<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Networks Associates, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[NETWORK LOGO]
2000 NOTICE OF ANNUAL
STOCKHOLDERS' MEETING
AND PROXY STATEMENT
MAY 25, 2000
1:00 P.M.
SANTA CLARA MARRIOTT
2700 MISSION COLLEGE BLVD.
SANTA CLARA, CALIFORNIA 95054
<PAGE> 3
[NETWORK LOGO]
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
MAY 5, 2000
Dear Networks Associates Stockholder:
You are cordially invited to join us at the Annual Meeting of Stockholders
of Networks Associates, Inc. on May 25, 2000.
It is important that your shares are represented and voted at the Annual
Meeting. Whether or not you plan to attend the Annual Meeting, please complete,
sign, date and promptly return the accompanying proxy in the enclosed
postage-paid envelope. Returning the proxy does not deprive you of your right to
attend the Annual Meeting. If you decide to attend the Annual Meeting and wish
to change your proxy vote, you may do so by voting in person at the Annual
Meeting.
On behalf of the Board of Directors, I would like to thank you for your
continued interest in the affairs of the Company. We look forward to seeing you
at the Annual Meeting.
Sincerely,
/s/ WILLIAM L. LARSON
William L. Larson
Chief Executive Officer
and Chairman of the Board
<PAGE> 4
[NETWORK LOGO]
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 25, 2000
------------------------
The Annual Meeting of Stockholders of Networks Associates, Inc., will be
held on Thursday May 25, 2000, at 1:00 p.m. Pacific Standard Time at the Santa
Clara Marriott, 2700 Mission College Boulevard, Santa Clara, California 95054,
for the following purposes:
1. To elect one director for a three-year term;
2. To amend our 1997 Stock Incentive Plan;
3. To ratify the appointment of PricewaterhouseCoopers LLP as our
independent auditors for the year ended December 31, 2000; and
4. To transact any other business as may properly come before the meeting.
Only stockholders owning our shares at the close of business on April 10,
2000 are entitled to attend and vote at the meeting. For ten days prior to the
meeting, a complete list of these stockholders will be available during ordinary
business hours at our principal office.
By order of the Board of Directors,
/s/ PRABHAT K. GOYAL
PRABHAT K. GOYAL
Secretary
Santa Clara, California
May 5, 2000
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PROCEDURAL INFORMATION...................................... 1
PROPOSALS TO BE VOTED ON.................................... 2
BOARD OF DIRECTORS.......................................... 3
Biographies............................................... 3
Meetings of the Board of Directors........................ 4
Compensation of Directors................................. 4
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 5
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..... 6
AUDIT COMMITTEE REPORT...................................... 8
COMPARISON OF STOCKHOLDER RETURN............................ 9
EXECUTIVE COMPENSATION AND OTHER MATTERS.................... 10
Summary Compensation Table................................ 10
Option Grants in 1999..................................... 11
Aggregate Option Exercises in 1999 and Year-End Option
Values................................................. 12
Employment and Change in Control Arrangements............. 12
Officers and Directors Insurance.......................... 13
New Plan Benefits......................................... 13
Certain Transactions...................................... 14
OTHER INFORMATION........................................... 16
APPENDIX A -- Summary of the 1997 Stock Incentive Plan...... A-1
APPENDIX B -- Audit Committee Charter....................... B-1
</TABLE>
i
<PAGE> 6
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
The accompanying proxy is solicited by our Board of Directors for use at
the 2000 Annual Meeting of Stockholders to be held May 25, 2000 at 1:00 p.m.
Pacific Standard Time or any adjournment thereof. This proxy statement contains
important information for you to consider when deciding on how to vote on the
matters brought before the meeting. PLEASE READ IT CAREFULLY.
PROCEDURAL INFORMATION
Only stockholders owning our shares at the close of business on April 10,
2000 are entitled to attend and vote at the meeting. For ten days prior to the
meeting, a complete list of these stockholders will be available during ordinary
business hours at our principal office. As of the record date, there were
138,751,606 shares of our common stock outstanding.
Solicitation of Proxies. The cost of soliciting proxies, including the
preparation, assembly, printing and mailing of the Proxy Statement, the proxy
material and any other material provided to stockholders, will be borne by us.
In addition, we will reimburse brokerage firms and other persons representing
beneficial owners of shares for their reasonable expenses in forwarding
solicitation material to such beneficial owners. We may use the services of our
officers, directors, and others to solicit proxies, personally or by telephone,
without additional compensation.
Voting of Proxies. The required quorum for the transaction of business at
the Annual Meeting is a majority of the shares of the common stock issued and
outstanding on the record date. Abstentions and broker non-votes will be counted
for purposes of determining the presence or absence of the quorum for the
transaction of business, but will not be counted for purposes of determining the
number of votes cast with respect to a proposal.
Revocability of Proxies. Any proxy given pursuant to this solicitation may
be revoked by the person giving it at any time before its use by delivering to
our Secretary a written notice of revocation or a duly executed proxy bearing a
later date or by attending the Annual Meeting and voting in person.
Quorum; Abstentions; Broker Non-votes. The required quorum for the
transaction of business at the Annual Meeting is a majority of the votes
eligible to be cast by holders of shares of common stock issued and outstanding
on the Record Date. Shares that are voted "FOR," "AGAINST," "WITHHELD" or
"ABSTAIN" will be treated as being present at the meeting for purposes of
establishing a quorum and also will be treated as shares entitled to vote at the
Annual Meeting (the "Votes Cast") with respect to such matter.
Although there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, we believe that abstentions should be
counted for the purposes of determining both (i) the presence or absence of
quorum for the transaction of business and (ii) the total number of Votes Cast
with respect to a proposal (other than election of directors). In the absence of
controlling precedent to the contrary, we intend to treat abstentions in this
manner. Accordingly, abstentions will have the same effect as a vote against the
proposal.
Broker non-votes will be counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but such broker
non-votes will not be counted for purposes of determining the number of Votes
Cast with respect to the particular proposal on which the broker has expressly
not voted. Accordingly, a broker non-vote will not affect the outcome of the
voting on a proposal.
1
<PAGE> 7
Deadline for Receipt of Stockholder Proposals. Proposals by our
stockholders which are intended to be presented by such stockholders at our 2001
Annual Meeting must be submitted in accordance with the provisions of our bylaws
and must be received by us no later than January 2, 2001 in order to be:
- considered for inclusion in the proxy statement and form of proxy
relating to that meeting; and
- considered at the meeting.
Stockholder proposals, including stockholder nominations for directors,
must be delivered to us at our offices at 3965 Freedom Circle, Santa Clara,
California 95054, on or prior to the January 2, 2001 deadline. Stockholders
wishing to make stockholder proposals should contact the Corporate Secretary for
details of the information to be included in such proposal/nomination.
PROPOSALS TO BE VOTED ON
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
The nominee for re-election at the Annual Meeting is Leslie G. Denend. Mr.
Denend is a Class II director. If elected, he will serve as director until the
annual meeting in 2003.
The nominee receiving the highest number of affirmative votes of the shares
entitled to vote on this matter shall be elected as a Class II director. Votes
withheld from any director will be counted for purposes of determining the
presence or absence of a quorum but are not counted as affirmative votes. A
broker non-vote will be counted for the purpose of determining the presence or
absence of a quorum, but, under Delaware law, it will have no legal effect upon
the election of directors.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THIS NOMINEE.
PROPOSAL NO. 2 -- AMENDMENT TO THE 1997 STOCK INCENTIVE PLAN
We believe that stock options are an important factor in attracting,
motivating and retaining qualified personnel who are essential to our success.
The Incentive Plan is intended to offer a significant incentive by allowing
employees to purchase our common stock at a price equal to the fair market value
on the date stock options are granted. Options granted under the Incentive Plan
will only become valuable if the price of our common stock increases over time
and as the options vest.
Currently a maximum of 16.48 million shares may be granted under the 1997
Stock Incentive Plan (the "Incentive Plan"). As of April 15, 2000, 12.08 million
shares had been issued and 4.40 million shares remained available for grant.
The amendment would increase the number of shares issuable under the
Incentive Plan by 6.0 million shares.
