Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-73112
Dated February 12, 2002
NETWORKS ASSOCIATES, INC.
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$345,000,000 OF 5.25% CONVERTIBLE SUBORDINATED NOTES DUE 2006
19,092,418 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES
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We issued the notes in a private placement in August 2001. This
prospectus will be used by selling securityholders to resell their notes and the
common stock issuable upon conversion of their notes.
The notes are convertible prior to maturity into common stock at an
initial conversion price of $18.07 per share, or approximately 55.3403 shares of
common stock per $1,000 principal amount of notes, in each case, subject to
adjustment in certain events. We will pay interest on the notes on February 15
and August 15 of each year, beginning on February 15, 2002. The notes will
mature on August 15, 2006, unless earlier converted or redeemed.
We may redeem all or a portion of the notes on or after August 20, 2004.
In addition, the holders may require us to repurchase the notes upon a change of
control of the company if we are not the surviving company.
The reported last sale price of our common stock on the Nasdaq National
Market on February 11, 2002 was $28.17 per share. Our common stock is traded on
the Nasdaq National Market under the symbol "NETA." Effective February 12, 2002,
our common stock will commence trading on the New York Stock Exchange under the
symbol "NET" and will no longer be traded on the Nasdaq National Market.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR INFORMATION THAT
YOU SHOULD CONSIDER BEFORE PURCHASING THESE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is dated February 12, 2002
You should rely only on the information incorporated by reference or
provided in this prospectus supplement or amendment. We have not authorized
anyone else 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 the information in this prospectus is accurate as of any date
other than the date on the front this prospectus.
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TABLE OF CONTENTS
PAGE
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Summary................................................................................ 1
Risk Factors........................................................................... 6
Risks Related To Network Associates.................................................... 6
Risks Related To The Notes And The Common Stock Into Which The Notes Are Convertible... 21
Where You Can Find More Information.................................................... 26
Use of Proceeds........................................................................ 28
Ratio of Earnings to Fixed Charges..................................................... 28
Dividend Policy........................................................................ 28
Description of Notes................................................................... 29
United States Federal Income Tax Consequences.......................................... 46
Selling Securityholders................................................................ 52
Plan Of Distribution................................................................... 57
Indemnification Of Directors And Officers.............................................. 60
Legal Matters.......................................................................... 60
Experts................................................................................ 60
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SUMMARY
This summary highlights some information from this prospectus, and it
may not contain all of the information that is important to you. It is qualified
by the more detailed information and consolidated financial statements,
including the notes to the consolidated financial statements, incorporated by
reference in this prospectus. You should read the full text of, and consider
carefully the more specific details contained in or incorporated by reference
into this prospectus
NETWORK ASSOCIATES
We are a leading supplier of network security and network management
solutions. We operate through two businesses consisting of our infrastructure
business and McAfee.com our publicly traded subsidiary. Our infrastructure
business is operated in six geographic regions: the United States, Europe,
Japan, Canada, Asia-Pacific and Latin America. McAfee.com is an application
service provider, or ASP, targeted at consumers and small to medium-sized
businesses.
The majority of our net revenue has historically been derived from our
McAfee anti-virus products and our Sniffer Technologies network fault and
performance products. In addition to these two flagship products, we have
focused our efforts on building a full line of complementary network security
and network management solutions. On the network security side, we strengthened
our anti-virus lineup by adding complementary products in the firewall,
intrusion detection, encryption, and virtual private networking categories. On
the network management side, we built upon our Sniffer Technologies line by
adding products in the help desk, asset management, network monitoring, and
network reporting categories. We continuously seek to expand our product lines.
To more effectively market our infrastructure products in our various
geographic regions, we have combined complementary products into separate
product groups, as follows:
- McAfee, which delivers world-class anti-virus and security
products and services;
- Sniffer Technologies, which is a leader in network availability
and system security products; and
- Magic Solutions, which is a leading provider of web-based service
desk solutions.
In the fourth quarter of 2001, we substantially completed integrating
the activities of our PGP product group into our McAfee and Sniffer product
groups. The PGP product group accounted for approximately 6% of net revenue in
2001. Former PGP products now marketed and sold as McAfee products include the
McAfee VPN, McAfee Desktop Firewall (our distributed firewall) for corporate
users and the McAfee E-Business Server. The CyberCop vulnerability assessment
technology was integrated into the Sniffer product line. We are seeking buyers
for the PGP desktop encryption and Gauntlet firewall products. In connection
with the PGP integration, we recorded a restructuring charge of approximately
$3.8 million during the fourth quarter of 2001, consisting primarily of the
costs related to severance packages for affected employees and other exit costs.
Related to this integration, we also expect, among other things:
- to record an additional restructuring charge of approximately
$5.0 million related to
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the divestiture of those PGP Security products that were not
integrated into our Sniffer and McAfee product groups;
- expense reductions of approximately $50 million in fiscal 2002,
primarily in the areas of cost of services and support, research
and development, marketing and sales, and to a lesser extent,
general and administrative expenses; and
- overall revenue to be adversely impacted in at least the
near-term due to, among other things, possible uncertainty on the
part of customers purchasing the PGP Security products being
sold.
PRODUCT GROUPS
McAfee
McAfee's products and services provide solutions designed to enforce
anti-virus policies, measure the performance of anti-virus activities and
deliver network security. The McAfee product group includes products and
services that provide multi-layer anti-virus protection, management and
reporting for desktops, servers, GroupWare, Internet technologies, and wireless
technologies. The McAfee product group also includes distributed firewalls and
virtual private network products for corporate users. McAfee's services are
provided by McAfee's Anti-Virus Emergency Response Team or AVERT. AVERT augments
McAfee's product offerings by identifying new viruses and deploying anti-virus
solutions to our customers. McAfee customers are primarily corporate customers,
including customers in the managed service market, such as ASPs, and managed
service providers, or MSPs.
Sniffer Technologies
Sniffer Technologies' products and services provide customers with
network and application management solutions designed to maximize network
availability and performance and system security. Sniffer Technologies' products
capture data, monitor network traffic and collect key network statistics.
Sniffer Technologies' products are also designed to optimize network and
application performance and increase network reliability by uncovering and
analyzing network problems and system vulnerabilities and recommending solutions
to such problems, automatically and in real-time for mid-level and high-speed
networks. Sniffer Technologies' customers are primarily corporate customers,
including customers in the managed service market.
Magic Solutions
Magic Solutions' products provide customers with a web-based set of
tools to manage their customer support and problem management needs. Magic
Solutions' product group consists of products that promote information sharing,
facilitate workflow, and improve service delivery. Magic Solutions' customers
are primarily corporations.
MCAFEE.COM
McAfee.com is a security ASP delivering security applications software
and related services through an Internet browser. The McAfee.com applications
allow users to detect and eliminate viruses on their PCs, repair their PCs from
damage caused by viruses, optimize their hard drives and update their PCs' virus
protection system with current software patches and upgrades. McAfee.com also
offers customers access to
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McAfee.com Personal Firewall, McAfee.com Wireless Security Center and McAfee.com
Internet Privacy Service. McAfee.com's customers include individuals and
corporations.
Under the terms of our licensing agreement with McAfee.com, McAfee.com's
business has historically been targeted exclusively at consumers. In March 2001,
we entered into a reseller agreement with McAfee.com allowing it to expand its
product offerings with McAfee.com for Business. McAfee.com for Business is a
website serving the security needs for small and medium-sized businesses
delivering managed applications services that allow businesses to provide
anti-virus and firewall security for their desktop PCs.
As of December 31, 2001, we owned 36.0 million shares of McAfee.com
Class B common stock, entitled to three votes per share and representing
approximately 76% of McAfee.com's outstanding common stock and 90% of its total
voting power.
SALES AND MARKETING
Our sales and marketing efforts are directed primarily at large
corporate and government customers, as well as to resellers, distributors and
system integrators worldwide. Our North American direct sales force,
constituting the majority of our sales force, is organized by product group. We
also have direct sales and support operations in Europe, Asia, South America and
Australia. To complement our direct sales efforts, we market many of our
products through corporate resellers, distributors, and retailers. In addition,
original equipment manufacturers, or OEMs, license our products and bundle them
with PC hardware or software.
OPERATING RESULTS
We were not profitable in 2001, 2000 and 1999. In 2001, we had a net loss of
$100.7 million on net revenues of $834.5 million compared to a net loss of
$102.7 million on net revenues of $745.7 million in 2000 and a net loss of
$159.9 million on net revenues of $683.7 million in 1999.
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Network Associates' principal executive office is located at 3965
Freedom Circle, Santa Clara, California 95054 and its telephone number is (408)
988-3832.
