
(5) Our Quarterly Report on Form 10-Q for the quarter ended March 31,
1998; as amended on Form 10-Q/A, filed with the Commission on
April 15, 1999;
(6) Our Current Report on Form 8-K, filed with the Commission on
January 14, 1999;
(7) Our Current Report on Form 8-K, filed with the Commission on
November 24, 1998;
(8) Our Current Report on Form 8-K, filed with the Commission on
October 22, 1998;
(9) Our Current Report on Form 8-K, filed with the Commission on
August 14, 1998;
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(10) Our Current Report on Form 8-K, filed with the Commission on June
9, 1998; as amended on Form 8-K/A, filed with the Commission on
July 1, 1998;
(11) Our Current Report on Form 8-K, filed with the Commission on
April 3, 1998;
(12) Our Current Report on Form 8-K, filed with the Commission on
March 25, 1998; Our Current Report on Form 8-K, filed with the
Commission on February 10, 1998; as amended on Form 8-K/A, filed
with the Commission on February 25, 1998; and
(13) The description of our Common Stock contained in our Registration
Statement on Form 8-A, filed on August 21, 1992, including any
amendments or reports filed for the purpose of updating such
description.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Prabhat K. Goyal
Vice President of Administration and Chief Financial Officer
Network Associates, Inc.
3965 Freedom Circle
Santa Clara, CA 95054
(408) 988-3932
You should rely only on the information incorporated by reference or
provided in this prospectus or the prospectus supplement. We have authorized no
one to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or the prospectus supplement is
accurate as of any date other than the date on the front of the document.
NETWORK ASSOCIATES, INC.
Networks Associates, Inc. was formed in December 1997 as a result of the
merger of McAfee Associates, Inc. and Network General Corporation. Following the
merger, McAfee changed its legal name to Networks Associates, Inc.
We are a leading developer and provider of software products that
address two of the most important concerns of information technology or IT
professionals: network security and network management.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated herein by reference
contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain
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risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results could differ materially from those expressed or forecasted in any
such forward-looking statements as a result of certain factors, including those
set forth in "Risk Factors," as well as those noted in the documents
incorporated herein by reference. In connection with forward-looking statements
which appear in these disclosures, investors should carefully review the factors
set forth in this prospectus under "Risk Factors."
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RISK FACTORS
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
OUR QUARTERLY FINANCIAL RESULTS WILL LIKELY FLUCTUATE
Our quarterly operating results have varied greatly in the past and will
likely vary greatly in the future depending upon a number of factors. Many of
these factors are beyond our control. Our revenues, gross margins and operating
results may fluctuate significantly from quarter to quarter due to, among other
things:
- volume, size and timing of new licenses and renewals of existing
licenses;
- our distributor inventory levels and product return rates;
- our inventory levels;
- introduction of new products, product upgrades or updates by us
or our competitors;
- the mix of products we sell;
- the success of our Net Tools product suite and related pricing
model;
- our continued evolution as an enterprise-wide software provider
and the related impact on the length of our sales cycle;
- the size and timing of our non-cash stock-based charges;
- changes in product prices by us or our competitors;
- trends in the computer industry;
- delays or reductions in customer software purchases related to
their Year 2000 compliance issues;
- costs related to acquisitions of technology or businesses;
- our investment experience related to our strategic minority
equity investments; and
- costs related to extraordinary events including litigation and
acquisitions.
Our business is impacted by the seasonal trends and global or regional
macroeconomic trends. For example, our net revenue is typically higher in the
fourth quarter, as many customers complete annual budgetary cycles, and lower in
the summer months when many businesses experience lower sales, particularly in
the European market. Our business in Japan, Asia generally and Latin America has
been adversely impacted by the adverse economic conditions there. If these
conditions were to spread to Europe or the U.S., our business, results of
operations and financial condition would be adversely impacted.
IN THE NEAR-TERM, WE EXPECT NEGATIVE, LIMITED OR NO GROWTH IN NET INCOME AND NET
REVENUE
We have experienced significant growth in net income (before acquisition
and related costs) and net revenue. However, our rate of growth has slowed in
recent periods due to increased price competition, a maturing anti-virus market
and an increasingly higher base from which to grow. More recently, we announced
that as a result of decreased visibility into future 1999 revenue due to Year
2000 issues and increasing sales cycles for our products, we intend to limit
distributor orders in the second quarter of 1999.
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Among other factors, our strategy of up-selling existing licenses to higher
level product suites and the increasing complexity of our products has resulted
in longer sales cycles for our products. In addition, like a number of other
enterprise-wide software providers, we have recently identified and expect a
continued slowing or reduction in customer capital spending related to Year 2000
compliance issues. Our intention to limit distributor orders in the second
quarter of 1999 in an effort to realign inventory levels in our distribution
channels to be more consistent with our revised future revenue expectations will
result in significantly lower revenue and a loss in the quarter ended June 30,
1999. Moreover, in later periods we could experience a significant reduction in
our net revenue, net income and related growth as the purchasing patterns of our
current or potential customers, particularly those to whom we market broader
enterprise solutions, are meaningfully impacted by Year 2000 concerns. Our
growth rate and net revenue also depend significantly on renewals of existing
orders. If our renewal or up-sale rates slow or decline, our net revenues and
operating results would be adversely affected.
THE TIMING AND AMOUNT OF OUR REVENUES ARE SUBJECT TO A NUMBER OF FACTORS THAT
MAKE IT DIFFICULT TO ESTIMATE OPERATING RESULTS PRIOR TO THE END OF A QUARTER
We do not expect to maintain a significant level of backlog. As a result,
product revenues in any quarter are dependent on contracts entered into or
orders booked and shipped in that quarter. We have generally experienced a trend
toward higher order receipt, and therefore a higher percentage of revenue
shipments, toward the end of the last month of a quarter. This trend makes
predicting revenues more difficult. The timing of closing larger orders
increases the risk of quarter-to-quarter fluctuation. As we have evolved as an
enterprise-wide software provider and continued with our efforts to license
larger product suites under the Net Tools umbrella, the size of our orders and
the length of our sales cycle have increased and may increase further. If orders
forecasted for a specific customer for a particular quarter are not realized or
revenues are not otherwise recognized in that quarter, our operating results for
that quarter could be materially adversely affected.