The affirmative vote of the holders of a majority of the shares of common
stock present or represented and voting at the Annual Meeting will be required
to approve this Proposal.
THE BOARD RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE INCENTIVE PLAN.
If you would like more information about the 1997 Stock Incentive Plan, a
summary of its terms is included in Appendix A to this Proxy Statement.
PROPOSAL NO. 3 -- SELECTION OF INDEPENDENT AUDITORS
The Board has selected PricewaterhouseCoopers LLP as independent
accountants to audit our financial statements for the fiscal year ending
December 31, 2000. PricewaterhouseCoopers LLP (formerly Coopers & Lybrand
L.L.P.) has acted in this capacity since its appointment during the fiscal year
ended December 31, 1991. A representative of PricewaterhouseCoopers LLP is
expected to attend the Annual Meeting in order to respond to questions from
stockholders and will have the opportunity to make a statement.
2
<PAGE> 8
The affirmative vote of the holders of a majority of the shares of common
stock present or represented and voting at the Annual Meeting will be required
to approve this Proposal.
THE BOARD RECOMMENDS A VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT AUDITORS.
BOARD OF DIRECTORS
We have a classified Board of Directors, consisting of five members, which
is divided into three classes with staggered three-year terms. At each annual
meeting, the term of one class expires. Directors in each class serve for terms
of three years.
The table below shows the current directors.
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION DIRECTOR
NAME AGE PRINCIPAL OCCUPATION OF TERM SINCE
---- --- -------------------- ---------- --------
<S> <C> <C> <C> <C>
Nominee for Class II Director:
Leslie G. Denend.............. 58 Director, Rational Software, 2000 1995
Proxim, Inc., Adaptive
Broadband Corporation and
Informix Corporation
Continuing Class I Directors:
Virginia Gemmell.............. 51 President, GlidePath, Inc. 2002 1996
Edwin L. Harper............... 54 President and Chief Operating 2002 1996
Officer, MTI Technology
Corporation
Continuing Class III
Directors:
William L. Larson............. 44 Chief Executive Officer and 2001 1993
Chairman of the Board,
Networks Associates, Inc.
Enzo Torresi.................. 54 Founding Partner, Eurofund 2001 1999
Partners
</TABLE>
BIOGRAPHIES
Mr. Denend has been a director of the company since June 1995. From
December 1997 to April 1998, Mr. Denend was President of the company. From June
of 1993 to December 1997, Mr. Denend was Chief Executive Officer and President
of Network General Corporation. From February of 1993 to June of 1993, Mr.
Denend was Senior Vice President of Network General Corporation. Mr. Denend
serves as a director of Rational Software, Proxim, Inc., Adaptive Broadband
Corporation and Informix Corporation.
Mr. Larson joined the company in September 1993 as its Chief Executive
Officer. In October 1993, Mr. Larson was appointed as a director of the company
and was elected to the additional office of President. In April 1995, Mr. Larson
was also elected Chairman of the Board of Directors. From August 1988 to
September 1993, Mr. Larson was employed as a Vice President of SunSoft, Inc., a
system software subsidiary of Sun Microsystems, Inc., where he was responsible
for worldwide sales and marketing.
Mr. Torresi has been a director of the Company since July 1999. Mr. Torresi
founded Eurofund, Inc. and has served as President since January 1999. From
January 1997 to August 1998, Mr. Torresi was Chief Executive Officer of 1Cast,
Inc. Mr. Torresi currently serves as a director of Optibase, Inc., and
Picturetel Corporation.
3
<PAGE> 9
Ms. Gemmell has been a director of the company since September 1996. Ms.
Gemmell founded GlidePath, Inc., a consulting firm, and has served as its
President since August 1995. From May 1986 to August 1995, Ms. Gemmell was a
Managing Partner of Synectics, Inc., a consulting firm.
Mr. Harper has been a director of the company since January 1993. From June
1996 to December 1998, Mr. Harper was the President and Chief Executive Officer
of SyQuest Technology, Inc., a manufacturer of computer peripherals. From June
1993 to April 1996, Mr. Harper was President and Chief Executive Officer of
ComByte, Inc., a privately-held PC peripherals company. From June 1992 to April
1993, Mr. Harper was President and Chief Executive Officer of Colorado Memory
Systems, a manufacturer of computer peripherals and from September 1990 through
May 1992 served as its President and Chief Operating Officer. Mr. Harper
currently serves as a director of Apex PC Solutions, Inc. In November 1998,
SyQuest filed a petition under Chapter 11 of the United States Bankruptcy Code.
MEETINGS OF THE BOARD OF DIRECTORS
During 1999 the Board of Directors held seven meetings. Each director
attended at least 75% of all Board and applicable meetings during 1999.
THE AUDIT COMMITTEE reviews, acts and reports to our Board of Directors on
various auditing and accounting matters, including the appointment of our
independent accountants, the scope of our annual audits, fees to be paid to the
independent accountants, the performance of our independent accountants and our
accounting practices. The Audit Committee held three meetings during 1999.
Members: Edwin Harper, Virginia Gemmell, Enzo Torresi. Mr. Torresi was added to
our Audit Committee in March 2000.
The Audit Committee has adopted a written charter, which is attached to
this Proxy Statement as Appendix B. Each member of our Audit Committee is
"independent" as defined under the National Association of Securities Dealers'
listing standards.
THE COMPENSATION COMMITTEE reviews and approves executive salary levels and
stock option grants. The Compensation Committee held four meetings during 1999.
Members: Virginia Gemmell and Edwin Harper.
COMPENSATION OF DIRECTORS
Directors fees, paid only to directors who are not employees, are as
follows:
- $5,000 quarterly retainer,
- $1,500 for each regular Board meeting attended,
- $1,000 for each Special meeting attended,
- expenses of attending Board and committee meetings.
Under our Stock Option Plan for Outside Directors, non-employee directors
are automatically granted an option to purchase 37,500 shares of our common
stock, when they first become a director. Each year after the initial grant,
they are entitled to receive an additional option grant to purchase up 15,000
shares of our common stock. All options are granted at the fair market value on
the date of grant. The initial grant vests one-third each year over three years
from the date of grant. The subsequent grants vest in full three years from the
date of grant. All options granted under this plan become fully exercisable in
the event of certain mergers, sales of assets or sales of the majority of our
voting stock. Ms. Gemmell received an option grant of 15,000 shares on September
23, 1999, Mr. Denend received an option grant of 15,000 shares on June 16, 1999,
Mr. Harper received an option grant of 15,000 shares on June 16, 1999 and Mr.
Torresi received an option grant of 37,500 shares on June 24, 1999.
"Fair Market Value" is defined in the Stock Option Plan for Outside
Directors as the closing price of our stock on the date the option is granted.
4
<PAGE> 10
Our employee directors are eligible to receive options and be issued shares
of Common Stock directly under the 1997 Stock Incentive Plan, are also eligible
to participate in our Employee Stock Purchase Plan and, if an executive officer,
the Executive Bonus Plan.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of our common stock owned by
(i) the Chief Executive Officer, each of the four other most highly compensated
executive officers during fiscal 1999, and (ii) each of our directors and
nominees as of April 15, 2000. As of April 15, 2000, we had no stockholders that
owned greater than 5% of our outstanding common stock.