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THE OFFERING
Securities Offered................................. $345,000,000 aggregate principal amount of 5.25%
Convertible Subordinated Notes due 2006 and 19,092,418
shares of common stock issuable upon conversion of the
notes, subject to adjustment in certain circumstances.
Maturity........................................... August 15, 2006, unless earlier converted or redeemed by
us at our option or repurchased by us at your option.
Interest Rate and Payments......................... 5.25% per year, payable on February 15 and August 15 of
each year. Our annual interest payments under these notes
will total approximately $18.1 million.
Conversion Rights.................................. You may convert your notes into our common stock at any
time, unless previously redeemed or repurchased, at a
conversion price of $18.07 per share (equal to a
conversion rate of approximately 55.3403 shares per $1,000
principal amount of notes).
Redemption of Notes at Our Option.................. We may redeem all or a portion of the notes on or after
August 20, 2004, at the redemption prices set forth in
this prospectus.
Change of Control.................................. Upon a change of control of Network Associates, you may
require us to purchase all or a portion of your notes. We
may pay the repurchase price in cash or in our common
stock or other applicable securities if we are not the
surviving corporation of the change of control transaction.
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Subordination...................................... The notes are unsecured and will be subordinated to all of
our existing and future senior indebtedness, as defined in
the indenture, and are pari passu with respect to the
$498,500,000 principal amount at maturity outstanding as
of December 31, 2001 of our Zero Coupon Convertible
Debentures due 2018 (the "debentures"). As of December
31, 2001, we had no indebtedness outstanding that would
have constituted senior indebtedness. As of December 31,
2001, our subsidiaries had approximately $586.2 million of
indebtedness and other liabilities outstanding, excluding
intercompany liabilities and liabilities of a type not
required to be reflected on a balance sheet in accordance
with generally accepted accounting principles, to which
the notes would have been effectively subordinated. The
notes are solely obligations of Network Associates. Our
subsidiaries are under no obligation to make any payments
under the notes.
Use of Proceeds.................................... We will not receive any proceeds from the sale by any
selling securityholder of the notes or the underlying
common stock.
Trading............................................ Our common stock is quoted on the Nasdaq National Market
under the symbol "NETA." Commencing on February 12, 2002,
our common stock will trade on the New York Stock Exchange
under the symbol "NET" and will no longer be traded on the
Nasdaq National Market.
Original Issuance.................................. The notes were originally issued in a private placement on
August 17, 2001. The initial purchaser in the placement
was Lehman Brothers Inc., who sold the notes to qualified
institutional buyers pursuant to Rule 144A.
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RISK FACTORS
Before you invest in the notes or shares of common stock underlying the
notes, you should be aware of various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included or incorporated by reference in this prospectus, before you
decide whether to purchase the notes or the shares of common stock underlying
the notes. The risks set forth below are not the only risks we face. If any of
the following risks occur, our business, financial condition, results of
operations and cash flows could be materially adversely affected. In such case,
the trading price of the notes and common stock could decline and result in a
loss of all or part of your investment.
Keep these risk factors in mind when you read "forward-looking"
statements elsewhere in this prospectus and in the documents incorporated herein
by reference. These are statements that relate to our expectations for future
events and time periods. Generally, the words "anticipate," "expect," "intend"
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements
RISKS RELATED TO NETWORK ASSOCIATES
OUR FINANCIAL RESULTS WILL LIKELY FLUCTUATE.
We were not profitable in 2001, 2000 and 1999. In 2001, we had a net
loss of $100.7 million on net revenues of $834.5 million compared to a net loss
of $102.7 million on net revenues of $745.7 million in 2000 and a net loss of
$159.9 million on net revenues of $683.7 million in 1999.
Our revenues and operating results have varied significantly in the
past. We expect fluctuations in our operating results to continue. As a result,
we believe that period-to- period comparisons of our financial results should
not be relied on as an indicator of our future results. Our expense levels are
based in part on our expectations regarding future revenues and in the short
term are relatively fixed. We may be unable to adjust our expenses in time to
compensate for any unexpected revenue shortfall.
Operational Factors.
Operational factors that may cause our revenues, gross margins and
operating results to fluctuate significantly from quarter to quarter include:
- volume, size and timing of new licenses and renewals of existing
licenses;
- introduction of new products, product upgrades or updates by us or our
competitors;
- the mix of products we sell and whether those products are sold directly
by us or indirectly through distributors and whether, in the case of
software licenses, the licenses are time-based subscription licenses or
perpetual licenses;
- costs or charges related to our acquisitions or dispositions, including
our planned disposition of the Gauntlet firewall and our PGP desktop and
wireless encryption product lines;
- the components of our revenue, particularly that portion attributable to
our ASP/MSP subscription model, that are deferred; and
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- stock-based compensation charges and costs related to extraordinary
events, including litigation and any reductions in forces.
Seasonal and Macroeconomic Factors.
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. In
recent periods, poor economic conditions in Asia, particularly Japan, and Latin
America have hurt our business. Customer concerns about weakening U.S. and
global economic conditions and the uncertainties following the terrorist attacks
of September 11, 2001 could also harm our business.
IT IS DIFFICULT FOR US TO ESTIMATE OPERATING RESULTS PRIOR TO THE END OF A
QUARTER.
Because we do not maintain a significant level of backlog, product
revenues in any quarter are dependent on contracts entered into or orders booked
and shipped in that quarter. Historically, we have experienced a trend toward
more product orders, and therefore, a higher percentage of revenue shipments, in
the last month of a quarter. Some customers believe they can enhance their
bargaining power by waiting until the end of a quarter to place their order.
WE FACE RISKS ASSOCIATED WITH THE INTEGRATION OF OUR PGP PRODUCT GROUP INTO OUR
MCAFEE AND SNIFFER PRODUCT GROUPS.
We recently integrated most of the PGP products into our McAfee and
Sniffer product groups and are seeking buyers for the remaining assets. Risks
related to the integration and possible sales include:
- we may not realize our estimated expense reductions of approximately $50
million in 2002 in full or on a timely basis;
- we may experience increased customer dissatisfaction or customer losses,
particularly from customers licensing the Gauntlet firewall and PGP
desktop and wireless encryption technologies that we plan to sell; and
- we may be unable to sell the Gauntlet firewall and PGP desktop and
wireless encryption technologies on favorable terms, on a timely basis,
or at all.
WE HAVE RECENTLY EXPERIENCED SIGNIFICANT CHANGES IN SENIOR MANAGEMENT AND PLAN
TO ADD NEW MEMBERS OF SENIOR MANAGEMENT.
On January 3, 2001, our board of directors appointed George Samenuk as
our chief executive officer and president. In April 2001, Stephen C. Richards
was hired as our new executive vice president and chief financial officer and
was recently named our chief operating officer. In October 2001, Zachary Nelson,
who was recently named our chief strategy officer, left that position. We have
also recently hired new heads of our Asia-Pacific, European and Latin American
operations. In December 2001, Gene Hodges, the president of our McAfee product
group, was appointed president of Network Associates and we hired Art Matin to
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replace Gene Hodges as the president of the McAfee product group. We intend to
continue to add new members to senior management. Changes in management may be
disruptive to our business and may result in the departure of existing employees
and/or customers. It may take significant time to locate, retain and integrate
qualified management personnel.
CRITICAL PERSONNEL MAY BE DIFFICULT TO ATTRACT, ASSIMILATE AND RETAIN.
Our success depends in large part on our ability to attract and retain
technically qualified and highly skilled sales, consulting, technical, marketing
and management employees. Competition for qualified employees is intense,
resulting in upward pressure on wages. In addition to our recent senior
management additions, we hired a significant number of new employees in 2000 and
2001. We may continue to add new employees to fill positions vacated by
departing employees and to expand our business. There may be reduced levels of
productivity as recent hires are trained and otherwise assimilate and adapt to
our organization.
Other than executive management who have "at will" employment
agreements, our employees are not typically subject to an employment agreement
or non-competition agreement. We may be unsuccessful in retaining key personnel.
For example, after April 22, 2000, the end of the 12-month lock-up period for
options repriced in April 1999, we experienced a larger than normal level of
employee departures as many of these employees elected to terminate their
employment with us. We may also have difficulties in retaining employees because
many of our employees hold options to purchase our stock at prices significantly
above the current market price for our stock.