OUR STOCK PRICE HAS BEEN VOLATILE AND IS LIKELY TO REMAIN VOLATILE
During the first quarter of 1999, our stock price ranged from a per share
high of $61.25 to a low of $28.06. At the close of market on April 30, 1999, our
stock price was $13.25 per share. Announcements, litigation developments, and
our ability to meet the expectations of brokerage firms, industry analysts or
investors with respect to our operating and financial results, may contribute to
this volatility. We may not discover, or be able to confirm, revenue or earnings
shortfalls until the end of a quarter, which could result in an immediate drop
in our stock price. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against companies with public traded securities. In April and
May 1999, a number of putative class actions were brought against us, our
officers and directors. This litigation, and any other litigation if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
COMPETITORS MAY INCLUDE PRODUCTS SIMILAR TO OURS IN THEIR HARDWARE OR SOFTWARE
AND RENDER OUR PRODUCTS OBSOLETE
Vendors of hardware and of operating system software or other software
(such as firewall or e-mail software) may enhance their products or bundle
separate products to include network security and management software similar to
our products. For example, Cisco incorporated a firewall in its hardware
products and Microsoft Corporation introduced limited anti-virus functionality
into versions of MS-DOS in 1993. The widespread inclusion of products that
perform the same or similar function as our products within
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computer hardware or other software could render our products obsolete and
unmarketable. Furthermore, even if these incorporated products are inferior or
more limited than our products, customers may elect to accept the incorporated
products rather than purchase our products. If we are unable to develop new
network security and management products to further enhance operating systems or
other software and to successfully replace any obsolete products, our business
could suffer.
WE EXPECT SIGNIFICANT NON-CASH STOCK-BASED CHARGES
In light of the recent decline in our stock price and in an effort to
retain our employee base, in April 1999, we offered to reprice options held by
all employees, other than directors and executive officers. In exchange for
their agreeing to not exercise any of the repriced options for a period of
twelve months, the exercise price of all eligible employee options with an
exercise price in excess of $11.0625 was reduced to $11.0625, the closing market
price on the NASDAQ on April 22, 1999. Option holders electing to have their
options repriced were required to acknowledge their acceptance by April 28,
1999. As a result of the increase in price between the date on which the options
were repriced, April 22, 1999, and the date on which the employees elected to
reprice their option grants, April 28, 1999, we will incur a stock-based
compensation charge. The initial charge for repriced shares is expected to be
approximately $ 27.6 million, the difference between the new $11.0625 per share
exercise price and $13.75, the closing share price on the NASDAQ on April 28,
1999. Of the total initial charge, approximately $7.4 million will be expensed
in the quarter ended June 30, 1999, and approximately $20.2 million will be
expensed over the remaining vesting period of approximately 3 years.
On March 31, 1999, the FASB issued an exposure draft of its Proposed
Interpretation, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion No. 25" (the "Proposed
Interpretation"). Under the Proposed Interpretation, stock options repriced
after December 15, 1998 will be subject to variable plan accounting treatment.
If adopted, this proposed guidance will require the Company to remeasure
compensation cost for outstanding repriced options each reporting period based
on changes in the market value of the underlying common stock after the date of
adoption. The FASB currently expects to approve the interpretation in the fourth
quarter of 1999. Depending upon movements in the market value of the Company's
common stock, this accounting treatment may result in significant additional
compensation charges in future periods.
In the first quarter of 1999, McAfee.com, our subsidiary, granted options
to individuals, including Network Associates executive officers, who are not
employed by McAfee.com. As a result, these options will be accounted for under
the variable method of accounting, which may result in significant non-cash
stock-based charges upon grant and as these options vest. In the quarter ended
March 31, 1999, these non-cash charges totaled approximately $457,000. See
"Management's Discussion and Analysis of Operating Results and Financial
Condition."
WE FACE RISKS ASSOCIATED WITH PAST AND FUTURE TRANSACTIONS
The software industry has experienced, and is expected to continue to
experience, a significant amount of consolidation. As part of our growth
strategy, we may buy or make investments in, complementary companies, products
and technologies. Since 1994 we have completed a large number of significant
acquisitions involving both public and private companies, including:
- CyberMedia in September 1998;
- Dr Solomon's in August 1998;
- Magic Solutions and TIS in April 1998;
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- Network General, PGP and Helix Software in December 1997;
- Vycor Corporation in February 1996;
- Saber Software in August 1995; and
- Pro Tools in January 1994.
We have also completed a number of smaller acquisitions and acquired a
number of our international distributors. Recently, we began making strategic
minority investments in complementary Internet related companies. In the three
months ended March 31, 1999, these minority investments totaled $26.5 million.
We are currently investigating acquisitions of additional foreign distributors
and other strategic minority investments.
Our acquisitions and strategic investments involve a number of risks and we
may not realize the expected benefits of these transactions. We may lose all or
a portion of our investment, particularly in the case of our strategic minority
investments.
The integration of transactions involves a complex, time consuming and
expensive process. Prior to any acquisition, each company has its own business,
culture, clients, employees and systems. Following any acquisition, we must
operate as a combined organization utilizing common information communication
systems, operating procedures, financial controls and human resource practices.
In order to successfully integrate acquired companies, we must, among other
things, successfully:
- attract and retain key management and other personnel; integrate,
both from an engineering and a sales and marketing perspective,
the acquired products into our suite of product offerings;
- coordinate research and development efforts;
- integrate sales forces; and
- consolidate duplicate facilities.
The difficulties of integrating an acquired company may be worsened by the
geographic distance between the companies, the complexity of the technologies
and operations being integrated, and the disparate corporate cultures being
combined. Successful acquisitions may be more difficult to accomplish in the
high technology industry than in other industries, and will require the
dedication of our management resources. Management's focus on the integration of
operations may distract attention from our day-to-day business, and may disrupt
key research and development, marketing or sales efforts. In addition, it is
common in the technology industry for aggressive competitors to attract
customers and recruit key employees away from companies during the integration
phase of an acquisition. If we cannot successfully integrate any acquisition,
our business could suffer.
In 1997 and 1998, we incurred significant nonrecurring charges associated
with our previous acquisitions. Our available cash and our securities may be
used to buy or invest in companies or products, which could result in
significant acquisition-related charges to earnings and dilution to our
stockholders. Moreover, if we buy a company, we may have to incur or assume that
company's liabilities, including liabilities that are unknown at the time of
acquisition, which may result in a material adverse effect on us.
WE WILL EXPERIENCE SIGNIFICANT AMORTIZATION CHARGES AND FACE THE RISK OF FUTURE
NON-RECURRING CHARGES IN THE EVENT OF IMPAIRMENT.
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In connection with our previous acquisitions accounted for under the
purchase method of accounting, in future periods we will experience significant
charges related to the amortization of purchased technology and goodwill. In
addition, if we later determine that this purchased technology and goodwill is
impaired, we will be required to take a related non-recurring charge to
earnings.
WE FACE RISKS RELATED TO OUR NET TOOLS MEGA-SUITE BUSINESS STRATEGY
Historically, a majority of our revenues resulted from the licensing of our
flagship anti-virus products and Sniffer products. Over the last year we have
been focusing our efforts on broadening our revenue base by providing network
security and management solutions to enterprise customers, targeting in
particular the Windows NT/Intel platform. To this end, we organized our products
into four product suites -- McAfee Total Virus Defense, PGP Total Active
Security, Sniffer Total Network Visibility and McAfee Total Service Desk--which
form our integrated "Net Tools" mega-suite solution. The Net Tools product suite
model involves a modified product pricing structure. Potential customers may not
respond favorably to this modified pricing structure and the lack of a favorable
response could materially adversely affect our operating results. In addition,
as part of the Net Tools concept, we are 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. We face
significant engineering challenges related to these efforts. Success of our Net
Tools suite strategy will also depend, in part, on the following factors:
- successful development and coordination of our sales force;
- successful development of a national accounts sales force; and
- the development and expansion of an effective professional
services organization.