Included in our four highest paid executive officers is Srivats Sampath,
currently the Chief Executive Officer of McAfee.com, and Zachary Nelson,
currently the Chief Executive Officer of myCIO.com. myCIO.com is our wholly
owned subsidiary and McAfee.com is our publicly traded subsidiary. As of April
15, 2000, McAfee.com had outstanding 43,696,505 shares of its common stock,
consisting of 7,696,505 shares of Class A common stock and 36,000,000 shares of
Class B common stock. As of April 15, 2000, we owned all shares of the
McAfee.com Class B common stock, entitled to three votes per share and
representing approximately 83% of McAfee.com's outstanding common stock and 94%
of its total voting power.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES RIGHT TO OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED(1) ACQUIRE(2) SHARES(3)
------------------------------------- --------- ---------- -----------
<S> <C> <C> <C>
William L. Larson(4)...................... 655 2,031,887 1.5
Leslie G. Denend(5)....................... 6,300 344,078 *
Virginia Gemmell(6)....................... 250 66,250 *
Edwin L. Harper(7)........................ -- 11,250 *
Prabhat K. Goyal(8)....................... 987 677,709 *
Peter R. Watkins(9)....................... 4,779 630,051 *
Zachary A. Nelson(10)..................... -- 404,278 *
Srivats Sampath(11)....................... -- 68,749 *
Enzo Torresi(12).......................... -- 37,500 *
Executive officers and directors as a
group (9 persons)....................... 12,971 4,271,752 3.1
</TABLE>
- ---------------
* Less than 1%
(1) Ownership includes direct and indirect (beneficial) ownership, as defined
by SEC rules. To our knowledge, each person, has sole voting and investment
power over the shares unless otherwise noted. The SEC rules for the
determination of beneficial ownership are very complex. However, generally
shares owned directly, plus those controlled (e.g. owned by members of
their immediate families), are considered beneficially owned. Excludes
shares that may be acquired through stock option exercises.
(2) Consists of shares that are currently exercisable or will become
exercisable within 60 days of April 15, 2000.
(3) Total shares owned (column 1) plus option shares (column 2) divided by
138,751,606 shares outstanding as of April 15, 2000.
(4) Trusts for which Mr. Larson or his wife act as trustee hold vested options
to acquire 900,000 shares of McAfee.com Class A common stock. These shares
represent approximately 2% of the voting power of the outstanding capital
stock of McAfee.com.
(5) Mr. Denend beneficially owns 2,000 shares of McAfee.com Class A common
stock. These shares represent less than 1% of the outstanding capital stock
of McAfee.com.
(6) Ms. Gemmell beneficially owns 500 shares of McAfee.com Class A common
stock. These shares represent less than 1% of the outstanding capital stock
of McAfee.com.
5
<PAGE> 11
(7) Mr. Harper beneficially owns 2,000 shares of McAfee.com Class A common
stock. These shares represent less than 1% of the outstanding capital stock
of McAfee.com.
(8) Mr. Goyal holds vested options to acquire 360,000 shares of McAfee.com
Class A common stock. These shares represent less than 1% of the
outstanding capital stock of McAfee.com.
(9) Mr. Watkins holds vested options for 180,000 shares of McAfee.com Class A
common stock. These shares represent less than 1% of the outstanding
capital stock of McAfee.com.
(10) Mr. Nelson holds vested options for 180,000 shares of McAfee.com Class A
common stock. These shares represent less than 1% of the outstanding
capital stock of McAfee.com.
(11) Mr. Sampath holds options that are vested or will vest within 60 days of
March 31, 2000 with respect to 300,000 shares of McAfee.com Class A common
stock. Mr. Sampath also beneficially owns 16,980 shares of McAfee.com Class
A common stock. These shares represent less than 1% of the outstanding
capital stock of McAfee.com.
(12) Mr. Torresi beneficially owns 5,000 shares of McAfee.com Class A common
stock. These shares represent less than 1% of the outstanding capital stock
of McAfee.com.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 1999, the Compensation Committee of the Board of Directors consisted
of Ms. Gemmell and Mr. Harper, neither of whom has served as our employee or
officer at any time. The Compensation Committee is responsible for setting and
administering policies governing compensation of executive officers, including
the annual Executive Bonus Plan and the 1997 Stock Incentive Plan. In addition,
the Compensation Committee reviews compensation levels of other management level
employees, evaluates the performance of management and reviews other
compensation-related issues.
COMPENSATION POLICIES
Our compensation policy is designed to enable us to attract, retain and
reward executive officers who are likely to contribute to our long-term success.
The Compensation Committee also believes that a strong correlation should exist
between executive compensation, business objectives and our overall performance.
In preparing the performance graph for this Proxy Statement, we have
selected the CRSP Total Return Industry Index for NASDAQ Computer and Data
Processing Services Stock Index ("CRSP Index"). The companies which we use for
comparison of salary and compensation information are not necessarily those
included in the CRSP Index, because they were determined not to be competitive
with the company for executive talent or because compensation information was
not available.
COMPONENTS OF COMPENSATION
There are three components of our executive compensation program which are
intended to attract and retain executive officers and to motivate them to
improve our financial position and to create value for our shareholders.
Salary
The Compensation Committee strives to offer salaries to its executive
officers, which are competitive with salaries offered by companies of similar
size and capitalization in the software industry. Base salaries are reviewed on
an annual basis and are subject to adjustment based upon the individual's
contribution to us and changes in salary levels offered by comparable companies.
In determining executive officers' salaries, the Compensation Committee
considers information provided by our Chief Executive Officer with respect to
individual officer responsibilities and performance, as well as salary surveys
and similar data available from independent sources.
6
<PAGE> 12
Bonuses
Awards under the Company's Executive Bonus Plan for 1999 were contingent
upon us achieving certain performance goals established by the Board of
Directors. For executive officers other than the Chief Executive Officer, awards
are also contingent on the achievement of individual performance objectives.
Target amounts of bonuses for each executive officer are set annually by the
Committee and are specifically weighted for identified financial, management,
strategic and operational goals. The Committee reviews performance against the
goals and approves payment of the bonuses. In 1999, bonuses awarded under the
plan to Mr. Larson, our Chief Executive Officer, totaled $366,275. The bonus
received by Mr. Larson under the plan was 47% of his total cash compensation.
Bonuses awarded under the plan in 1999 to other executive officers represented
between 31% and 39% of their total cash compensation.
Equity Incentives
The Committee believes that employee equity ownership is highly motivating,
provides a major incentive to employees in building stockholder value and serves
to align the interests of employees with the interests of our stockholders. In
determining the amount of equity compensation to be awarded to executive
officers in any fiscal year, the Committee considers the position of the
officer, the current stock ownership of the officer, the number of shares which
continue to be subject to vesting under outstanding options and the expected
future contribution of the officer to our performance, giving primary weight to
the officer's position and his expected future contributions. In addition, we
compare the stock ownership and options held by each officer with the other
officers' equity positions and the officer's experience and value to us.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In 1997, 1998 and 1999, Mr. Larson's base salary increased by approximately
fifteen percent (15%), forty-seven percent (47%), and zero percent (0%),
respectively. In determining these adjustments, the Committee considered, among
other things, compensation data for chief executives of comparable companies and
Mr. Larson's performance in 1997, 1998 and 1999.
The Chief Executive Officer evaluates the performance of all other
executive officers on an annual basis and recommends salary adjustments, which
are subject to review and approval by the Compensation Committee. Performance
evaluations for individual executive officers are based on predetermined
individual goals proposed by management and approved by the Compensation
Committee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code limits deductions for federal
income tax purposes, certain executive compensation exceeding $1,000,000 for any
executive officer in any year. Our 1997 Stock Incentive Plan enables
compensation recognized in connection with the exercise of options to qualify as
an exception to the deduction limit. The Committee will continue to evaluate the
issues relating to executive compensation and will take appropriate action where
necessary. The Committee's policy is to qualify its executive compensation for
deductibility under applicable tax laws where possible.
COMPENSATION COMMITTEE
Virginia Gemmell
Edwin Harper
7
<PAGE> 13
AUDIT COMMITTEE REPORT
Our Audit Committee currently consists of three members. In connection with
the audited financial statements contained in our 1999 Annual Report on Form
10-K, the Audit Committee:
- reviewed the audited financial statements with our management;
- discussed with PricewaterhouseCoopers, LLP, our independent auditors, the
materials required to be discussed by Statement of Auditing Standard 61,
or SAS 61;
- reviewed the written disclosures and the letter from
PricewaterhouseCoopers required by Independent Standards Board No. 1 and
discussed with PricewaterhouseCoopers their independence; and
- based on the foregoing review and discussion, recommended to our Board of
Directors that the audited financial statements be included in our 1999
Annual Report on Form 10-K.