WE FACE RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
For 2001 and 2000, net revenue from international sales represented
approximately 35% and 37%, respectively, of our net revenue. We intend to focus
on international growth and expect international revenue to account for a
significant percentage of our net revenue. Related risks include:
- longer payment cycles and greater difficulty in collecting accounts
receivable;
- increased costs and management difficulties related to the building of
our international sales and support organization;
- the acceptance of the reorganization of our international sales forces
by regions;
- the need to train and integrate the new heads of Asia-Pacific, Europe
and Latin America;
- uncertainties relative to regional economic circumstances, including the
continued economic weakness in Asia and a weak Euro;
- currency fluctuations and risks related to hedging strategies;
- political instability in emerging markets;
- tariffs, trade barriers and export restrictions; and
- a high incidence of software piracy in some countries.
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WE DEPEND ON REVENUE FROM OUR FLAGSHIP ANTI-VIRUS AND SNIFFER PRODUCTS.
We have historically derived a majority of our net revenues 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 revenues for the foreseeable
future. Because of this revenue concentration, our business could be harmed by a
decline in demand for, or in the prices of, these products as a result of, among
other factors, any change in our pricing model, a maturation in the markets for
these products or other risks described in this prospectus.
CUSTOMERS MAY CANCEL OR DELAY PRODUCT PURCHASES.
Weakening economic conditions, new product introductions and expansions
of our business may increase the time necessary to sell our products and require
us to spend more on our sales efforts. Our products may be considered to be
capital purchases by our current or prospective customers. Capital purchases are
often discretionary and, therefore, are canceled or delayed if the customer
experiences a downturn in its business prospects or as a result of economic
conditions in general.
WE FACE A NUMBER OF RISKS RELATED TO OUR PRODUCT SALES THROUGH DISTRIBUTORS.
We sell a significant amount of our products through intermediaries such
as distributors. Our top ten distributors typically represent approximately 37%
to 42% of our net revenue in any quarter. Our largest distributor, Ingram Micro,
accounted for approximately 27% of net revenue during 2001.
Loss of a Distributor.
Our distributor agreements may be terminated by either party without
cause. If one of our significant distributors terminates its distribution
agreement, we could experience a significant interruption in the distribution of
our products.
Need for Accurate Distributor Information.
We recognize revenue on products sold by our distributors when
distributors sell our products to their customers. To determine our business
performance at any point in time or for any given period, we must timely and
accurately gather sales information from our distributors' information systems,
at an increased cost to us. Our distributors' information systems may be less
accurate or reliable than our internal systems.
Sale of Competing Products.
Our distributors may sell other vendors' 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.
Payment Difficulties.
Some of our distributors may experience financial difficulties, which
could adversely impact our collection of accounts receivable. Our allowance for
doubtful accounts was approximately $8.4 million at December 31, 2001 and $15.3
million at December 31, 2000. In 1999, one of our large European distributors,
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CHS, entered bankruptcy requiring us to record a related accounts receivable
write-off of approximately $28.7 million. Also in 1999, Pinacor, a U.S.
distributor, entered bankruptcy requiring us to record a related accounts
receivable write-off of approximately $6.0 million. We regularly review the
collectibility and credit worthiness of our distributors to determine an
appropriate allowance for doubtful accounts. Our uncollectable accounts could
exceed our current or future allowances.
WE EXPECT SIGNIFICANT STOCK-BASED COMPENSATION CHARGES.
We expect to incur stock-based compensation charges related to employee
options repriced in April 1999. The size of these charges could be significant
depending on movements in the market value of our common stock and, in some
cases, the market value of McAfee.com common stock. On December 31, 2001, the
market value of our common stock and McAfee.com's common stock was $25.85 and
$33.91, respectively. Subject to a number of assumptions and limitations
including the timing and number of options exercises, for each $1.00 increase in
the price of our common stock or McAfee.com's common stock, at March 31, 2002 we
could expect a stock-based compensation charge of approximately $2.3 million and
$235,000, respectively. We may also incur additional stock-based compensation
charges related to executive compensation arrangements.
WE FACE THE RISK OF FUTURE NON-RECURRING CHARGES IN THE EVENT OF IMPAIRMENT AND
WILL EXPERIENCE SIGNIFICANT AMORTIZATION CHARGES RELATED TO PURCHASED
TECHNOLOGY.
We adopted SFAS 142 beginning in 2002 and, as a result, we no longer
amortize goodwill. However, we will continue to have significant amortization
related to purchased technology and other identifiable intangibles, and we must
evaluate our goodwill and purchased technology at least annually for impairment.
For 2001, our amortization charge for purchased technology and other
identifiable intangibles was approximately $13.0 million, and for goodwill was
$51.1 million. If we determine that these items are impaired, we will be
required to take a related non-recurring charge to earnings.
WE MAY NEED TO USE A LARGE PORTION OF OUR CASH BALANCES, ISSUE A SIGNIFICANT
AMOUNT OF OUR COMMON STOCK OR INCUR ADDITIONAL INDEBTEDNESS TO REPURCHASE OUR
OUTSTANDING DEBENTURES.
On February 13, 1998, we issued zero coupon debentures having an
aggregate face amount at maturity of $885.5 million and generating net proceeds
(after deducting fees and expenses) to us of approximately $337.6 million. The
initial price for the debentures was $391.06 per $1,000 of principal amount at
maturity. At the option of the holder, we are required to repurchase the
debentures as of February 13, 2003 at a repurchase price equal to the initial
issue price plus the accretion of original issue discount on the debentures to
such date (or $494.52 per $1,000 of principal amount at maturity). In the case
of such a required repurchase, at our option, we may pay the aggregate
repurchase price in cash, shares of our common stock or a combination of cash
and common stock. The number of shares of common stock so issued by us would be
based on the fair value of our common stock at the time of any required
repurchase. On the same date and at the same repurchase price, we may at our
option redeem the outstanding debentures for cash.
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As of December 31, 2001, we had used $173.7 million of our cash
to repurchase zero coupon debentures having an aggregate face amount at maturity
of $387.0 million. Assuming that as of February 13, 2003, all zero coupon
debentures outstanding as of December 31, 2001, are redeemed the aggregate
redemption price would equal approximately $246.5 million. As of December 31,
2001, our aggregate cash, cash equivalents and marketable securities were
approximately $943.0 million, including $102.5 million held by McAfee.com.
In anticipation of any repurchase or optional redemption of the
debentures, we may issue additional indebtedness to pay all or a portion of the
repurchase or redemption price. This indebtedness may be issued in a greater
amount than, or on terms less favorable than, the outstanding debentures or
notes.
WE FACE RISKS RELATED TO THE ORGANIZATION OF OUR U.S. PROFESSIONAL SERVICES
ORGANIZATION AND SALES EFFORTS BY PRODUCT GROUPS.
Our U.S. sales force and related professional service organization are
organized by product group: McAfee, Sniffer Technologies and Magic Solutions.
Risks related to this structure include:
- customer confusion or irritation related to multiple sales calls from
different members of our sales forces;
- potential losses of cross-selling opportunities and lead sharing between
the separate product groups' sales representatives;
- possible failures by our centralized general and administrative group to
meet each product group's individualized infrastructure and support
requirements; and
- one or more of our product groups lacking sufficient qualified
professional services personnel to support its products.
WE FACE RISKS ASSOCIATED WITH PAST AND FUTURE TRANSACTIONS.
Acquisitions.
We may buy or make investments in complementary companies, products and
technologies. Since 1995, we have completed a large number of significant
acquisitions involving both public and private companies including the
acquisition of CyberMedia and Dr. Solomon's in 1998 and Network General in 1997.
We and McAfee.com have also completed a number of smaller acquisitions and we
have acquired a number of our international distributors.
Integration of an acquired company or technology involves a complex,
time consuming and expensive process. The successful integration of an
acquisition requires, among other things, that we:
- integrate and retain key management, sales and other personnel;
- integrate the acquired products into our product offerings both from an
engineering and sales and marketing perspective;
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- integrate and support preexisting supplier, distribution and customer
relationships;
- coordinate research and development efforts; and
- consolidate duplicate facilities and functions.
The geographic distance between the companies, the complexity of the
technologies and operations being integrated, and the disparate corporate
cultures being combined may increase the difficulties of integrating an acquired
company or technology. 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.
Our available cash and securities may be used to buy or invest in
companies or products, possibly resulting 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.
Investments.
We have made a number of venture and minority investments in private and
publicly-traded companies with complementary products, services and
technologies. As of December 31, 2001, the minority venture investments we
continue to hold totaled $2.4 million consisting of investments in public and
private companies, amounting to $2.2 million and $200,000, respectively. During
2001, we recorded a $20.6 million impairment charge in connection with these
investments. We may make additional strategic investments.
WE COULD EXPERIENCE CUSTOMER AND MARKET CONFUSION DUE TO SIMILARITIES IN THE
NAMES USED BY OUR DIFFERENT PRODUCT GROUPS AND SUBSIDIARIES.