WE FACE RISKS RELATED TO OUR SNIFFER PRODUCT STRATEGY
Although we will continue to offer perpetual licenses with annual support
and maintenance contracts for our Sniffer products, we have recently developed a
subscription-licensing model for these products. We are also seeking to increase
our total Sniffer unit sales through recently developed software-only versions
of some of our Sniffer products, which we would mean that we would no longer
sell the hardware components contained in those products. However, there is a
risk that customers will continue to require that we provide the hardware
platform and components currently contained in our Sniffer products. Despite our
efforts, total unit license of Sniffer products may not increase and customers
may not accept 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, our
operating results and financial condition would be likely be affected in the
following ways:
- in the case of subscription licenses, we would expect an increase
in deferred revenues related to the service portion of the
two-year Sniffer license that would be capitalized on our balance
sheet;
- in the initial year of the subscription license, the
corresponding revenue would be lower than if the license were
perpetual; and
- in the case of the software-only Sniffer product license, we
would expect lower total revenues and a higher overall gross
margin related to that license, as we would not be selling the
corresponding hardware component (currently the hardware
component generates a lower gross margin than the total product
gross margin).
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WE FACE RISKS RELATED TO OUR STRATEGY OF ACQUIRING INDEPENDENT AGENTS AND
DISTRIBUTORS
We have been acquiring existing independent agents and distributors of our
products in certain strategic markets. We may be required to provide customers
the same level of technical support that was previously provided by the acquired
agents and distributors. We may be unable to provide technical support or
operate any acquired distributor or agent as well as previous operators or at
all. The acquisition of any distributor or agent may not result in increased
foreign revenues.
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE; WE FACE RISKS
ASSOCIATED WITH PRODUCT DEVELOPMENT
The network security and management market is highly fragmented and
characterized by ongoing technological developments, evolving industry standards
and rapid changes in customer requirements. Our success will depend on our
ability to:
- offer a broad range of network security and management software
products;
- continue to enhance existing products and expand product
offerings;
- develop and introduce in a timely manner new products with
technological advances;
- respond promptly to new customer requirements;
- comply with evolving industry standards without delays in
compliance;
- provide upgrades and updates to users frequently and at low cost;
and
- remain compatible with popular operating systems such as Windows
95, Windows NT and NetWare.
We may not be able to successfully develop and market, on a timely basis,
enhancements to our existing products or new products. Our product enhancements
or new products may not adequately address the changing needs of the
marketplace. New products with new technological capabilities could replace or
shorten the life cycle of our products or cause our customers to defer or cancel
purchases of our products. For example, in the first quarter of 1999, we believe
a number of customers for our security products deferred their product purchases
pending the introduction of our integrated Active Security product in April
1999.
We may continue to experience delays in software development as we have at
times in the past. Complex software products like ours may contain undetected
errors or version compatibility problems, particularly when first released,
which could delay or cost us our market acceptance. For example, we experienced
compatibility issues in connection with our recent NetShield upgrade, and our
anti-virus software products have in the past falsely detected viruses that did
not actually exist. Difficulties and delays associated with new product
introductions, performance or enhancements could have a material adverse effect
on our business, financial condition and results of operation.
Our product development efforts are impacted by the adoption or evolution
of industry standards. For example, no uniform industry standard has developed
in the market for encryption security products. As industry standards are
adopted or evolve, we may have to modify existing products or develop and
support new versions of existing products. In addition, if no industry standard
develops, our products and our
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competitors' products could be incompatible, which could prevent or delay
overall development of the market for a particular product. If our products fail
to comply with existing or evolving industry standards in a timely fashion, our
business, results of operation and financial condition could be materially and
adversely affected.
Our long-term success depends on our ability to upgrade and update existing
product offerings, modify and enhance acquired products and introduce new
products which meet our customers' needs. Future upgrades and updates may
include additional functionality, respond to user problems or address
compatibility problems with changing operating systems and environments. We
believe that our ability to provide these upgrades and updates frequently and at
low costs is key to our success. For example, the proliferation of new and
changing viruses makes it imperative to update anti-virus products frequently to
avoid obsolescence. Failure to release upgrades and updates could have a
material adverse effect on our business, results of operations and financial
condition. We may not be successful in these efforts. In addition, future
changes in Windows 95, Windows NT, NetWare or other popular operating systems
could cause compatibility problems with our products. Further, delays in the
introduction of future versions of operating systems or lack of market
acceptance of these future versions would delay or reduce demand for our future
products which were designed to operate with these future operating systems. Our
failure to introduce in a timely manner new products that are compatible with
operating systems and environments preferred by desktop computer users would
have a material adverse effect on our business, results of operation and
financial condition.
WE DEPEND ON REVENUE FROM OUR FLAGSHIP ANTI-VIRUS AND SNIFFER PRODUCTS
We have historically derived a majority of our net revenue from our
flagship McAfee anti-virus software products and Sniffer network fault and
performance management products. These products are expected to continue to
account for a significant portion of our net revenue for the foreseeable future.
Because of this concentration of revenue, a decline in demand for or in the
prices of these products as a result of competition, technological change, a
change in our pricing model, inclusion of anti-virus or network management and
analysis software as a standard part of hardware or operating system software or
other software, or a maturation in the markets for these products, could harm
our business.
IF THE NETWORK MANAGEMENT AND NETWORK SECURITY MARKETS DO NOT EVOLVE AS WE
ANTICIPATE, OUR BUSINESS COULD SUFFER
The markets for our network management and network security products are
evolving, and their growth depends upon broader market acceptance of this
software, including help desk software. Although the number of personal
computers, or PCs, attached to large-area networks has increased dramatically,
the network management and network security markets continue to be emerging
markets. These markets may not continue to develop or may not develop rapidly
enough to benefit our business significantly. In addition, there are a number of
potential approaches to network management and network security, including the
incorporation of management and security tools into network operating systems.
Therefore, even if network management and network security tools gain broader
market acceptance, our products may not be selected by potential purchasers. To
the extent that either the network management or network security market does
continue to develop, we expect that competition will increase.
WE ARE SUBJECT TO INTENSE COMPETITION IN THE NETWORK MANAGEMENT AND SECURITY
MARKETS AND WE EXPECT TO FACE INCREASED COMPETITION IN THE FUTURE
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The markets for our products are intensely competitive, and we expect
competition to increase in the near-term. We believe that the principal
competitive factors affecting the markets for our products include:
- performance;
- functionality;
- quality;
- customer support;
- breadth of product line;
- frequency of upgrades and updates;
- integration of products;
- manageability of products;
- brand name recognition;
- company reputation; and
- price.