AUDIT COMMITTEE
Edwin Harper
Virginia Gemmell
Enzo Torresi
8
<PAGE> 14
COMPARISON OF STOCKHOLDER RETURN
The following graph shows a five-year comparison of cumulative total
returns for our common stock, the CRSP Total Return Index for the NASDAQ Stock
Market ("NASDAQ US") and the CRSP Total Return Industry Index for NASDAQ
Computer and Data Processing Services Stocks ("C&DP Index"), each of which
assumes an initial value of $100 and reinvestment of dividends. The information
presented in the graph and table is as of the end of each fiscal year ended
December 31.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
NASDAQ STOCK MARKET- NASDAQ COMPUTER &
NETWORKS ASSOCIATES, INC. US DATA PROCESSING
------------------------- -------------------- -----------------
<S> <C> <C> <C>
Dec-95 100 100 100
Dec-96 226 123 123
Dec-97 271 151 152
Dec-98 510 212 271
Dec-99 205 384 572
</TABLE>
Pursuant to the Proxy Rules, the Compensation Committee Report, the Audit
Committee Report and the Stock Performance Graph are not deemed filed with the
SEC and are not deemed incorporated by reference into any filings with the SEC.
Performance for 1999 reflects a December 31, 1999 closing market price on the
Nasdaq National Market of $26.69.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Directors, executive officers and persons 5% stockholders are required to
file reports with respect to their ownership and changes of ownership of the
company's common stock with the SEC. The company believes that during 1999, all
filing requirements were met.
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<PAGE> 15
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table summarizes the compensation paid to our Chief Executive
Officer and our four other most highly compensated executive officers as of
December 31, 1999, based on salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------------
----------------------------------------- SECURITIES SECURITIES
OTHER ANNUAL UNDERLYING UNDERLYING ALL OTHER
SALARY COMPENSATION NAI MCAFEE.COM COMPENSATION
NAME AND PRINCIPAL POSITION AGE YEAR ($)(1) BONUS($) ($) OPTIONS (#) OPTIONS(#) ($)(2)
- --------------------------- --- ---- -------- -------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William L. Larson........ 44 1999 $420,000 $366,275 -- -- 900,000(3) $3,250
Chief Executive Officer 1998 419,962 453,775 -- 300,000 4,308
and Chairman of the 1997 286,268 279,600 -- 1,200,000 2,375
Board
Prabhat Goyal............ 45 1999 $300,013 $136,313 -- 100,000 360,000(3) $3,250
Chief Financial Officer, 1998 300,013 134,107 -- 225,000 3,250
Vice President of 1997 188,469 94,913 -- 300,000 2,375
Finance and
Administration
Peter R. Watkins......... 45 1999 $300,012 $167,988 100,000 180,000(3) $3,250
President and Chief 1998 299,628 130,260 225,000 3,250
Operating Officer 1997 191,289 66,577 $11,357(4) 300,000 2,375
Zachary A. Nelson........ 38 1999 $300,013 $156,434 -- 200,000 180,000(3) $3,250
President and Chief 1998 300,013 147,718 -- 225,000 3,250
Executive Officer 1997 -- -- -- -- --
MyCIO.com
Srivats Sampath(5)....... 40 1999 $240,000 $ 62,608 -- -- 900,000(3) $3,250
President and Chief 1998 112,769 15,652 -- 150,000 3,250
Executive Officer 1997 -- -- -- --
McAfee.com
</TABLE>
- ---------------
(1) Salary includes amounts deferred under our 401(k) Plan.
(2) Represents contributions made by us pursuant to our 401(k) Plan.
(3) In January 1999, a total of 4,140,000 options over shares of McAfee.com
Class A common stock were granted to our Chief Executive Officer and our
four most highly compensated executive officers, including 900,000 options
granted to Srivats Sampath, the Chief Executive Officer of McAfee.com. These
options were granted at exercise price of $3.67 per share. At the time the
options were granted, they vested 25% on January 15, 2000 with 2.083%
vesting each month thereafter for the following 36 months. In September
1999, the aggregate number of options granted to each of these individuals,
other than Mr. Sampath, and the amount of their individual grants, was
reduced by 50%. In exchange for this reduction, the remaining options were
vested in full. McAfee.com share amounts shown above reflect this 50%
reduction. Mr. Sampath's McAfee.com options were not reduced and they
continue to vest in accordance with their original term.
(4) Represents cost of living allowance for overseas assignment and amounts
reimbursed for payment of certain taxes.
(5) Mr. Sampath was under McAfee.com's compensation plan in 1999 and therefore
received no Networks Associates options.
Mr. Larson joined Networks Associates in September 1993 as its Chief
Executive Officer. In October 1993, Mr. Larson was appointed as a director and
was elected to the additional office of President. In April 1995, Mr. Larson was
also elected Chairman of the Board of Directors. From August 1988 to September
1993, Mr. Larson was employed as a Vice President of SunSoft, Inc., a system
software subsidiary of Sun Microsystems, Inc., where he was responsible for
worldwide sales and marketing.
Mr. Goyal joined Networks Associates in March 1996 and was elected as Vice
President of Finance, Corporate Controller and Treasurer in April 1996. Mr.
Goyal became Chief Financial Officer, Vice President
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<PAGE> 16
of Finance and Administration and Secretary in October 1996. From July 1994 to
March 1996 Mr. Goyal was Director, Finance and OEM Development, Solaris Products
Group for SunSoft, Inc. From November 1991 to June 1994, Mr. Goyal served as
Director, Finance and Sales Operations of SunSoft, Inc.
Mr. Nelson is currently the Chief Executive Officer of myCIO.com. Mr.
Nelson joined Networks Associates in March 1997 as Vice President and General
Manager of Network Management and became President and Chief Executive Officer
of MyCIO.com in December 1999. From February 1993 to March 1997, Mr. Nelson was
employed in various capacities, most recently as Vice President of Marketing,
for Oracle Corporation. From January 1990 to February 1993, Mr. Nelson was
employed in various capacities, ultimately serving as Director of Corporate
Marketing, at SunSoft, Inc., a system software subsidiary of Sun Microsystems,
Inc.
Mr. Watkins joined Networks Associates in May 1995 as Vice President of
International Operations. Mr. Watkins became President and Chief Operating
Officer in December 1999. Mr. Watkins was Vice President of International
Operations from May 1995 to October 1996 and Vice President of Security from
October 1996 to January 1997 when he became Vice President and General Manager
of Security. From January 1991 to April 1995, Mr. Watkins was employed in
various capacities, ultimately serving as Managing Director of European
Operations, at SunSoft, Inc., a system software subsidiary of Sun Microsystems,
Inc.
Mr. Sampath is currently the Chief Executive Officer of McAfee.com. He
joined Networks Associates in June 1998 as Vice President of Worldwide Marketing
and became President and Chief Executive Officer of McAfee.com in December 1998.
From June 1996 to December 1997, Mr. Sampath was Vice President of Product
Marketing for Netscape Communications, a provider of Internet software and
services. From June 1993 to June 1996, Mr. Sampath was President and Chief
Executive Officer of Discussions Corporation, a company that he founded to
develop e-mail based groupware solutions.
Our officers serve at the discretion of the Board of Directors. There are
no family relationships among any of our directors and executive officers.
This table shows stock option grants made by Networks Associates and
McAfee.com to our Chief Executive Officer and our four other most highly
compensated executive officers during the year ended December 31, 1999:
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------
NUMBER % OF TOTAL POTENTIAL REALIZABLE
OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED ANNUAL RATES OF STOCK
UNDERLYING TO APPRECIATION FOR
COMPANY OPTIONS EMPLOYEES EXERCISE OPTION TERMS(3)
GRANTING GRANTED IN FISCAL PRICE EXPIRATION ------------------------
NAME OPTION (#)(1) YEAR ($/SH)(2) DATE 5% ($) 10% ($)
---- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William L. Larson.... NAI --
McAfee.com 900,000 25.8% $ 3.67 01/15/09 $2,077,239 $5,264,131
Prabhat K. Goyal..... NAI 100,000 * $ 12.25 05/05/09 $ 770,396 $1,952,335
McAfee.com 360,000 10.3% $ 3.67 01/15/09 $ 830,896 $2,105,653
Peter R. Watkins..... NAI 100,000 * $ 12.25 05/05/09 $ 770,396 $1,952,335
McAfee.com 180,000 5.2% $ 3.67 01/15/09 $ 415,448 $1,052,826
Zachary A. Nelson.... NAI 200,000 1.2% $ 12.25 05/05/09 $1,540,792 $3,904,669
McAfee.com 180,000 5.2% $ 3.67 01/15/09 $ 415,448 $1,052,826
Srivats Sampath...... NAI --
McAfee.com 900,000 25.8% $ 3.67 01/15/09 $2,077,239 $5,264,131
</TABLE>
- ---------------
* Less than 1%
(1) All of the above options for the company's common stock granted in 1999 vest
at the rate of one-fourth one year from the date of grant and 1/48 per month
after that. Under the Incentive Plan, the Board is allowed to modify the
terms of outstanding options. The exercisability of options may be
accelerated upon a change in control. Options are cancelled on an optionee's
termination of employment under certain
11
<PAGE> 17
specified circumstances. Except for Mr. Sampath's options, options over shares
of McAfee.com Class A common stock are fully vested. Mr. Sampath's McAfee.com
options vest in the same manner as his Networks Associates options.