Network Associates, our product groups and our subsidiaries, often have
similar and potentially confusing names, products and Web addresses. For
example, our online consumer anti-virus products are sold by our publicly traded
McAfee.com subsidiary, our retail and large corporate anti-virus products are
sold by our retail division, which is called McAfee Retail, and our hosted
anti-virus products are marketed and sold by our McAfee product group. Customers
of our McAfee product group are frequently confused by the need to access
information regarding our products and services at www.mcafeeb2b.com. The web
address www.mcafee.com is utilized by our publicly traded subsidiary McAfee.com.
WE FACE RISKS RELATED TO OUR APPLICATION SERVICE PROVIDER STRATEGY.
Customers of our ASP or hosted products and services essentially "rent"
the use our software. For example, McAfee ASaP offers hosted services to
corporate customers and McAfee.com is dedicated to updating, upgrading and
managing PCs over the Internet for consumers and small to medium-sized
businesses. This web-based model is a relatively new concept, and our ASP
products and services may fail to maintain or increase market acceptance. The
growth, market acceptance and ultimate profitability of our ASP services is
highly uncertain and subject to a number of factors, including:
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- our ability to successfully adapt existing products or develop new or
enhanced products that operate in a fast, secure and reliable manner
over the Internet;
- increased expenditures associated with the creation of a new business or
delivery platform, such as product development, marketing and technical
and administrative support;
- the introduction of new products by third-party competitors; and
- our ability to properly price our products and services to generate the
greatest revenue opportunities.
OUR MANAGED SERVICE PROVIDER STRATEGY EXPOSES US TO RISKS IN ADDITION TO THOSE
GENERALLY EXPERIENCED AS AN ASP.
We also make our hosted products and services available over the
Internet in what we refer to as a managed environment. Unlike our ASP solutions,
these managed service provider, or MSP, solutions are customized, monitored and
updated by networking professionals for a specific customer. To successfully
offer MSP services we must:
- effectively monitor and customize each customer's managed services;
- attract and retain qualified networking professionals to manage customer
accounts; and
- effectively price our products and services to account for the higher
costs associated with selling managed services.
We also allow intermediaries, such as Internet Service Providers, to
sell and host our products and services in a managed environment. This MSP
reseller strategy exposes us to additional risks:
- we must select, train and maintain qualified and financially stable MSP
resellers;
- it is more difficult for us to ensure customer satisfaction as we do not
have direct customer contact and we rely on our resellers to timely and
properly customize and administer our products and services;
- we must develop and maintain mutually satisfactory revenue sharing
arrangements with our MSP resellers; and
- our MSP resellers may compete with our own MSP efforts.
WE FACE RISKS RELATED TO OUR RELATIONSHIP WITH MCAFEE.COM.
We have entered into various inter-company arrangements with McAfee.com,
our publicly traded subsidiary. Pursuant to our cross license agreement with
McAfee.com, we have licensed all our technology to McAfee.com for use in the
markets
-13-
specified below and McAfee.com has licensed its technology to us for our use
outside of McAfee.com's markets. Our license and other agreements with
McAfee.com expose us to risks, including:
- subject to the reseller agreement described below, McAfee.com has the
exclusive right to use the licensed technology for providing single-user
consumer licenses for our products and services sold over the Internet
or for Internet-based products and licensing the technology to original
equipment manufacturers for sale to individual consumers;
- we may not offer a product incorporating third-party technology if those
products are competitive with products offered by McAfee.com;
- the license agreement is perpetual and may only be terminated by us if
McAfee.com fails to cure a material breach of the license within 30 days
after we notify it of the breach, subject to mandatory dispute
resolution prior to the effectiveness of any proposed termination; and
- we are required to indemnify McAfee.com with respect to litigation
related to our licensed technology.
These risks manifest themselves, among other ways, in terms of customer
confusion, sales force confusion over market boundaries and possible conflicts
between the companies.
In March 2001, we entered into reseller agreements with McAfee.com.
Under these agreements, McAfee.com may resell our products to business
customers, except in Japan, and, in certain countries, we may sell McAfee.com
products to OEMs and end-users directly or through ASPs.
WE ARE SUBJECT TO INTENSE COMPETITION IN THE NETWORK MANAGEMENT AND SECURITY
MARKETS AND WE EXPECT TO FACE INCREASED COMPETITION IN THE FUTURE.
The markets for our products are intensely competitive and we expect
competition to increase in the near-term.
-14-
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.
Anti-Virus Software.
Our principal competitor in the anti-virus market is the Norton Product
Group of Symantec. Trend Micro remains the strongest competitor in the Asian
anti-virus market, with Dr. Ahn's making recent inroads, particularly in Japan
and Korea. Other anti-virus competitors include numerous smaller companies and
shareware authors that may in the future develop competing software or be
consolidated into larger competitors.
Network Security.
Our principal competitors in the security market vary by product type.
For firewalls, our principal competitors include CheckPoint, Symantec, and
larger companies such as Cisco Systems and Microsoft. For intrusion detection
products, we compete with Cisco Systems, Internet Security Systems and Symantec.
The markets for encryption and virtual private network, or VPN, products are
highly fragmented with numerous small and large vendors. VPN competitors include
hardware and software vendors, including telecommunications companies and
traditional networking suppliers.
-15-
Network Management.
Our principal competitor in the network management market is Agilent.
Other competitors include Acterna Corporation, Cisco Systems, Computer
Associates, Compuware, Concord Communications, DeskTalk Systems, GN Nettest,
Network Instruments, Radcom Technologies, Shomiti Systems and WildPackets.
Helpdesk.
Our principal competitors in the help desk market are Computer
Associates, FrontRange Solutions and Peregrine Systems.
Other Competitors.
We also face competition from large software companies such as HP,
Intel, Microsoft and Novell, which may offer network security and management
products as enhancements to their operating system.
WE FACE PRODUCT DEVELOPMENT RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGES IN
OUR MARKET.
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 depends on our ability
to timely and effectively:
- offer a broad range of network security and management software
products;
- enhance existing products and expand product offerings;
- respond promptly to new customer requirements and industry
standards; and
- remain compatible with popular operating systems such as Linux,
Netware, Windows XP, Windows 2000, Windows 98 and Windows NT, and
develop products that are compatible with new or otherwise
emerging operating systems.
We may 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 harm market acceptance.
Our long-term success depends on our ability to keep our products
current. For example, the proliferation of new and changing viruses makes it
imperative to update anti-virus products frequently to avoid obsolescence.
Accordingly, we must upgrade and update existing product offerings, modify and
enhance acquired products and introduce new products which meet our customers'
needs. We believe that our ability to provide these upgrades and updates
frequently and at low costs is key to our anti-virus success.
COMPETITORS MAY INCLUDE PRODUCTS SIMILAR TO OURS IN THEIR HARDWARE OR SOFTWARE
AND RENDER OUR PRODUCTS OBSOLETE, AND IF THERE ARE FEWER WEAKNESSES IN
THIRD-PARTY SOFTWARE, THE PERCEIVED NEED FOR OUR SOFTWARE MAY DECLINE.
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
-16-
management software similar to our products. From time to time, Microsoft has
indicated that it would incorporate its own anti-virus software or functionality
into its products. The widespread inclusion of products that perform the same or
similar functions as our products within 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.
Many current viruses exploit known weaknesses in third-party software.
If these weaknesses are corrected or, if there are fewer third-party software
weaknesses, the perceived need for our products may decline.
OUR HARDWARE BASED PRODUCTS FACE MANUFACTURING, SUPPLY, INVENTORY, LICENSING AND
OBSOLESCENCE RISKS.
Third-Party Manufacturing.
We rely on a small number of third parties to manufacture some of our
hardware-based Sniffer and E-ppliance products. We expect the number of our
hardware-based products and our reliance on third-party manufacturers to
increase as software-only network security and management solutions become less
viable. Reliance on third-party manufacturers involves a number of risks,
including the lack of control over the manufacturing process and the potential
absence or unavailability of adequate capacity. If any of our third party
manufacturers cannot or will not manufacture our 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 this additional capacity is available
at commercially acceptable terms, the qualification process could be lengthy and
could cause interruptions in product shipments. The unexpected loss of any of
our manufacturers would be disruptive to our business.
Sourcing.
Our hardware-based products contain critical components supplied by a
single or a limited number of third parties. Any significant shortage of
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.
Third-Party Licenses.
Some of our hardware-based products incorporate licensed software. We
must be able to obtain reasonably priced licenses and successfully integrate
this software with our hardware.
Obsolescence.
Hardware based products may face greater obsolescence risks than
software products. We could incur losses or other charges in disposing of
obsolete inventory.