Performance and quality of our anti-virus software products are measured by
number and type of viruses detected, the speed at which the products run and
ease of use. Some of our competitors have longer operating histories, greater
name recognition, larger technical staffs, established relationships with
hardware vendors, and/or greater financial, technical and marketing resources.
These factors may provide our competitors with an advantage in penetrating the
original equipment manufacturer, or OEM, market with their network security and
management products. As is the case in many segments of the software industry,
we have been encountering, and we expect to further encounter, increasing
competition. This increased competition could reduce average selling prices and,
therefore, profit margins. Competitive pressures could result not only in price
reductions but also in a decline in sales volume, which could cause our business
to suffer. In addition, competitive pressures may make it difficult for us to
maintain or exceed our historic growth rate.
Although there is a trend toward consolidation in the network security and
management market, the market is currently highly fragmented with products
offered by many companies. Our principal competitors in the anti-virus market
include Symantec, Computer Associates/Cheyenne Software, IBM, and Trend Micro,
as well as numerous smaller companies and shareware authors that may in the
future develop into stronger competitors or be consolidated into larger
competitors. In the encryption portion of the security market, our principal
competitors are Security Dynamics, Cylink, Entrust Technologies and VeriSign.
Our principal competitors in the help desk market are Remedy and Software
Artistry, recently acquired by Tivoli Systems/IBM. Our principal competitor in
the software-based network fault and performance management market is
Hewlett-Packard with other competitors including Azure Technologies, Concord
Communications, DeskTalk Systems, Kaspia Systems, Shomiti Systems, and Wandel &
Goltermann. We also face competition in the security market from Cisco, Security
Dynamics, Checkpoint Software, Internet Security Systems and Axent, and other
vendors in the encryption/firewall/intrusion detection market. In addition, we
face 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, we may face increased
competition from these large companies, as well as other companies seeking to
enter the market. The trend toward enterprise-wide network management and
security solutions may result in a consolidation of the network management and
security market around a smaller number of companies who are able to provide the
necessary software and support capabilities. In addition, to the extent that we
are successful in developing our Net Tools suite of products designed around a
centralized management and administration console for the Windows NT platform,
we will likely compete with large computer systems management companies such as
Tivoli
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<PAGE> 14
Systems and Computer Associates. We may be unable to 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 we do. In addition, software companies who currently use
traditional distribution methods may in the future decide to compete more
directly with us by utilizing electronic software distribution.
OUR CUSTOMERS MAY CANCEL OR DELAY THEIR PURCHASES OF OUR PRODUCTS, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS; OUR SALES CYCLE IS LONG, WHICH COULD ADVERSELY
AFFECT OUR QUARTERLY RESULTS
Our products may be considered to be capital purchases by certain customers
or prospective customers. Capital purchases are often discretionary and,
therefore, are canceled or delayed if the customer experiences a downturn in its
business or prospects or as a result of economic conditions in general. Any
cancellation or delay could adversely affect our results of operations.
In addition, as we have continued to evolve as an enterprise-wide software
provider and continue to focus on the sale of product suites under the Net Tools
umbrella, our sales cycle has lengthened and may continue to lengthen. Sales of
large complex products, particularly product suites, frequently require a long
education process and significant technical evaluation and commitment of capital
and other resources. Moreover, these sales may be subject to the risk of delays
associated with customers' internal budget and other procedures for approving
large capital expenditures, deploying new technologies within their network and
testing and accepting new technologies that affect key operations. Because of
these longer sales cycles and the potential large size of such orders, if
anticipated orders are not realized or revenues are not otherwise recognized in
a particular quarter, our operating results for that quarter could suffer.
WE HAVE ONLY RECENTLY DEVELOPED OUR LARGE ACCOUNTS SALES FORCE; WE FACE RISKS
RELATED TO OUR SALES FORCE STRUCTURE
Our North American direct sales force is divided into three tiers. The
first tier focuses on the sale of all of our product suites under the Net Tools
umbrella to enterprise and national account customers. The second tier consists
of tow separate sales groups focused on the sale of the two product supersuites
(Net Tools Secure and Net Tools Manager) to the departmental level. The third
tier consists of four separate outbound corporate telesales forces who actively
market our individual product suites to customers with less than 1,000 end
users. Historically, we have not a large enterprise or national accounts sales
force and only recently developed a direct sales group focused on these larger
accounts.
To succeed in the direct sales channel for the enterprise and national
accounts market and for the sale of the separate security product suite, we must
build a significant direct sales organization and must attract and retain
qualified personnel. These individuals will require training about, and
knowledge of, product attributes for our various product suites. We may not
succeed in building the necessary sales organization or in attracting, retaining
or training these individuals. Historically, we sold our products at the
departmental level. To succeed in the enterprise and national accounts market
requires, among other things, our establishing relationships and contacts with
senior technology officers at these accounts. Our sales force may not succeed in
these efforts.
Our sales organization structure may result in multiple customer contacts
by our different sales representatives, particularly in circumstances where the
customer has multiple facilities and offices. These multiple contacts may likely
result from a lack of coordination between our various sales organizations and a
lack of focus by the individual sales representatives on their designated
customers or products. The
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<PAGE> 15
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 our business, results of operations and financial condition. In
addition, while the development of a direct sales channel reduces our dependence
on resellers and distributors, it may lead to conflicts for the same customers
and further customer confusion, pressure by current and prospective customers
for price reductions on products and, consequently, in reductions in our gross
margin and operating profit.
WE SELL OUR PRODUCTS THROUGH INTERMEDIARIES, WHO MAY NOT VIGOROUSLY MARKET OUR
PRODUCTS, HAVE RIGHTS OF RETURN OR MAY HAVE DIFFICULTY IN TIMELY PAYING FOR
PURCHASED PRODUCTS
We market a significant portion of our products to end-users through
intermediaries, including distributors, resellers and value-added resellers.
Beginning in 1998, our dependence on these indirect sales channels increased
significantly with the development of a software-only version of our Sniffer
product and the acquisition of CyberMedia in September 1998. The Sniffer product
was previously only a combined software/hardware product with a limited number
of resellers. CyberMedia sold its products only through indirect channels.
Our distributors sell other products that are complementary to, or compete
with, our products. While we encourage our distributors to focus on our products
through market and support programs, these distributors may give greater
priority to products of other suppliers, including competitors. Our agreements
with our distributors generally permit our distributors to return our product to
us in the event of end user returns to the distributor, inaccurate estimates of
end user demand by the distributor, increased purchases by distributors in
response to sales incentives or transitions to new products. We record sales to
distributors as revenue and at the same time establish a reserve for returns.
Returns could exceed reserves as a result of distributors holding excessive
amounts of our product in inventory. Our current or future reserves for returns
could be inadequate which would adversely impact our operating results.