(2) All options were granted at an exercise price equal to the fair market value
of the common stock on the date of grant.
(3) These columns present hypothetical future values that might be realized on
exercise of the options, less the exercise price. These values assume that
the market price of our stock appreciates at a five and ten percent compound
annual rate over the ten-year term of the options. The five and ten percent
rates of stock price appreciation are presented as examples pursuant to the
SEC's Proxy Rules and do not necessarily reflect management's assessment of
our future stock price performance. These potential realizable values
presented are not intended to indicate the value of the options.
The following table shows stock option exercises and the value of
unexercised stock options held by our Chief Executive Officer and our four other
most highly compensated executive officers during the year ended December 31,
1999:
AGGREGATE OPTION EXERCISES IN 1999
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
COMPANY SHARES OPTIONS AT 12/31/99(#) 12/31/99($)(2)
GRANTING ACQUIRED ON VALUE --------------------------- ---------------------------
NAME OPTION EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
William L. Larson.... NAI 300,000 $2,915,520.00 1,634,377 516,250 $13,172,109 $ 7,488
McAfee.com -- -- 900,000 $37,197,000
Prabhat K. Goyal..... NAI -- -- 474,688 349,375 $ 1,159,265 $1,688,252
McAfee.com 360,000 $14,878,800
Peter R. Watkins..... NAI -- -- 425,998 338,945 $ 2,624,958 $1,470,504
McAfee.com 180,000 $ 7,439,400
Zachary A. Nelson.... NAI -- -- 267,813 407,187 $ 3,328 $2,889,372
McAfee.com 180,000 $ 7,439,400
Srivats Sampath...... NAI -- -- -- -- -- --
McAfee.com -- -- -- 900,000 $37,197,000
</TABLE>
- ---------------
(1) Calculated by taking the market price on the date of exercise, less the
exercise price, multiplied by the number of options exercised
(2) Calculated by taking the closing market price on December 31, 1999, of
$26.6875 for Networks Associates and $45.00 for McAfee.com, as applicable,
less the exercise price, multiplied by the number of options exercisable or
unexercisable. The amounts in these columns may not represent amounts
actually realized by these executive officers. On April 17, 2000, the
closing market price for McAfee.com was $19.25.
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
William L. Larson entered into an agreement with us dated July 20, 1995,
that was amended on May 11, 1999, which provides that, if his employment is
involuntarily terminated other than for cause, he will be entitled to receive
severance payments for eighteen months after such a termination. The payments
would be based on his base salary and bonus at the time of termination. These
payments would stop if he commenced employment elsewhere. In addition, the
agreement provides that if his employment with us is terminated other than for
cause within three months of our merger, or a sale of substantially all of our
assets due to such a transaction, all of his outstanding options will become
fully vested and immediately exercisable, ten days prior to the consummation of
the transaction.
Prabhat K. Goyal entered into an agreement with us dated June 7, 1996,
which provides that if his employment with us is terminated other than for
cause, within three months of our merger or a sale of
12
<PAGE> 18
substantially all of our assets due to such transaction, all of his outstanding
options will become fully vested and immediately exercisable, ten days prior to
the consummation of the transaction. In addition, the agreement was amended on
May 11, 1999 to provide that in the event that his employment is involuntarily
terminated other than for cause in connection with a change in control, he will
be entitled to receive severance payments for twelve months after such a
termination.
Peter R. Watkins entered into an agreement with us dated May 1, 1995, which
provides that if his employment with us is terminated other than for cause
within three months of our merger or a sale of substantially all of our assets
due to such transaction, all of his outstanding options will become fully vested
and immediately exercisable, ten days prior to the consummation of the
transaction. In addition, the agreement was amended on May 11, 1999 to provide
that in the event that his employment is involuntarily terminated other than for
cause in connection with a change in control, he will be entitled to receive
severance payments for twelve months after such a termination.
Zachary A. Nelson entered into an agreement with us dated March 20, 1997,
which provides that if his employment with us is terminated other than for cause
within three months of our merger or a sale of substantially all of our assets
due to such transaction, all of his outstanding options will become fully vested
and immediately exercisable, ten days prior to the consummation of the
transaction. In addition, the agreement was amended on May 11, 1999 to provide
that in the event that his employment is involuntarily terminated other than for
cause in connection with a change in control, he will be entitled to receive
severance payments for twelve months after such a termination.
Srivats Sampath entered into an agreement with McAfee.com dated April 14,
2000, which provides that, if his employment with McAfee.com is involuntarily
terminated other than for cause within twelve months of (i) a sale of 50% of
McAfee.com's shares, (ii) a Networks Associates' change of control, if
McAfee.com is majority owned by us at the time, or (iii) a sale of substantially
all of McAfee.com's assets, he will be entitled to receive severance payments
for twelve months after such a termination. The payments would be based on his
base salary and bonus at the time of termination. In addition, the agreement
provides that if his employment with McAfee.com is terminated other than for
cause within twelve months after any such event, all of his outstanding options
will become fully vested and immediately exercisable, prior to the consummation
of the transaction.
OFFICERS AND DIRECTORS INSURANCE
We maintain an insurance policy covering officers and directors under to
cover any claims made against them for wrongful acts that they may otherwise be
required to pay or for which we are required to indemnify them, subject to
certain exclusions.
NEW PLAN BENEFITS
As of April 17, 2000, no benefits or amounts relating to the additional
6,000,000 options to acquire shares of common stock added to the 1997 Stock
Incentive Plan, subject to stockholder approval, have been received by, or
allocated to, any individuals under that plan.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION OPTIONS
----------------- ---------
<S> <C>
Named officers.............................................. N/A
All Current Executive Officers as a Group................... N/A
All Current Non-Employee Directors as a Group............... N/A
All Current Non-Executive Employees as a Group.............. N/A
</TABLE>
In order to meet our option needs, in December 1999, our Board of Directors
approved the 2000 Nonstatutory Stock Option Plan and reserved 3,000,000 shares
for issuance under the plan. The plan provides for an option price at fair
market value of the Company's common stock on the date of grant. The options
vest over a period of four years: 25% vest one year from the date of grant and
the remaining vest ratably in monthly increments over three years. All options
under the option plan expire ten years after grant. As of March 31,
13
<PAGE> 19
2000, substantially all of these options had been granted from this plan. None
of these options were granted to our officers or directors.
CERTAIN TRANSACTIONS
Option Grants from McAfee.com to Our Officers and Directors
In January 1999, our Chief Executive Officer and each of our four most
highly compensated executive officers were granted options to acquire shares of
McAfee.com Class A common stock. These option grants are described in greater
detail above under "Executive Compensation and Other Matters."
Transactions Between Us and McAfee.com
We have entered into certain agreements with McAfee.com for the purpose of
defining our ongoing relationship. These agreements were developed in the
context of a parent/subsidiary relationship and therefore are not the result of
arms-length negotiations between independent parties.
Corporate Management Services Agreement. On January 1, 1999, we entered
into a Corporate Management Services Agreement with McAfee.com under which we
provide McAfee.com services relating to tax, accounting, insurance, employee
benefits administration, corporate record-keeping, payroll, information
technology infrastructure, and facilities management. In addition, McAfee.com
may request that we provide certain additional services from time-to-time in the
future, with the fee for such additional services subject to negotiation between
the parties. The initial monthly fee that we receive for services under the
agreement is a portion of the costs we incur (based on headcount) plus a 10%
mark-up. During the year ended December 31, 1999, we charged McAfee.com $3.7
million under this agreement.