-17-
WE RELY ON THE CONTINUED PROMINENCE OF MICROSOFT TECHNOLOGY.
Although we intend to support other operating systems, we seek to be the
leading supplier of network security and management products for Windows/Intel
based networks. Sales of our products would be materially and adversely affected
by market developments that are adverse to the Windows operating environments,
including the failure of users and application developers to accept Windows. 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, including
the recently introduced Windows XP. We may be unable to gain the necessary
access from Microsoft to its product development activities.
WE MAY FAIL TO SUPPORT OPERATING SYSTEMS WHICH SUCCESSFULLY COMPETE WITH
MICROSOFT'S TECHNOLOGY, INCLUDING COMPETING VERSIONS OF THE UNIX OPERATING
SYSTEM.
We are expanding our product support to include the Unix operating
system and the Linux operating system. Sales of our products could be materially
and adversely impacted by our failure to support those operating systems or
competing operating systems that receive broad market acceptance. The Unix
system encompasses many separate operating systems of which we only support a
few, including for example, Sun Microsystems' Solaris Unix operating system.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WHICH OFFER ONLY LIMITED
PROTECTION AGAINST POTENTIAL INFRINGERS.
We rely on a combination of contractual rights, trademarks, trade
secrets, patents and copyrights to establish and protect proprietary rights in
our software. However, the steps taken by us to protect our proprietary software
may not deter its misuse or theft. We are aware that a substantial number of
users of our anti-virus products have not paid any registration or license fees
to us. Competitors may also independently develop technologies or products that
are substantially equivalent or superior to our products. Changing legal
interpretations of liability for unauthorized use of our software, or lessened
sensitivity by corporate, government or institutional users to avoiding
infringement of intellectual property could also harm our business.
INTELLECTUAL PROPERTY LITIGATION IN THE NETWORK SECURITY AND MANAGEMENT MARKET
IS COMMON AND CAN BE EXPENSIVE.
Litigation may be necessary to enforce and protect trade secrets and
other intellectual property rights that we own. Similarly, we may be required to
defend against claimed infringement by others. In addition to the expense and
distractions associated with litigation, adverse determinations could:
- result in the loss of our proprietary rights;
- subject us to significant liabilities, including monetary liabilities;
- require us to seek licenses from third parties; or
- prevent us from manufacturing or selling our products.
-18-
The litigation process is subject to inherent uncertainties. 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 our products or us.
If we acquire a portion of software included in our products from third
parties, our exposure to infringement actions may increase because we must rely
upon these third parties as to the origin and ownership of any software being
acquired. Similarly, exposure to infringement claims increase if we employ or
hire software engineers previously employed by competitors, notwithstanding
measures taken by us or our competitors to protect our competitors' intellectual
property.
PENDING OR FUTURE LITIGATION COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS
OF OPERATION AND FINANCIAL CONDITION.
In addition to intellectual property litigation, from time to time, we
have been subject to litigation. Where we can make a reasonable estimate of the
liability relating to pending litigation, we record a related liability. As
additional information becomes available, we assess the potential liability and
revise estimates as appropriate. However, because of uncertainties relating to
litigation, the amount of our estimates could be wrong. In addition to the
related cost and use of cash, pending or future litigation could cause the
diversion of management's attention and resources. A putative securities class
action is currently pending against us, our directors and our former officers.
The plaintiffs allege that we and the other defendants improperly engaged in a
course of conduct by which we improperly accounted for revenue from our software
license sales and that, as a result, certain of our financial statements were
false and misleading and not in compliance with generally accepted accounting
principles.
PRODUCT LIABILITY AND RELATED CLAIMS MAY BE ASSERTED AGAINST US.
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 may not be effective under the laws of
certain jurisdictions, particularly in circumstances involving unsigned
licenses.
COMPUTER "HACKERS" MAY DAMAGE OUR PRODUCTS AND SERVICES.
Due to 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 and services, including our various
websites. For example, we have recently seen the spread of viruses, or worms,
that intentionally delete antivirus and firewall software. Similarly, hackers
may attempt to penetrate our network security and misappropriate proprietary
information or cause interruptions of our internal systems and services. Also, a
number of websites have been subject to denial of service attacks, where a
website is bombarded with information requests eventually causing the website to
overload, which causes a delay or disruption of service. If successful, any of
these events could damage users' or our computer systems. In addition, since we
do not control diskette duplication by distributors or our independent agents,
diskettes containing our software may be infected with viruses.
-19-
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 similar claims may be made in the future.
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.
BUSINESS INTERRUPTIONS MAY IMPEDE OUR OPERATIONS AND ADVERSELY AFFECT OUR
BUSINESS.
We face a number of potential business interruption risks that are
beyond our control. The State of California has recently experienced
intermittent power shortages, sharp increases in the cost of energy and even
interruptions of service to some business customers.
Additionally, we may experience natural disasters that could interrupt
our business. Our corporate headquarters is located near a major earthquake
fault. The potential impact of a major earthquake on our facilities,
infrastructure and overall operations is not known. Despite safety precautions
that have been implemented, there is no guarantee that an earthquake would not
seriously disturb our entire business process. We are largely uninsured for
losses and business disruptions caused by an earthquake and other natural
disasters.
WE FACE RISKS ASSOCIATED WITH U.S. GOVERNMENT CONTRACTING.
We are currently engaged in several research and development contracts
with agencies of the U.S. government. The willingness of these government
agencies to enter into future contracts with us depends in part on our continued
ability to meet their expectations.
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 government agencies. Although we have been awarded
contract fees of more than 1% of the contract costs 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.
OUR CRYPTOGRAPHY TECHNOLOGY IS SUBJECT TO EXPORT RESTRICTIONS.
Some of our network security products, particularly those incorporating
encryption, may be subject to export restrictions. As a result, some products
may not be exported to international customers without prior U.S. government
approval. The list of products and end users for which export approval is
required, and the regulatory policies with respect thereto, are subject to
revision by the U.S. government at any time. The cost of compliance with U.S.
and international export laws and changes in existing laws could affect our
-20-
ability to sell certain products in certain markets, and could have a material
adverse effect on our international revenues.
RISKS RELATED TO THE NOTES AND THE COMMON STOCK
INTO WHICH THE NOTES ARE CONVERTIBLE
OUR INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW
AND WE WILL BE PERMITTED TO INCUR ADDITIONAL INDEBTEDNESS IN THE FUTURE.
Our annual debt service obligations on the notes being offered hereby
will be approximately $18.1 million per year in interest payments. In addition,
we may be required to repurchase our outstanding zero coupon debentures, by
paying cash, common stock or a combination of cash and common stock, if the
holders exercise their right to put the debentures to us in February 2003. We
intend to fulfill our debt service and repayment obligations both from cash
generated by our operations and from our cash and investments. As of December
31, 2001, our aggregate cash, cash equivalents and marketable securities were
approximately $943.0 million, including $102.5 million held by McAfee.com. As of
December 31, 2001, we have used $173.7 million of our cash to repurchase zero
coupon debentures having an aggregate face amount at maturity of $387.0 million.
Assuming that as of February 13, 2003, all zero coupon debentures outstanding as
of December 31, 2001 are redeemed the aggregate redemption price would equal
approximately $246.5 million. If we are unable to generate sufficient cash to
meet these obligations and need to use existing cash or liquidate investments in
order to fund our debt service obligations, we may have to delay or curtail
research and development programs.
Our current and future indebtedness could have significant additional
negative consequences, including:
- requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete;
- placing us at a possible competitive disadvantage to less leveraged
competitors and competitors that have better access to capital
resources;
- affecting our ability to make interest payments on our indebtedness,
including the notes; and
-21-
- in addition, the indenture permits us to incur additional indebtedness
in the future, which could compound the risks described above.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES,
WHICH MAY REDUCE THEIR MARKET PRICE.
The notes are a new issue of securities for which there is currently no
trading market. Although the notes not registered for resale under this
Registration Statement are eligible for trading in PORTAL, we cannot assure you
that an active trading market for the notes will develop or be sustained. Lehman
Brothers, Inc., the "initial purchaser," has informed us that it intends to make
a market in the notes. The initial purchaser, however, is not obligated to make
a market in the notes and may discontinue this market making activity at any
time without notice. In addition, market making activity by the initial
purchaser will be subject to the limits imposed by the federal securities laws
and governmental regulations. As a result, we cannot assure you that any market
for the notes will develop, or if one does develop, that it will be actively
sustained.