Many of our distributors are experiencing economic difficulties worldwide,
which may adversely impact our collection of accounts receivable. For example,
CHS, our largest European distributor, has experienced a significant downturn in
its business. As a result, we have experienced a delay in collections from them
and may experience difficulties in collecting amounts owed to us. We regularly
review the collectibility and credit worthiness of our distributors to determine
an appropriate allowance for doubtful accounts reserve. Our uncollectible
accounts could exceed our current or future allowance for doubtful accounts
reserve, which would adversely impact our operating results.
WE NEED TO EXPAND AND DEVELOP AN EFFECTIVE PROFESSIONAL SERVICES ORGANIZATION;
WE RELY ON THIRD-PARTY PROFESSIONAL SERVICES
As our products and computer networks in general increase in complexity,
customers require greater professional assistance to design, install, configure
and implement our products. To date, we have relied on our limited professional
services capabilities and increasingly on outside professional service
providers, including our distributors, resellers and system integrators. These
third party service providers may provide inadequate levels of professional
services. Moreover, reliance on these third parties both places a greater burden
on them and reduces our ability to control and establish standards for providing
these support services. Our reliance on these third parties could, delay our
recognition of product revenue, harm our relationships or reputation with these
third parties or the end users of our products or result in decreased future
sales of, or prices for, our products.
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<PAGE> 16
To more effectively service our customer's evolving needs, we intend to
significantly expand and develop our worldwide professional service
organization. We may not succeed in these efforts. Effectively expanding and
developing our professional services organization will require that we hire and
train more service professionals who must be continually trained and educated to
ensure that they possess sufficient technical skills and product knowledge. The
market for qualified professionals is intensely competitive, making hiring and
retention difficult. We expect significant competition in this market from
existing providers of professional services and future entrants. We must also
properly price our services to attract customers, while maintaining sufficient
margins for these services. We therefore expect that we will have lower profit
margins on our service revenues. The failure to develop an effective
professional services organization could have a material adverse effect on our
business, results of operations and financial condition.
WE RELY ON THE CONTINUED PROMINENCE OF MICROSOFT TECHNOLOGY
Although we intend to support other operating systems, our mission is to be
the leading supplier of network security and management products for Windows
NT/Intel based Network. Sales of our products would be materially and adversely
affected by market developments which are adverse to the Windows operating
environments, including the failure of users and application developers to
accept Windows NT. In addition, our ability to develop products using the
Windows operating environments is dependent on our ability to gain timely access
to, and to develop expertise in, current and future developments by Microsoft.
We may not be able to gain the necessary access from Microsoft.
WE MUST EFFECTIVELY MANAGE OUR GROWTH
Our business has grown rapidly, both internally and through acquisitions.
This growth has placed, and any future growth would continue to place, a
significant strain on our limited personnel, management and other resources. Our
ability to manage any future growth, particularly with the anticipated expansion
of our international business and growth in distribution business, will require
us to:
- attract, train, motivate and manage new employees successfully;
- effectively integrate new employees into our operations; and
- continue to improve our operational, financial, management and
information systems and controls.
If we continue to grow, our management systems currently in place may be
inadequate or we may not be able to effectively manage this growth.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WHICH OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGERS; WE MAY FACE LITIGATION RELATED
TO OUR PROPRIETARY TECHNOLOGY AND RIGHTS.
Our success depends significantly upon our proprietary software technology.
We rely on a combination of contractual rights, trademarks, trade secrets,
patents and copyrights to establish and protect proprietary rights in our
software. However, these protections may be inadequate or competitors may
independently develop technologies or products that are substantially equivalent
or superior to our products. We do not typically obtain signed license
agreements from our corporate, government and institutional customers who
license products directly from us. Rather, we include an electronic version of a
shrink-wrap license in all of our electronically distributed software and a
printed license in the box for our products distributed through traditional
distributors in order to protect our copyrights and trade secrets in those
products. Since none of these licenses are signed by the licensee, many legal
authorities believe that such licenses may not be
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<PAGE> 17
enforceable under the laws of many states and foreign jurisdictions. In
addition, the laws of some foreign countries either do not protect these rights
at all or offer only limited protection for these rights. The steps taken by us
to protect our proprietary software technology may be inadequate to deter misuse
or theft of this technology. For example, we are aware that a substantial number
of users of our anti-virus products have not paid any registration or license
fees to us. Changing legal interpretations of liability for unauthorized use of
the our software, or lessened sensitivity by corporate, government or
institutional users to avoiding infringement of intellectual property, could
have a material adverse effect on our business, results of operations and
financial condition.
There has been substantial litigation regarding intellectual property
rights of technology companies. In the past we have been, and we currently are,
subject to litigation related to our intellectual property, including a pending
unfair trade practice case and separate patent infringement cases involving each
of Symantec, Hilgraeve and Trend Micro. Although we intend to defend ourselves
vigorously against claims asserted against us in the foregoing actions or
matters, developments arising out of this pending litigation or any other
litigation to which we are or may become a party could have a material adverse
effect on our business, results of operation and financial condition. Adverse
determinations in litigation could:
- result in the loss of our proprietary rights;
- subject us to significant liabilities;
- require us to seek licenses from third parties; or
- prevent us from manufacturing or selling our products.
The litigation process is subject to inherent uncertainties and we may not
prevail in these matters, or we may be unable to obtain licenses with respect to
any patents or other intellectual property rights that may be held valid or
infringed upon by us or our 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 us.
In addition, as we may acquire a portion of software included in its
products from third parties, our exposure to infringement actions may increase
because we must rely upon such third parties as to the origin and ownership of
any software being acquired. Similarly, exposure to infringement claims will
increase to the extent that we employ or hire additional software engineers
previously employed by competitors, notwithstanding measures taken by these
competitors to protect their intellectual property. In the future, litigation
may be necessary to enforce and protect trade secrets and other intellectual
property rights that we own. We may also be subject to litigation to defend
against claimed infringement of the rights of others or determine the scope and
validity of the proprietary rights of others. This litigation could be costly
and cause diversion of management's attention, either of which could have a
material adverse effect on our business, results of operations and financial
condition.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO FOREIGN CURRENCY FLUCTUATIONS
AND OTHER INHERENT RISKS RELATED TO DOING BUSINESS IN FOREIGN COUNTRIES
In the first quarter of 1999 and in 1998, 1997 and 1996, net revenue from
international licenses represented approximately 43%, 36%, 36% and 32%,
respectively, of our net revenue. Historically, we have relied upon independent
agents and distributors to market our products internationally. We expect that
international revenues will continue to account for a significant percentage of
net revenue. We also expect that a significant portion of this international
revenue will be denominated in local currencies. To reduce the impact of foreign
currency fluctuations, we use nonleveraged forward currency contracts. However,
our
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<PAGE> 18
future results of operations may be adversely affected by currency
fluctuations or by costs associated with currency risk management strategies.