The Corporate Management Services Agreement may be terminated either by us
when we cease to own a majority of McAfee.com's outstanding voting stock or by
McAfee.com upon 30 days notice to us.
Cross License Agreement. We entered into a technology cross license
agreement with McAfee.com through one of our wholly-owned subsidiaries. Under
this agreement, we granted McAfee.com worldwide non-exclusive patent licenses
and exclusive copyright licenses for the sale or licensing of software products
or software services to certain OEMs and end users solely via the Internet.
Eligible end users include only single-node, individual consumers. In
consideration for the license and rights granted under this license, McAfee.com
is required to pay us a royalty on revenues from related product and
subscription sales, initially at a rate of 20% commencing on January 1, 1999 and
declining 1.625% per quarter until the rate is 7% in the quarter beginning
January 1, 2001, and remaining at 7% thereafter. Also under this agreement,
McAfee.com granted us non-exclusive patent licenses and exclusive copyright
licenses for the sale of products to enterprise customers through any method of
distribution including the Internet and to end users through any method
excluding the Internet. In consideration for the rights granted under this
license, we are required to pay McAfee.com a royalty of $250,000 per quarter.
Under this cross technology agreement, we will provide end user support to
McAfee.com customers. Charges for such support will be equal to a portion of the
costs to us plus a 10% markup. During the year ended December 31, 1999, we
charged McAfee.com $2.4 million and $4.4 million for royalties and support
services, respectively.
Asset Contribution and Receivables Settlement Agreement. We entered into an
asset contribution agreement with McAfee.com effective as of January 1, 1999
that transferred ownership of certain assets to McAfee.com. Among the assets
transferred to McAfee.com were: a number of co-hosting and technology agreements
to which we were a party; revenues from advertising and sponsorship agreements
involving McAfee.com; ownership rights in 3 patent applications; computers and
Internet infrastructure hardware; and any other assets which both we and
McAfee.com's board of directors agree to transfer at a future date. No
liabilities were transferred to McAfee.com except for those directly resulting
from the assets transferred.
Revolving Loan Agreement. In January 1999, we entered into a revolving loan
agreement with McAfee.com. Under the agreement, we agreed to make available to
McAfee.com up to $30 million in cash as a revolving loan. The interest rate
under this revolving loan is equal to the one-month LIBOR rate. The
14
<PAGE> 20
revolving loan is repayable in full on January 1, 2001, the termination date of
the agreement. As of December 31, 1999, no amounts were outstanding under this
agreement.
Tax Sharing Agreement. We have entered into a tax-sharing agreement with
McAfee.com under which McAfee.com calculates its income taxes on a separate
return basis. McAfee.com will be included in our consolidated group for federal
income tax purposes for so long as we beneficially own at least 80% of the total
voting power and the value of the outstanding common stock. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the tax-sharing agreement allocates tax liabilities between McAfee.com and us,
during the period in which McAfee.com is included in our consolidated group, we
could be liable in the event that any federal tax liability is incurred, but not
discharged, by McAfee.com or any other members of our consolidated group.
Under the tax sharing agreement, McAfee.com and each other member has
agreed to indemnify us if we are required to pay any tax liability amount in
excess of our hypothetical separate income tax liability, provided we are not in
default of our obligation to pay our hypothetical separate income tax liability.
The tax sharing agreement will terminate if McAfee.com is no longer
eligible to join us in the filing of a consolidated federal income tax return.
In the event of such termination, any net operating losses or other carryforward
amounts would not be available to McAfee.com upon departure from the group.
Under the tax sharing agreement, McAfee.com will not be reimbursed for any such
loss of tax benefits.
Joint Cooperation Agreement. We have entered into a Joint Cooperation and
Master Services Agreement with McAfee.com which governs the provision of
technology services among the parties. Under this agreement, our anti-virus
emergency response team (AVERT) will provide McAfee.com with research and
solutions for virus events. The agreement also contains standard terms and
conditions governing the provision of technology services from one party to the
other under statements of work that may be negotiated from time to time.
Currently McAfee.com has entered into one such statement of work under which
McAfee.com provides us infrastructure and technical support services for our web
site. We pay McAfee.com a fee for these services in an amount equal to ten
percent of McAfee.com's total quarterly technology costs plus a ten percent
service charge. McAfee.com is obligated to provide these services until December
31, 2000 under this statement of work. During the year ended December 31, 1999,
we were charged $834,000. For the fiscal periods prior to 1999, we received
similar services from McAfee.com, which were allocated and accounted for in the
same manner.
Indemnification and Voting Agreement. We have entered into an
Indemnification and Voting Agreement with McAfee.com which became effective on
December 2, 1999. Except under certain specified circumstances, we will
indemnify McAfee.com for all losses related to any third party claims relating
to events or circumstances arising out of our actions or inactions, including
those of our subsidiaries and officers and directors, on or prior to December 2,
1999. Additionally, for so long as we own at least 20% of McAfee.com's
outstanding voting power, we will vote our shares of McAfee.com's common stock
in favor of the election of two independent McAfee.com directors.
Registration Rights Agreement. We have entered into a registration rights
agreement with McAfee.com that entitles us to include the shares of common stock
we own in McAfee.com in any future registration of common stock McAfee.com
makes, other than any registration statement relating to an acquisition or a
stock option plan. In addition, at any time after June 2, 2000, we or certain of
our transferees can request that McAfee.com file a registration statement so we
can publicly sell our McAfee.com shares. McAfee.com has agreed pursuant to the
terms of this registration rights agreement to pay all costs and expenses, other
than underwriting discounts and commissions, related to shares to be sold by us
or certain of our transferees in connection with any such registration.
DirectWeb
During the first quarter of 1999, we acquired 3,948,199 shares of Series A
Preferred Stock of DirectWeb, Inc. for $2.5 million, and 4,615,385 shares of
DirectWeb Series B Preferred Stock for $6.0 million.
15
<PAGE> 21
DirectWeb, Inc. is a subscription-based online service offering a complete
turnkey Windows 98-based PC, unlimited Internet access and technical support for
a fixed monthly fee. In connection with the formation of DirectWeb, we received
a warrant to acquire 3,175,000 shares of DirectWeb common stock for total
consideration of $317.50. Prior to the transactions described below, on an as
converted basis and excluding shares that may be acquired upon exercise of our
warrant, our total DirectWeb investment represented approximately 12.3% of
DirectWeb's outstanding capital stock. With respect to this balance,
approximately 35.2% was owned by William L. Larson, a DirectWeb founder and our
Chief Executive Officer; 35.4% was owned by Dennis Cline, a DirectWeb founder
and our former Vice President of Worldwide Sales; and 17.1% was owned by
unrelated third party investors who, along with us, invested in DirectWeb's
Series A and Series B Preferred Stock.
In November 1999, we sold our 12.3% ownership in DirectWeb to Dennis Cline,
resulting in a net loss of $2.5 million. At that time, we also agreed to
exchange our warrants to acquire 3,175,000 shares of DirectWeb common stock for
a warrant to acquire $2 million worth of DirectWeb Series C preferred stock at
the same price per share as paid by the Series C preferred stock investors.
William L. Larson sold approximately 83.0% of his stake in DirectWeb to Dennis
Cline in November 1999. He retains an approximately 5.9% ownership interest in
DirectWeb.
OTHER INFORMATION
We know of no other matters to be submitted at the annual meeting. If any
other matters properly come before the annual meeting, it is the intention of
the persons named in the enclosed proxy card to vote the shares they represent
as our Board of Directors may recommend.
By Order of the Board of Directors
/s/ Prabhat K. Goyal
PRABHAT K. GOYAL
Secretary
May 5, 2000
16
<PAGE> 22
APPENDIX A
SUMMARY OF THE 1997 STOCK INCENTIVE PLAN
The key provisions of the Incentive Plan are summarized below. This
summary, however, is not intended to be a complete description of all terms of
the Incentive Plan. A copy of the plan text will be furnished to any stockholder
upon request. Such a request should be directed to the Corporate Secretary at
the company's principal executive office at 3965 Freedom Circle, Santa Clara, CA
95054.