In addition, the liquidity of the trading market in the notes and the
market price quoted for the notes may be adversely affected by changes in the
overall market for convertible securities, changes in our prospects or financial
performance or in the prospects for companies in our industry generally. If an
active market for our notes fails to develop or be sustained, the trading price
of the notes could fall. If an active trading market were to develop, the notes
could trade at prices that may be lower than the initial offering price. Whether
or not they could trade at lower prices depends on many factors, including:
- prevailing interest rates;
- the markets for similar securities;
- general economic conditions; and
- our financial condition, historical financial performance and future
prospects.
-22-
THE NOTES ARE SUBORDINATED TO ALL OUR EXISTING AND FUTURE SENIOR INDEBTEDNESS
AND THE DEBT OF OUR SUBSIDIARIES WHICH MAY INHIBIT OUR ABILITY TO REPAY YOU.
The notes are unsecured and are subordinated to all of our existing and
future senior indebtedness, as defined in the indenture, and are pari passu with
respect to the $498,500,000 principal amount at maturity of our debentures
outstanding as of December 31, 2001. As defined in the indenture; senior
indebtedness initially includes only secured indebtedness of Network Associates;
however when less than $60,000,000 aggregate principal amount at maturity of the
zero coupon convertible debentures remain outstanding, the senior indebtedness
definition expands to include both secured and unsecured obligations of Network
Associates. As of December 31, 2001, we had no indebtedness outstanding that
would have constituted senior indebtedness (including obligations that would
only be included within the definition of senior indebtedness at such time as
less than $60,000,000 aggregate principal amount at maturity of the debentures
remains outstanding). In the event of our bankruptcy, liquidation or
reorganization or upon acceleration of the notes due to an event of default
under the indenture and in specified other events, our assets will be available
to pay obligations on the notes only after all senior indebtedness has been paid
in full in cash or other payment satisfactory to holders of senior indebtedness.
As a result, there may not be sufficient assets remaining to pay amounts due on
any or all of the outstanding notes.
OUR CORPORATE STRUCTURE RESULTS IN SUBSTANTIAL STRUCTURAL SUBORDINATION OF THE
NOTES AND MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
The notes are obligations exclusively of Network Associates. Since a
significant portion of our operations are conducted through our subsidiaries,
our cash flow and our consequent ability to service debt, including the notes,
are dependent upon the earnings of our subsidiaries and the distribution of
those earnings to us, or upon loans or other payments of funds by those
subsidiaries to us. These subsidiaries are separate and distinct legal entities
and have no obligation to make any payments on the notes or to make any funds
available for payments on the notes, whether by dividends, loans or otherwise.
In addition, the ability of our subsidiaries to make dividend payments or loans
or advances to us may be subject to statutory or contractual restrictions and
may be contingent on the earnings of the subsidiaries.
Our right to receive assets of any of our subsidiaries upon their
liquidation or reorganization, and your consequent right to participate in those
assets, will be effectively subordinated to any claims creditors may have
against our subsidiaries, including trade creditors, unless we are recognized as
a creditor to the subsidiary.
As of December 31, 2001, our subsidiaries had approximately $586.2
million of indebtedness and other liabilities outstanding, excluding
intercompany liabilities and liabilities of a type not required to be reflected
on a balance sheet in accordance with generally accepted accounting principles,
to which the notes would have been effectively subordinated. In addition, the
indenture does not limit the creation of additional indebtedness by our
subsidiaries.
OUR ABILITY TO REPURCHASE NOTES WITH CASH UPON A CHANGE OF CONTROL MAY BE
LIMITED.
In certain circumstances involving a change of control, as defined in
"Description of the Notes--Repurchase at Option of Holders Upon a Change of
Control" you may require us to repurchase some or all of your notes. We may have
insufficient financial resources at such time or may be unable to arrange
financing to pay the repurchase price of the notes in cash. Our ability to
repurchase the notes in such event may be limited by law, by the terms of other
agreements relating to our senior indebtedness and by such indebtedness and
agreements as may be entered into, replaced, supplemented or amended from time
to time.
-23-
We may be required to refinance our senior indebtedness in order to make such
payments. We may not have the financial ability to repurchase the notes in cash
if payment for our senior indebtedness is accelerated.
OUR STOCK PRICE HAS BEEN VOLATILE AND IS LIKELY TO REMAIN VOLATILE, WHICH MAY
ADVERSELY AFFECT THE PRICE OF OUR STOCK AND THE NOTES.
During 2001, our stock price was highly volatile ranging from a
per-share high of $27.27 to low of $4.19. Announcements, litigation
developments, and our ability to meet the expectations of investors with respect
to our operating and financial results may contribute to current and future
stock price 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 addition, similar events with respect to
McAfee.com, our publicly traded subsidiary, and fluctuations in its stock price,
may also contribute to the volatility of our stock price. Securities class
action litigation has been instituted following previous periods of volatility.
A number of putative class actions were brought against our former officers,
directors and us. This litigation, and any other litigation, could result in
substantial costs and a diversion of management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET OR OPTION EXERCISES AND
SALES COULD LOWER OUR STOCK PRICE.
A substantial number of the shares of our common stock are subject to
stock options and our outstanding debentures and the notes may be converted into
shares of common stock. We cannot predict the effect, if any, that future sales
of shares of common stock or notes, or the availability of shares of common
stock or notes for future sale, will have on the market price of our common
stock or notes. Sales of substantial amounts of common stock, including shares
issued upon the exercise of stock options or the conversion of the notes or our
outstanding debentures, or the perception that such sales could occur, may
adversely affect prevailing market prices for our common stock and notes.
THE NOTES MAY NOT BE RATED OR MAY RECEIVE A LOWER RATING THAN ANTICIPATED.
One or more rating agencies may rate the notes. If one or more rating
agencies assigns the notes a rating lower than expected by investors, the market
price of the notes and our common stock could be harmed.
OUR CHARTER DOCUMENTS AND DELAWARE LAW, OUR RIGHTS PLAN AND OUR INDENTURES MAY
IMPEDE OR DISCOURAGE A TAKEOVER, WHICH COULD LOWER OUR STOCK PRICE.
Our Charter Documents and Delaware Law
Pursuant to our charter, 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 our stockholders. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock.
Our classified board and other provisions of Delaware law and our
certificate of incorporation and bylaws, could also delay or make a merger,
tender offer or proxy contest
-24-
involving us more difficult.
Our Rights Plan
Our board of directors has adopted a shareholders rights plan. The
rights will become exercisable 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. If the rights become
exercisable, the holders of the rights (other than the person acquiring 15% or
more of our common stock) will be entitled to acquire in exchange for the
rights' exercise price, shares of our common stock or shares of any company in
which we are merged, with a value equal to twice the rights' exercise price.
Our Indentures
The indenture governing our outstanding debentures, as well as the
indenture for the notes, may require that we offer to repurchase such debentures
or the notes following the occurrence of certain types of change in control
transactions. These repurchase provisions could have the effect of discouraging
a merger or takeover of us, which may not be in the best interest of certain
stockholders and could have an adverse effect on the market value of our common
stock.
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WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Commission, in accordance with the Securities Exchange Act of 1934. You may read
and copy our reports, proxy statements and other information filed by us at the
public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information about the public reference rooms. Our
reports, proxy statements and other information filed with the Commission are
available to the public over the Internet at the Commission's World Wide Web
site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" into this
prospectus the information we filed with the Commission. This means that we can
disclose important information by referring you to those documents. The
information incorporated by reference is considered to be a part of this
prospectus. Information that we file later with the Commission will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made by us with the Commission
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until this offering
is complete:
- Our Annual Report on Form 10-K for the fiscal year ended December 31,
2001 as filed with the Commission on February 8, 2002; and
- The description of our common stock which is contained in our
Registration Statement on Form 8-A filed with the Commission on January
25, 2002 pursuant to Section 12 of the Exchange Act , the description of
our common stock which is contained in our Registration Statement on
Form 8-A filed with the Commission on August 21, 1992 pursuant to
Section 12 of the Exchange Act, the description of our preferred share
purchase rights on Form 8-A filed on October 22, 1998, the description
of our zero coupon convertible subordinated debentures on Form S-3 filed
on May 6, 1998, and any description of any of our securities which is
contained in any registration statement filed after the date hereof
under Section 12 of the Exchange Act, including any amendment or report
filed for the purpose of updating any such description.
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You may request a copy of these filings, at no cost, by contacting us at
the following address:
Investor Relations
Networks Associates, Inc.