Other risks inherent in international revenue generally include:
- payment cycles;
- greater difficulty in accounts receivable collection;
- unexpected changes in regulatory requirements;
- seasonality due to the slowdown in European business activities
during the third quarter;
- tariffs and other trade barriers;
- export restrictions on our encryption and other security
products;
- uncertainties relative to regional economic circumstances,
including the current economic turbulence in Asia;
- political instability in emerging markets and difficulties in
staffing; and
- managing foreign operations.
These factors may have a material adverse effect on our future
international license revenue. Further, in countries with a high incidence of
software piracy, we may experience a higher rate of piracy of our products.
In addition, a portion of our international revenue is expected to
continue to be generated through independent agents. Since these agents are not
our employees and are not required to offer our products exclusively, they may
discontinue marketing our products entirely. Also, we may have limited control
over these agents, limited access to the names of the customers to whom these
agents sell its products and limited knowledge of the information provided by,
or representations made by, these agents to its customers.
COMPUTER "HACKERS" MAY DAMAGE OUR PRODUCTS
Given our high profile in the security software market, we have been a
target of computer hackers who have, among other things, created viruses to
sabotage or otherwise attack our products. While to date these efforts have been
discovered quickly and their adverse impact has been limited, similar viruses or
efforts may be created or replicated in the future. In this event, users'
computer systems could be damaged and demand for our software products may
suffer as a result. In addition, since we do not control diskette duplication by
distributors or our independent agents, diskettes containing our software may be
infected with viruses.
FALSE DETECTION OF VIRUSES AND ACTUAL OR PERCEIVED SECURITY BREACHES COULD
ADVERSELY AFFECT OUR BUSINESS
Our anti-virus software products have in the past and may at times in the
future falsely detect viruses that do not actually exist. These false alarms,
while typical in the industry, may impair the perceived reliability of our
products and may therefore adversely impact market acceptance of our products.
In addition, we have in the past been subject to litigation claiming damages
related to a false alarm, and there can be no assurance that similar claims will
not be made in the future. Similarly, an actual or perceived breach of network
or computer security at one of our customers, regardless of whether the breach
is attributable to our products, could adversely affect the market's perception
of our security products. This could adversely effect our business, results of
operations and financial condition.
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OUR CRYPTOGRAPHY TECHNOLOGY IS SUBJECT TO EXPORT RESTRICTIONS AND MAY BECOME
OBSOLETE
Certain of our network security products, technology and associated
assistance are subject to export restrictions imposed by the U.S. Department of
State and the U.S. Department of Commerce. These restrictions permit the export
of encryption products so long as certain requirements are met, but prohibit the
export of these products to countries deemed hostile by the U.S. Government.
U.S. export regulations regarding the export of encryption technology require
either a transactional export license or the granting of Department of Commerce
Commodity jurisdiction. As result of this regulatory regime, foreign competitors
facing less stringent controls may be able to compete more effectively than we
can in the global market. While we have obtained approval from the Department of
Commerce to export to certain end users, the U.S. Government may not approve
pending or future export license requests. Further, the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, may be revised from time to time. Failure to obtain the
required licenses or the costs of compliance could have a material adverse
effect on our international revenues.
In addition, some of our network security products are dependent on the
use of public key cryptography technology. This technology depends in part upon
the application of certain mathematical principles known as factoring. The
security afforded by public key cryptography technology is based on our belief
that the factoring of large prime numbers is difficult. Should an easy factoring
method be developed, the security afforded by encryption products using public
key cryptography technology would be reduced or eliminated. Furthermore, any
significant advance in techniques for attacking cryptographic systems could also
render some or all of our existing products and services obsolete or
unmarketable. Moreover, factoring problems can theoretically be solved by
computer systems significantly faster and more powerful than those presently
available. If these improved techniques for attacking cryptographic systems are
ever developed, our business would be adversely affected.
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS
Our network security and management software products are used to protect
and manage computer systems and networks that may be critical to organizations.
As a result, our sale and support of these products involves the risk of
potential product liability and related claims. Our license agreements with our
customers typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in these license agreements may not be
effective under the laws of certain jurisdictions, particularly in circumstances
involving unsigned licenses. A product liability claim brought against us could
have a material adverse effect on our business, results of operations and
financial condition.
OUR MANAGEMENT AND TECHNICAL PERSONNEL ARE CRITICAL TO OUR BUSINESS, THESE
INDIVIDUALS MAY NOT REMAIN WITH US IN THE FUTURE
We rely, and will continue to rely, on a number of key technical and
management employees. While employees are required to sign standard agreements
concerning confidentiality and ownership of inventions, our employees are
generally not otherwise subject to employment agreements or to noncompetition
covenants. If any of our key employees leave, our business, results of
operations and financial condition could suffer. Furthermore, we do not maintain
life insurance policies on our key employees.
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<PAGE> 20
Our ability to achieve our revenue and operating performance objectives
will depend in large part on our ability to attract and retain technically
qualified and highly skilled sales, consulting, technical, marketing and
management personnel. Competition for these employees is intense and is expected
to remain so for the foreseeable future. We may not be successful in retaining
our existing key personnel and in attracting and retaining the personnel we
require, and our failure to retain and hire key employees could adversely affect
our business and operating results. For example, in early April 1998, Messrs.
Leslie Denend, David Carver and John Stringer resigned from their positions as
executive officers, although Mr. Denend remains a director. Additions of new and
departures of existing employees, particularly in key positions, can be
disruptive and can result in departures of existing employees, which could
adversely affect our business.
WE FACE RISKS ASSOCIATED WITH U.S. GOVERNMENT CONTRACTING
We expect that in the near term, a meaningful portion of our revenues will
result from existing research and development contracts with agencies of the
U.S. government. We believe that the willingness of these government agencies to
enter into future contracts with us will in part be dependent upon our continued
ability to meet their expectations. However, we may be unable to procure
additional government contracts.
Minimum fee awards for companies entering into government contracts are
generally between 3% and 7% of the costs incurred by them in performing their
duties under the related contract. However, these fee awards may be as low as 1%
of the contract costs. Furthermore, these contracts are subject to cancellation
at the convenience of the governmental agencies. Although we have been awarded
contract fees of more than 1% of the contract costs in the past and there have
been no terminations of any government contracts in the past, minimum fee awards
or cancellations may occur in the future. Reductions or delays in federal funds
available for projects we are performing could also have an adverse impact on
our government business. Contracts involving the U.S. government are also
subject to the risks of disallowance of costs upon audit, changes in government
procurement policies, required competitive bidding and, with respect to
contracts involving prime contractors or government-designated subcontractors,
the inability of those parties to perform under their contracts. Any of the
foregoing events could adversely affect our results of operations or financial
conditions.