ADMINISTRATION AND ELIGIBILITY. The Compensation Committee administers the
Incentive Plan. Employees, non-employee directors and consultants of the company
are eligible to participate in the Incentive Plan, although incentive stock
options may be granted only to employees. As of April 17, 2000, approximately
2,213 employees and consultants would have been eligible to participate in the
Incentive Plan.
FORM OF AWARDS. Awards under the Incentive Plan may take the form of
options to acquire common stock of the company, stock appreciation rights
("SARs"), restricted shares or stock units, or any combination of these. No
payment is required upon the grant of an award, except for the payment of the
par value of any Restricted Stock awarded.
Options may include nonstatutory stock options ("NSOs") as well as
incentive stock options ("ISOs") intended to qualify for special tax treatment.
The term of an option cannot exceed 10 years. The exercise price of an ISO must
be equal to or greater than the fair market value of the common stock on the
date of grant, while the exercise price of an NSO must be equal to or greater
than 85% of fair market value. As of April 17, 2000, the closing price of the
company's common stock on the NASDAQ National Market was $22.0625 per share.
The exercise price of an option may be paid in any legal form permitted by
the Compensation Committee, including:
- a full-recourse promissory note;
- the surrender of shares of common stock; or
- the surrender of restricted shares already owned by the optionee.
The Compensation Committee may also permit optionees pay off their
withholding tax obligation upon exercise of an NSO by surrendering a portion of
their option shares to the company. The Incentive Plan also allows the optionee
to pay the exercise price of an option through a "cashless exercise" in a broker
assisted transaction.
At any point in time, the Committee may offer to buy out an outstanding
option for cash or give an optionee the right to give up their option for cash.
A SAR permits the participant to elect to receive any appreciation in the
value of the underlying stock from the company. This appreciation may be in
shares of common stock, cash or a combination of the two, with the Compensation
Committee having the discretion to determine the form in which such payment is
made. The amount payable on exercise of an SAR is measured by the difference
between the market value of the underlying stock at exercise and the exercise
price. All SARs intended to be exempt from the 162(m) Limit will be granted with
an exercise price equal to or greater than 100% of the fair market value of the
common stock on the date of grant. SARs may, but need not, be granted in
conjunction with options. Upon exercise of an SAR granted in tandem with an
option, the corresponding portion of the related option must be surrendered and
cannot thereafter be exercised. Conversely, upon exercise of an option to which
an SAR is attached, the SAR may no longer be exercised to the extent that the
corresponding option has been exercised.
Restricted shares are shares of common stock that are subject to forfeiture
in the event that the applicable vesting conditions are not satisfied.
Restricted shares have the same voting and dividend rights as other shares of
common stock. The recipient of restricted shares may pay all projected
withholding taxes relating to the award with shares of common stock rather than
cash.
A-1
<PAGE> 23
A stock unit is an unfunded bookkeeping entry representing the equivalent
of one share of common stock. A holder of stock units has no voting rights or
other privileges as a stockholder but may be entitled to receive dividend
equivalents equal to the amount of dividends paid on the same number of shares
of common stock. Dividend equivalents may be converted into additional stock
units or settled in the form of cash, common stock or a combination of both.
Stock units, when vested, may be settled by distributing shares of common stock
or by a cash payment corresponding to the fair market value of an equivalent
number of shares of common stock, or a combination of both. Vested stock units
are settled at the time determined by the Compensation Committee. If the time of
settlement is deferred, interest or additional dividend equivalents may be
credited on the deferred payment. The recipient of stock units may pay all
withholding taxes relating to the settlement of the award with common stock
rather than cash.
VESTING CONDITIONS. The Compensation Committee determines the vesting and
other conditions. The vesting conditions may be based on:
- the length of the recipient's service;
- his or her individual performance;
- the company's performance; and
- other appropriate criteria.
In the case of restricted shares and stock units vesting is based on the
company's performance.
Where company performance is used as a vesting or issuance condition,
performance goals are based on business criteria specified by the Committee,
selected from one or more of the following:
<TABLE>
<S> <C>
- - cash flow, - return on capital,
- - earnings per share, - return on stockholder equity,
- - gross margin, - growth with respect to any of the
- - net income, foregoing measures,
- - operating income, - expense reduction,
- - operating margin, - growth in bookings,
- - pre-tax profit, - growth in revenue, and
- - return on assets, - stock price increase.
</TABLE>
Vesting may be accelerated in the event of the recipient's death,
disability or retirement or in the event of a transfer of control with respect
to the company. Transfer of control is defined in the Incentive Plan as:
- the direct or indirect sale or exchange by the stockholders of the
company of all or substantially all of the voting stock of the company;
- a merger in which the company is a party; or
- the sale, exchange or transfer of all or substantially all of the assets
of the company.
A transfer of control will also occur in the event of a liquidation or
dissolution of the company.
DEFERRAL OF AWARDS. The Committee may permit or require the recipient of an
award to:
- have cash that otherwise would be paid to him or her, as a result of the
exercise of an SAR or the settlement of stock units, credited to a
deferred compensation account established for him or her as an entry on
the company's books;
- to have shares of common stock that otherwise would be delivered to him
or her as a result of the exercise of an option or SAR converted into an
equal number of stock units; or
- to have shares that otherwise would be delivered to him or her as a
result of the exercise of an option or SAR or the settlement of stock
units converted into an amount credited to a deferred compensation
account established for him or her on the company's books.
The amount to be credited is measured by reference to the fair market value
of common stock as of the date when shares otherwise would have been delivered
to the award recipient. A deferred compensation
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<PAGE> 24
account established under this provision may be credited with interest or other
forms of investment return, as determined by the Committee.
NUMBER OF RESERVED SHARES AND MAXIMUM AWARDS. The total number of shares of
the company's common stock that may be issued under the Incentive Plan, subject
to shareholder approval, is 16.48 million. Under the terms of the Incentive
Plan, if:
- any options, SARs, restricted shares or stock units are forfeited;
- if options or SARs terminate for any other reason prior to exercise;
- if options currently outstanding under the Predecessor Plan are forfeited
or otherwise terminate unexercised; or
- if stock units are settled,
then only the number of shares (if any) actually issued in settlement of such
stock units reduces the number of shares available under the Incentive Plan and
the balance again becomes available for awards under the Plan. If SARs are
exercised, then only the number of shares (if any) actually issued in settlement
of such SARs reduces the number available and the balance again becomes
available for awards. No individual may receive options or SARs covering more
than one million shares in any calendar year (subject to anti-dilution
adjustments), except that the limit is 1.5 million shares for a new employee in
the year in which he or she is hired. In the case of an award that is subject to
performance vesting conditions, no individual may receive more than 300,000
restricted shares or stock units in any calendar year (subject to anti-dilution
adjustments).
NEW PLAN BENEFITS. Awards under the Incentive Plan are discretionary.
Therefore, it is not possible to determine the benefits that will be received in
the future by participants in the Incentive Plan.
FEDERAL TAX CONSEQUENCES
The federal income tax consequences of awards under the Incentive Plan are
summarized as follows:
Options
The award of stock options will have no federal income tax consequences to
the company or the optionee at the time of the option grant.
For ISOs the exercise will not result in any regular taxable income to the
optionee at the time and neither will the company be entitled to any deduction,
however, at the time of exercise, the excess of the fair market value over the
exercise price is an adjustment for purposes of computing alternative minimum
taxable income. If the optionee holds the shares for the required statutory
period, the difference between the sale price and the exercise price generally
will be taxed as a capital gain or loss. If the optionee holds the shares for
less than the statutory period, the optionee will generally recognize ordinary
income at the time of the sale equal to the excess of the fair market value of
the shares at exercise (or if less, the sales proceeds) over the exercise price
and the company will generally be entitled to a deduction for the same amount.
Any additional gain on the disposition will generally be taxed as a capital
gain.
For NSOs the optionee will generally recognize taxable income equal to the
excess of the fair market value at the time of exercise over the exercise price.