3965 Freedom Circle
Santa Clara, California 95054
Telephone: (877) 346-3575
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USE OF PROCEEDS
We will not receive any proceeds from the sale by any selling
securityholder of the notes or the underlying common stock.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each period indicated is as
follows:
YEAR ENDED DECEMBER 31
------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
Ratio of earnings to fixed charges ..... 21.0x 8.5x -x(1) -x(1) -x(1)
These computations include us and our consolidated subsidiaries. In
calculating the ratio of earnings to fixed charges, "earnings" consist of net
income (loss) before provisions for income taxes plus fixed charges. "Fixed
charges" consist of:
- interest expense plus the portion of rental expense under operating
leases deemed by us to be representative of the interest factor, and
- amortization of debt issuance costs.
(1) During the fiscal years ended December 31, 2001, 2000 and 1999, there was
a deficiency of earnings to cover fixed charges of approximately $91.4
million, $97.8 million and $131.0 million, respectively.
DIVIDEND POLICY
We have not paid any cash dividends since our reorganization into a
corporate form in October 1992. We intend to retain future earnings for use in
our business and do not anticipate paying cash dividends in the foreseeable
future.
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DESCRIPTION OF NOTES
We issued the notes under an indenture dated as of August 17, 2001
between us and State Street Bank and Trust Company of California, N.A., as
trustee. The following summarizes some, but not all, of the provisions of the
notes and the indenture. A copy of the indenture, the resale registration rights
agreement and the form of certificate evidencing the notes have been filed as
exhibits to this registration statement.
References in this section to "Network Associates," "us," "we," and
"our" are solely to Networks Associates, Inc. and not to our subsidiaries.
GENERAL
We issued $345,000,000 in aggregate principal amount of the notes in a
private placement in August 2001. The notes are general unsecured obligations of
Network Associates and are junior in right of payment as described under
"Subordination of Notes." The Notes are convertible into our common stock as
described under "Conversion Rights." The Notes were issued only in denominations
of $1,000, or in multiples of $1,000. The Notes will mature on August 15, 2006,
unless earlier redeemed at our option by us or purchased by us at your option
upon a change of control.
The notes bear interest at the rate of 5.25% per year. We will pay
interest semiannually on February 15 and August 15 of each year beginning
February 15, 2002, subject to limited exceptions if the notes are converted,
redeemed or purchased prior to the interest payment date. The record dates for
the payment of interest are February 1 and August 1. We may, at our option, pay
interest on the notes by check mailed to the holders. However, a holder with an
aggregate principal amount in excess of $5,000,000 will be paid by wire transfer
in immediately available funds at their election. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
We will maintain an office in New York, New York where the notes may be
presented for registration, transfer, exchange or conversion. The office is
initially an office or agency of the trustee.
CONVERSION RIGHTS
You may convert any outstanding notes (or portions of outstanding notes)
into our common stock, at any time prior to maturity, unless previously redeemed
or purchased, initially at the conversion price of $18.07 per share (equal to a
conversion rate of approximately 55.3403 shares per $1,000 principal amount of
notes), subject to adjustment as described below. We will not issue fractional
shares of common stock upon conversion of notes. Instead, we will pay a cash
adjustment based upon the closing sale price of our common stock on the business
day immediately preceding the conversion date. You may convert notes only in
denominations of $1,000 and whole multiples of $1,000.
You may exercise conversion rights at any time prior to the close of
business on the final maturity date of the notes. However, if you are a holder
of notes that have been called for redemption, you must exercise your conversion
rights prior to the close of business on the second business day preceding the
redemption date, unless we default in payment of the redemption price. In
addition, if you have exercised your right to require us to repurchase your
notes because a change of control has occurred, you may convert your notes into
our common stock only if you withdraw your notice and convert your notes prior
to the close of business on the business day immediately preceding the change of
control repurchase date.
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Except as provided below, if you convert your notes into our common
stock on any day other than an interest payment date, you will not receive any
interest that has accrued on these notes. By delivering to the holder the number
of shares issuable upon conversion, determined by dividing the principal amount
of the notes being converted by the conversion price, together with a cash
payment, if any, in lieu of fractional shares, we will satisfy our obligation
with respect to the notes. That is, accrued but unpaid interest will be deemed
to be paid in full rather than canceled, extinguished or forfeited. If you
convert after a record date for an interest payment but prior to the
corresponding interest payment date, you will receive interest accrued and paid
on such notes on the interest payment date, notwithstanding the conversion of
such notes prior to such interest payment date, because you will have been the
holder of record on the corresponding record date. However, at the time of
surrender of such notes for conversion, you must pay us an amount equal to the
interest that has accrued and will be paid on the notes being converted on the
interest payment date. The preceding sentence does not apply, however, to a
holder that converts, after a record date for an interest payment date but prior
to the corresponding interest payment date, notes that we call for redemption
prior to such conversion on a redemption date that is on or prior to third
business day after such interest payment date.
You will not be required to pay any taxes or duties relating to the
issuance or delivery of our common stock if you exercise your conversion rights,
but you will be required to pay any tax or duty which may be payable relating to
any transfer involved in the issuance or delivery of the common stock in a name
other than your name. Certificates representing shares of common stock will be
issued or delivered only after all applicable taxes and duties, if any, payable
by you have been paid.
To convert interests in a global note, you must deliver to DTC the
appropriate instructions form for conversion pursuant to DTC's conversion
program. To convert a definitive note, you must:
- complete the conversion notice on the back of the note, or a facsimile
of the conversion notice;
- deliver the completed conversion notice and the notes to be converted to
the specified office of the conversion agent;
- pay all funds required, if any, relating to interest on the notes to be
converted to which you are not entitled, as described in the second
preceding paragraph; and
- pay all taxes or duties, if any, as described in the preceding
paragraph.
The conversion date will be the date on which all of the foregoing
requirements have been satisfied. The notes will be deemed to have been
converted immediately prior to the close of business on the conversion date. A
certificate for the number of shares of common stock into which the notes are
converted, including any cash in lieu of any fractional shares, will be
delivered as soon as practicable on or after the conversion date.
We will adjust the initial conversion price in certain circumstances
subject to certain exceptions, including:
- issuances of our common stock as a dividend or distribution on all of
our common stock;
- certain subdivisions and combinations of our common stock;
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- issuances to all holders of our common stock of certain rights or
warrants to purchase our common stock at less than the current market
price of our common stock;
- distributions to all holders of our common stock of shares of our
capital stock, evidences of our indebtedness or assets, including
securities, but excluding:
- our common stock;
- the rights and warrants referred to in the third bullet point above;
- any dividends and distributions in connection with a
reclassification, change, consolidation, merger, combination, sale
or conveyance resulting in a change in the conversion consideration
pursuant to the second succeeding paragraph; or
- any dividends or distributions paid exclusively in cash;
- but including securities of our subsidiaries to the extent we do not
elect to reserve such securities on a pro rata basis for the benefit
of holders of notes as described below;
- distributions consisting exclusively of cash to all holders of our
common stock to the extent that such distributions, combined together
with:
- all other such all-cash distributions made within the preceding 12
months for which no adjustment has been made, plus
- any cash and the fair market value of other consideration paid for
any tender offers by us or any of our subsidiaries for our common
stock expiring within the preceding 12 months for which no
adjustment has been made,
- exceeds 10% of our market capitalization on the record date for such
distribution; and
- purchases of our common stock pursuant to a tender offer made by us or
any of our subsidiaries to the extent that the same involves an
aggregate consideration that, together with:
- any cash and the fair market value of any other consideration paid
in any other tender offer by us or any of our future subsidiaries
for our common stock expiring within the 12 months preceding such
tender offer for which no adjustment has been made, plus
- the aggregate amount of any all-cash distributions referred to in
the preceding bullet point to all holders of our common stock within
12 months preceding the expiration of a tender offer for which no
adjustments have been made,
- exceeds 10% of our market capitalization on the expiration of such
tender offer.
We will not make an adjustment in the conversion price unless such
adjustment would require a change of at least 1% in the conversion price then in
effect at such time. We will carry forward and take into account in any
subsequent adjustment any adjustment that would otherwise be required to be
made. Except as stated above, we will not adjust the conversion price for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing.
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If we:
- reclassify or change any of our common stock, other than changes
resulting from a subdivision or combination; or
- consolidate or combine with or merge into any person or sell or
convey to another person all or substantially all of our property
and assets.
and the holders of our common stock receive capital stock, other securities or
other property or assets, including cash or any combination thereof, with
respect to or in exchange for their common stock, the holders of the notes may
convert the notes into the consideration they would have received if they had
converted their notes immediately prior to such reclassification, change,
consolidation, combination, merger, sale or conveyance.
If we distribute shares of common stock of a subsidiary of ours to all
holders of our common stock, we may elect to reserve the pro rata portion of
such shares for the benefit of the holders of notes in lieu of adjusting the
conversion price pursuant to the fourth bullet point of the description of
conversion price adjustments set forth above.