POTENTIAL YEAR 2000 PROBLEMS COULD ADVERSELY IMPACT OUR BUSINESS
Many currently installed computer systems and software products experience
difficulty in functionality with respect to distinguishing between twenty-first
century dates and twentieth century dates. As a result, many companies' software
and computer systems may need to be upgraded or replaced in order to function
properly in the future.
We have tested our current products for Year 2000 compliance and believe
that they are Year 2000 compliant. However, the failure of our current or prior
products to operate properly with regard to Year 2000 requirements could cause
us to incur unanticipated expenses to remedy any problems, cause a reduction in
sales and expose us to related litigation by our customers, each of which could
harm our business. In addition, we and the third parties with whom we conduct
business may utilize equipment or software that may not be Year 2000 compliant.
Failure of our or any of these third party's equipment or software to operate
properly with regard to the Year 2000 requirements could result in, among other
things, unanticipated expenses or efforts to remedy any problems, which could
harm our or such third party's respective business. Furthermore, the purchasing
patterns of customers, or potential customers, may be affected by Year 2000
issues. Companies may expend significant resources to evaluate and correct their
own equipment or software for Year 2000 compliance while they simultaneously
evaluate the preparedness of the third parties with whom they deal. These
expenditures may result in reduced funds available to purchase products and
services
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<PAGE> 21
such as those offered by us, which could adversely affect our business. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS AND THIRD-PARTY MANUFACTURERS, WHO MAY
NOT CONSISTENTLY MEET OUR BUSINESS NEEDS
Some of our products contain critical components supplied by a single or a
limited number of third parties. We have been required to purchase certain
computer platforms around which we design our network fault and performance
management products to ensure an available supply of these products for our
customers. Any significant shortage of these platforms or other components or
the failure of the third party supplier to maintain or enhance these products
could lead to cancellations of customer orders or delays in placement of orders
which could materially adversely affect our results of operations. In addition,
if our purchase of these components or platforms exceeds demand, we could incur
losses or other charges in disposing of excess inventory, which could also
materially adversely affect our results of operations.
Our manufacturing operations consist primarily of assembly, testing and
quality control of materials, components, subassemblies and systems for our
Sniffer based products. We use third party manufacturers for these manufacturing
operations. Reliance on third party manufacturers involves a number of risks,
including the lack of control over the manufacturing process and the absence or
unavailability of adequate capacity. In the event that any third party
manufacturers cannot or will not continue to manufacture the Sniffer based
products in required volumes, on a cost effective basis, in a timely manner or
at all, we will have to secure additional manufacturing capacity. Even if such
additional capacity is available at commercially acceptable terms, the
qualification process could be lengthy and could create delay in product
shipments.
OUR DELAWARE LAW AND OUR ADOPTION OF A RIGHTS PLAN MAY INHIBIT POTENTIAL
ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON
STOCK AND PREVENT CHANGES IN OUR MANAGEMENT.
Our board of directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote of action by its stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock.
In October 1998 our board of directors adopted shareholders rights plan.
Each right under this plan entitles the record holder to buy 1/1000th of a share
of our series B participating preferred stock at an exercise price of $200.00.
The rights will become exercisable following the tenth day after a person or
group announces acquisition of 15% or more of our common stock or announces
commencement of a tender or exchange offer the consummation of which would
result in ownership by the person or group of 15% or more of our common stock.
We are entitled to redeem the rights at $0.01 per right at any time on or before
the tenth day following acquisition by a person or group of 15% or more of our
common stock.
Certain provisions of Delaware law and our certificate of incorporation
and bylaws, such as a classified board, could delay or make a merger, tender
offer or proxy contest involving Network Associates more difficult. While these
provisions and our rights plan are intended to enable our board of directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which may not be in the best interest of certain stockholders. Our rights plan
and these provisions could have an adverse effect on the market value of our
common stock.
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USE OF PROCEEDS
Network Associates will not receive any of the proceeds from the sale of
the shares offered by this prospectus. All proceeds from the sale of the shares
offered hereby will be for the account of the selling stockholders, as described
below. See "Selling Stockholders" and "Plan of Distribution."
SELLING STOCKHOLDERS
The following table sets forth as of the date of this prospectus, the
name of each of the selling stockholders, the number of shares of common stock
that each selling stockholder owns, the number of shares of common stock owned
by each selling stockholder that may be offered for sale from time to time by
this prospectus, and the number of shares of common stock to be held by each
selling stockholder assuming the sale of all the common stock offered hereby.
The selling stockholders are former or current employees of Network
Associates, QA Information Security Holding AB, a Swedish corporation, or FSA
Corporation, an Alberta corporation. We may amend or supplement this prospectus
from time to time to update the disclosure set forth herein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY OWNED
OFFERING(1) NUMBER OF AFTER OFFERING(1)
-------------------- SHARES BEING -------------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------- ---------- ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
Erik Aberg 21,595 * 21,595 0 *
Daniel Friedman 362,587 * 362,587 0 *
Mikael Larsson 10,660 * 10,660 0 *
Morgan Stanley & Co. 75,002 * 75,002 0 *
Pasi Karlsson 4,594 * 4,594 0 *
Per Karlsson 9,137 * 9,137 0 *
</TABLE>
- ----------
* Less than 1%.
(1) Based on 138,197,011 shares outstanding as of April 30, 1999.
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time
to time by the selling stockholders. The selling stockholders will act
independently of Network Associates in making decisions with respect to the
timing, manner and size of each sale. The selling stockholders may sell the
shares being offered hereby on the Nasdaq National Market, or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price, at varying prices or at negotiated prices. The shares offered
hereby may be sold, without limitation, by one or more of the following means of
distribution: (a) a block trade in which the broker-dealer so engaged will
attempt to sell such shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a
broker-dealer as principal and resale by such broker-dealer for its own account
pursuant to this prospectus; (c) an over-the-counter distribution in accordance
with the rules of the Nasdaq National Market; (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (e)
in privately negotiated
-21-
<PAGE> 23
transactions. To the extent required, this prospectus may be amended and
supplemented from time to time to describe a specific plan of distribution.
In connection with distributions of the shares offered hereby or
otherwise, the selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of Network Associates' common stock in the course of hedging the positions
they assume with selling stockholders. The selling stockholders may also sell
Network Associates' common stock short and deliver the shares offered hereby to
close out such short positions. The selling stockholders may also enter into
option or other transactions with broker-dealers or other financial institutions
which require the delivery to such broker-dealer or other financial institution
of shares offered hereby, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction). The selling stockholders may also pledge the
shares offered hereby to a broker-dealer or other financial institution, and,
upon a default, such broker-dealer or other financial institution, may effect
sales of the pledged shares pursuant to this prospectus (as supplemented or
amended to reflect such transaction). In addition, any shares offered hereby
that qualify for sale pursuant to Rule 144 may, at the option of the holder
thereof, be sold under Rule 144 rather than pursuant to this prospectus.