This taxable income will be subject to withholding tax. Also the company can
take a deduction equal to the ordinary income recognized by the optionee. Upon
any subsequent disposition of the shares, the difference between the sale price
and the exercise price will generally be taxed as capital gain or loss.
Restricted Shares
For restricted shares, unless the purchaser elects to be taxed at the time
of issuance, these shares will generally be taxed in the same way as NSOs.
However, due to the company's right to repurchase the shares when the purchaser
stops providing services to the company, the holder does not recognize ordinary
income at the time of the sale, but at the time at which the company's right to
repurchase the shares stops. Ordinary
A-3
<PAGE> 25
income is measured as the difference between the purchase price and the fair
market value of the shares on the date that the company's right to repurchase
the shares stops.
Stock Appreciation Rights
For SARs, no income is recognized at the time of the grant. When the right
is exercised, the recipient will recognize taxable income equal to the amount of
the cash received and the fair market value of any common stock received. For a
recipient who is also an employee, the income recognized will be subject to
withholding and the company will be able to take a deduction equal to the same
amount of that income. For common stock received upon exercise of an SAR, the
subsequent sale will be treated in the same way as the gain or loss on an NSO.
Stock Units
The grant of a stock unit award results in no federal income tax
consequences for the participant or the company. The payment of a stock unit
award results in taxable income to the participant equal to the amount of the
payment received. The value is based on the fair market value of the common
stock on the date of the payment. The company will be able to take a deduction
equal to the same amount.
A-4
<PAGE> 26
APPENDIX B
AUDIT COMMITTEE CHARTER
CHARTER FOR THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF
NETWORKS ASSOCIATES, INC.
PURPOSE:
The purpose of the Audit Committee of the Board of Directors of Networks
Associates, Inc. and its subsidiaries (the "Company") shall be to make such
examinations as are necessary to monitor the Company's system of internal
controls, to provide the Company's Board of Directors with the results of its
examinations and recommendations derived therefrom, to outline to the Board of
Directors improvements made, or to be made, in internal accounting controls, to
nominate to the Board of Directors independent auditors to audit the Company's
financial statements and to provide to the Board of Directors such additional
information and materials as it may deem necessary to make the Board of
Directors aware of significant financial matters which require the Board of
Director's attention.
In addition, the Audit Committee will undertake those specific duties and
responsibilities listed below and such other duties as the Board of Directors
from time to time prescribe.
MEMBERSHIP:
The Audit Committee members will be appointed by, and will serve at the
discretion of, the Board of Directors and will consist of at least three members
of the Board of Directors, meeting the following criteria:
1. Each member will be an independent director, as defined in NASDAQ
Rule 4200;
2. Each member will be able to read and understand fundamental
financial statements, in accordance with the NASDAQ National Market Audit
Committee requirements; and
3. At least one member will have past employment experience in finance
or accounting, requisite professional certification in accounting, or other
comparable experience or background, including a current or past position
as a chief executive or financial officer or other senior officer with
financial oversight responsibilities.
Notwithstanding the foregoing, one director who is not an independent
director may serve on the Audit Committee if the required determination and
other requirements of NASD Rule 4310(c)(26)(B) are complied with.
RESPONSIBILITIES:
The responsibilities of the Audit Committee shall include:
1. Reviewing on a continuing basis the adequacy of the Company's
system of internal controls.
2. Reviewing the independent auditors' proposed audit scope and
approach;
3. Reviewing and managing the external audit and the Company's
relationship with its external auditors by (i) selecting, and evaluating
the performance of the independent auditors; (ii) reviewing the independent
auditors' fee arrangements, proposed audit scope and approach; (iii)
obtaining a formal written statement from the independent auditors
regarding relationships and services with the Company which may impact
independence and presenting this statement to the board, and to the extent
there are relationships, monitoring and investigating them; (iv) reviewing
the independent auditors' peer review conducted every three years; and (v)
discussing with the Company's independent auditors the financial statements
and audit findings, including any significant adjustments, management
judgments and accounting estimates, significant new accounting policies and
disagreements with management and any other matters described in SAS No.
61, as may be modified or supplemented;
B-1
<PAGE> 27
4. Conducting a post-audit review of the financial statements and
audit findings, including any significant suggestions for improvements
provided to management by the independent auditors;
5. Reviewing and recommending to the Board of Directors for inclusion
in the Company's annual report on Form 10-K, the audited financial
statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations;
6. Ensuring that the Company's independent auditors review the
Company's interim financial statements included in quarterly reports on
Form 10-Q, using professional standards and procedures for conducting such
reviews;
7. Reviewing the unaudited quarterly operating results in the
Company's quarterly earnings release;
8. Overseeing compliance with the requirements of the Securities and
Exchange Commission for disclosure of auditor's services and audit
committee members and activities;
9. Reviewing management's monitoring of compliance with the Company's
standards of business conduct and with the Foreign Corrupt Practices Act;
10. Reviewing, in conjunction with counsel, any legal matters that
could have a significant impact on the Company's financial statements;
11. Providing oversight and review of the Company's asset management
policies, including an annual review of the Company's investment policies
and performance for cash and short-term investments;
12. Reviewing the Company's compliance with employee benefit plans;
13. Overseeing and reviewing the Company's policies regarding
information technology and management information systems;
14. If necessary, instituting special investigations and, if
appropriate, hiring special counsel or experts to assist;
15. Reviewing related party transactions for potential conflicts of
interest;
16. Reviewing its own structure, processes and membership
requirements;
17. Providing a report in the Company's proxy statement in accordance
with the requirements of Item 306 of Regulation S-K and Item 7(e)(3) of
Schedule 14A; and
18. Performing other oversight functions as requested by the full
Board of Directors.
In addition to the above responsibilities, the Audit Committee will
undertake such other duties as the Board of Directors delegates to it.
MEETINGS:
The Audit Committee will meet at least three times each year. The Audit
Committee may establish its own schedule which it will provide to the Board of
Directors in advance.
The Chief Executive Officer, Chief Financial Officer, and the independent
auditors shall be invited to attend all meetings. The Audit Committee will meet
separately with the Chief Executive Officer and separately with the Chief
Financial Officer of the Company at least annually to review the financial
affairs of the Company. The Audit Committee will meet with the independent
auditors of the Company, at such times as it deems appropriate, to review the
independent auditors' examination and management report.
MINUTES:
The Audit Committee will maintain written minutes of its meetings, which
minutes will be filed with the minutes of the meetings of the Board of
Directors.
B-2
<PAGE> 28
REPORTS:
The Audit Committee will summarize its examinations and recommendations to
the Board as may be appropriate, consistent with the Committee's charter.
B-3
<PAGE> 29
DETACH HERE
PROXY
NETWORKS ASSOCIATES, INC.
3965 Freedom Circle
Santa Clara, California 95054
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints William L. Larson and Prabhat K. Goyal as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote as designated on the reverse side, all
the shares of common stock of Networks Associates, Inc. held of record by the
undersigned on April 10, 2000, at the Annual Meeting of Stockholders to be held
on May 25, 2000, or any adjournment thereof.
- --------------------------------------------------------------------------------
SEE REVERSE SEE REVERSE SIDE (Continued and to be signed on reverse side)
DETACH HERE
[X] Please mark votes as in this example.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [ ]
This Proxy, when properly executed, will be voted in the manner directed herein
by the assigned stockholder. If no direction is taken this proxy will be voted
for Proposals 1, 2, 3 and 4.
1. Election of Class II Director.
Nominee: Leslie G. Denend
For Withheld
[ ] [ ]
2. To approve an amendment to the 1997 Stock Incentive Plan to increase the
number of shares of the Company's Common Stock reserved for Issuance
thereunder by 6,000,000 shares.
For Against Abstain
[ ] [ ] [ ]
3. To ratify the appointment of PricewaterhouseCoopers LLP as the
Independent accountants for the fiscal year ending December 31, 2000.
For Against Abstain
[ ] [ ] [ ]
4. At their discretion, the proxies are authorized to vote upon other
business as may properly come before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears to the left. When shares are held in joint
tenancy, all of such persons should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
Signature: Date:
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Signature: Date:
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