Any broker-dealer participating in such transactions as agent may
receive commissions from the selling stockholder and/or purchasers of the shares
offered hereby (and, if it acts as agent for the purchaser of such shares, from
such purchaser). Usual and customary brokerage fees will be paid by the selling
stockholder. Broker-dealers may agree with the selling stockholder to sell a
specified number of shares at a stipulated price per share, and, to the extent
such a broker-dealer is unable to do so acting as agent for the selling
stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to the selling stockholder. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions (which may involve cross and block transactions and which
may involve sales to and through other broker-dealers, including transactions of
the nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales, may pay to or receive
from the purchasers of such shares commissions computed as described above.
To comply with the securities laws of certain states, if applicable, the
shares offered hereby will be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the shares
offered hereby may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
We have advised the selling stockholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of the shares
offered hereby in the market and to the activities of the selling stockholders
and their affiliates. In addition, we will make copies of this prospectus
available to the selling stockholders and have informed them of the need for
delivery of copies of this prospectus to purchasers at or prior to the time of
any sale of the shares offered hereby. The selling stockholders may indemnify
any broker-dealer than participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter,
any discount,
-22-
<PAGE> 24
commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of our directors
for monetary damages to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability
- for any breach of their duty of loyalty to the corporation or its
stockholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases
or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- for any transaction from which the director derived an improper
personal benefit.
Our bylaws provide that we must indemnify our directors and executive
officers and may indemnify our other officers, employees and agents to the
fullest extent permitted by law. Our bylaws also permit us to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers,
in addition to indemnification provided for in our bylaws. These agreements,
among other things, indemnify our directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of Network Associates, arising out of such person's services as an Network
Associates director or officer, any subsidiary of Network Associates or any
other company or enterprise to which the person provides services at our
request.
We also maintain an insurance policy insuring our directors and officers
against liability for certain acts and omissions while acting in their official
capacities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Network Associates pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
Certain legal matters relating to the validity of the securities offered
hereby will be passed upon for Network Associates by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K for the year ended December 31,
1998, have been so incorporated by reference in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
-23-
<PAGE> 25
================================================================================
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER NETWORK ASSOCIATES NOR ANY SELLING STOCKHOLDER HAS
AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL
NOR IS IT SEEKING AN OFFER TO BUY THE SHARES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE SHARES.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information............ 2
Network Associates............................. 3
Forward-Looking Statements..................... 3
Risk Factors .................................. 5
Use of Proceeds................................ 21
Selling Stockholders........................... 21
Plan of Distribution........................... 21
Indemnification of Directors and Officers...... 23
Legal Matters.................................. 23
Experts........................................ 23
</TABLE>
483,575 SHARES
NETWORKS ASSOCIATES, INC.
------------------
COMMON STOCK
------------------
PROSPECTUS
May 28, 1999
================================================================================
<PAGE> 26
NETWORK ASSOCIATES, INC.
REGISTRATION STATEMENT ON FORM S-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14.OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will pay all expenses incident to the offering and sale to the public
of the shares being registered other than any commissions and discounts of
underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except for
the Securities and Exchange Commission registration fee and the Nasdaq Stock
Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee................................... $ 1,806.79
Accounting fees and expenses........................... $ 7,500.00
Legal Fees and expenses................................ $15,000.00
Nasdaq Stock Market listing fee........................ $ 9,671.00
Miscellaneous.......................................... $ 1,022.21
Total.................................................. $35,000.00
</TABLE>
ITEM 15.INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of directors for
monetary damages to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability:
- for any breach of their duty of loyalty to the corporation or its
stockholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases
or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- for any transaction from which the director derived an improper
personal benefit.
Our bylaws provide that we shall indemnify its directors and executive
officers and may indemnify its other officers, employees and agents to the
fullest extent permitted by law. Our bylaws also permit us to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
Bylaws would permit indemnification.
We have entered into agreements to indemnify its directors and officers,
in addition to indemnification provided for in our bylaws. These agreements,
among other things, indemnify our directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of Network Associates, arising out of such person's services as our
director or officer, any of our subsidiaries or any other company or enterprise
to which the person provides services at the request of the Company.
We also maintain an insurance policy insuring its directors and officers
against liability for certain acts and omissions while acting in their official
capacities.
II-1
<PAGE> 27
ITEM 16.EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
5.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
24.1 Power of Attorney (contained on Page II-3).
</TABLE>
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement to include any material information
with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material
change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of this offering.
B. Undertaking Regarding Filings Incorporating Subsequent Exchange
Act Documents by Reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
C. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
II-2
<PAGE> 28
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable cause to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on May 28, 1999.
NETWORK ASSOCIATES
By: /s/ Prabhat K. Goyal
-------------------------------------
Prabhat K. Goyal
Vice President of Administration
and Chief Financial Officer
II-4
<PAGE> 30
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Prabhat K. Goyal his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendment to this Registration Statement on Form S-3, and to file the same, with
exhibits thereto and other documents n connection therewith, with the Securities
and Exchange Commission, granting to said attorney-in-fact full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant on May 28, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ William L. Larson Chief Executive Officer and Chairman of the Board
- ---------------------------------- (Principal Executive Officer)
William L. Larson
/s/ Prabhat K. Goyal Vice President of Administration, Chief Financial
- ---------------------------------- Officer Treasurer and Secretary (Principal
Prabhat K. Goyal Financial and Accounting Officer)
/s/ Leslie G. Denend Director
- ----------------------------------
Leslie G. Denend
/s/ Virginia Gemmell Director
- ----------------------------------
Virginia Gemmell
/s/ Edwin Harper Director
- ----------------------------------
Edwin Harper
</TABLE>
II-5
<PAGE> 31
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
========================================
EXHIBITS
========================================
Registration Statement on Form S-3
NETWORK ASSOCIATES, INC.
May 28, 1999
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
- --------
NUMBER
<S> <C>
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (contained on Page II-3).
</TABLE>
<PAGE> 1
EXHIBIT 5.1
May 28, 1999
Network Associates, Inc.
3965 Freedom Circle
Santa Clata, CA 95054
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed by
you with the Securities and Exchange Commission on or about the date hereof (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of a total of up to 483,575 shares of your
Common Stock (the "Shares"). All of the Shares are issued and outstanding and
may be offered for sale for the benefit of the selling stockholders named in the
Registration Statement. The Shares are to be sold from time to time in the
over-the counter-market at prevailing prices or as otherwise described in the
Registration Statement. As your legal counsel, we have examined the proceedings
taken by you in connection with the sale of the Shares.
It is our opinion that the Shares are legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Networks Associates, Inc.:
We hereby consent to the incorporation herein by reference in this
Registration Statement on Form S-3 of our reports dated March 31, 1999, except
for the matters discussed in Note 17, as to which the date is April 7, 1999,
relating to the consolidated financial statements and financial statement
schedule, which appear in Networks Associates, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
May 25, 1999