Under the provisions of our rights plan, upon conversion of the notes
into common stock, to the extent that the rights plan is still in effect upon
such conversion, the holders will receive, in addition to the common stock, the
rights described in the rights plan, whether or not the rights have separated
from the common stock at the time of conversion, subject to certain limited
exceptions, and in such case there will be no adjustment to the conversion
price.
If a taxable distribution to holders of our common stock or other
transaction occurs which results in any adjustment of the conversion price, you
may, in certain circumstances, be deemed to have received a distribution subject
to U.S. income tax as a dividend. In certain other circumstances, the absence of
an adjustment may result in a taxable dividend to the holders of our common
stock. See "United States Federal Income Tax Consequences" below.
We may from time to time, to the extent permitted by law, reduce the
conversion price of the notes by any amount for any period of at least 20 days.
In that case, we will give at least 15 days' notice of such decrease. We may
make such reductions in the conversion price, in addition to those set forth
above, as our board of directors deems advisable to avoid or diminish any income
tax to holders of our common stock resulting from any dividend or distribution
of stock or rights to acquire stock or from any event treated as such for income
tax purposes.
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OPTIONAL REDEMPTION BY NETWORK ASSOCIATES
Optional Redemption
We may not redeem the notes in whole or in part at any time prior to
August 20, 2004. At any time on or after August 20, 2004, we may redeem some or
all of the notes on at least 20 but not more than 60 days' notice, at the
following redemption prices, expressed in percentages of the principal amount:
DURING THE TWELVE MONTHS COMMENCING REDEMPTION PRICE
----------------------------------- ----------------
August 20, 2004......................................................................... 101.3125%
August 15, 2005......................................................................... 100.0000%
We will pay interest accrued and unpaid to, but excluding, the
redemption date on notes called for redemption. If the redemption date is an
interest payment date, we will pay the interest to the holder of record on the
corresponding record date, which may or may not be the same person to whom we
will pay the redemption price.
Partial Redemption
If we do not redeem all of the notes, the trustee will select the notes
to be redeemed in principal amounts of $1,000 or whole multiples of $1,000 by
lot or on a pro rata basis. If any notes are to be redeemed in part only, we
will issue a new note or notes in principal amount equal to the unredeemed
principal portion thereof. If a portion of your notes is selected for partial
redemption and you convert a portion of your notes, the converted portion will
be deemed to be taken from the portion selected for redemption.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a change of control occurs, you will have the right to require us to
repurchase all of your notes, or any portion of those notes that is equal to
$1,000 or a whole multiple of $1,000 at a repurchase price equal to 100% of the
principal amount of the notes to be repurchased, plus interest accrued and
unpaid to, but excluding, the repurchase date. Notwithstanding the foregoing,
you will not have a right to require us to repurchase the notes unless prior to
that repurchase we have made any applicable change of control offers required by
our then outstanding senior indebtedness and have purchased all then outstanding
senior indebtedness validly tendered for payment in connection with such change
of control offers.
At our option, instead of paying the repurchase price in cash, we may
pay the repurchase price in whole or in part our common stock (or in the case of
a merger in which we are not the surviving corporation, common stock, ordinary
shares or American Depository, shares of the surviving corporation or its direct
or indirect parent corporation) or a combination of the applicable securities
and cash. The number of shares of the applicable common stock, securities or a
combination of the applicable common stock or securities will be valued at 95%
of the average closing prices of the applicable common stock or securities, for
the five trading days immediately preceding and including the third trading day
prior to the repurchase date. However, we may not pay the purchase price in the
applicable common stock or securities or a combination of the applicable common
stock or securities and cash, unless we satisfy certain conditions prior to the
repurchase date as provided in the indenture, including:
- registration of the shares of the applicable common stock or securities
to be issued upon repurchase under the Securities Act and the Exchange
Act, if required;
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- qualification of the shares of the applicable common stock or securities
to be issued upon repurchase under applicable state securities laws, if
necessary, or the availability of an exemption therefrom; and
- listing of the applicable common stock or securities on a United States
national securities exchange or quotation thereof in an inter-dealer
quotation system of any registered United States national securities
association.
Within 30 days after the occurrence of a change of control, we are
required to give you notice of the occurrence of the change of control and of
your resulting repurchase right. Unless otherwise required by law, the
repurchase date is 30 days after the date we give notice of a change of control.
To exercise the repurchase right, you must deliver prior to the close of
business on the business day immediately preceding the repurchase date, written
notice to the trustee of your exercise of your repurchase right, together with
the notes with respect to which your right is being exercised. You may withdraw
this notice by delivering to the paying agent a notice of withdrawal prior to
the close of business on the business day immediately preceding the repurchase
date.
A "change of control" will be deemed to have occurred when any of the
following has occurred:
(i) the acquisition by any person of beneficial ownership,
directly or indirectly, through a purchase, merger or other
acquisition transaction or series of purchase, merger or other
acquisition transactions of shares of our capital stock
entitling that person to exercise 50% or more of the total
voting power of all shares of our capital stock entitled to
vote generally in elections of directors, other than any
acquisition by us, any of our subsidiaries or any of our
employee benefit plans; or
(ii) our consolidation or merger with or into any other person, any
merger of another person into us, or any conveyance, transfer,
sale, lease or other disposition of all or substantially all
of our properties and assets to another person, other than one
or more of our wholly-owned subsidiaries, other than the
occurrence of any of the following events:
(a) any transaction a result of which holders of 50% or
more of the total voting power of all shares of our
capital stock entitled to vote generally in elections
of directors immediately prior to the transaction
have, directly or indirectly, at least 50% of the
total voting power of all shares of capital stock of
the surviving entity entitled to vote generally in
elections of directors of the surviving entity
immediately after the transaction; and
(b) any merger solely for the purpose of changing our
jurisdiction of incorporation and resulting in a
reclassification, conversion or exchange of
outstanding shares of common stock solely into shares
of common stock of the surviving entity.
However, a change of control will be deemed not to have occurred if:
(a) the closing sale price per share of our common stock
for any five trading days within the period of 10
consecutive trading days ending immediately after the
later of the change of control or the public
announcement of the change of control, in the case of
a change of control under the first clause above, or
the period of 10 consecutive trading days ending
immediately before the change of control, in the case
of a
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change of control under the second clause above,
equals or exceeds 110% of the conversion price of the
notes (as adjusted); or
(b) at least 90% of the consideration in the transaction
or transactions (other than payments for fractional
shares and cash payments pursuant to dissenters'
appraisal rights) otherwise constituting a change of
control consists of shares of common stock traded or
to be traded immediately following such change of
control on a national securities exchange or the
Nasdaq National Market and, as a result of such
transaction or transactions, the notes become
convertible solely into such common stock (and any
rights attached thereto).
The beneficial owner shall be determined in accordance with Rule 13d-3 of the
Exchange Act. The term "person" includes any syndicate or group which would be
deemed to be a "person" under Section 13 (d)(3) of the Exchange Act.
The term "all or substantially all" as used in the definition of change
in control will likely be interpreted under applicable state law and will be
dependent upon particular facts and circumstances. There may be a degree of
uncertainty in interpreting this phrase. As a result, we cannot assure you how a
court would interpret this phrase under applicable law if you elect to exercise
your rights following the occurrence of a transaction which you believe
constitutes a transfer of "all or substantially all" of our assets.
Rule 13e-4 under the Exchange Act, requires the dissemination of certain
information to security holders if an issuer tender offer occurs and may apply
if the repurchase option becomes available to holders of the notes. We will
comply with this rule to the extent applicable at that time.
We may, to the extent permitted by applicable law and any agreement or
indenture governing our then outstanding indebtedness, at any time purchase the
notes in the open market or by tender at any price or by private agreement. Any
note so purchased by us may, to the extent permitted by applicable law, be
reissued or resold or may be surrendered to the trustee for cancellation. Any
notes surrendered to the trustee may not be reissued or resold and will be
canceled promptly.
The change of control feature of the notes may in certain circumstances
make more difficult or discourage a takeover of Network Associates and, thus,
the removal of incumbent management. The repurchase right is not the result of
our knowledge of any effort to accumulate any common stock or to obtain control
of Network Associates by means of a merger, tender offer, solicitation or
otherwise, or part of a plan by us to adopt a series of anti-takeover
provisions. Instead, this right is the result of negotiations between us and the
initial purchaser.
The foregoing provisions would not necessarily protect holders of the
notes if highly leveraged or other transactions involving us occur that may
adversely affect holders.
Our ability to repurchase notes upon the occurrence of a change in
control is subject to important limitations. The occurrence of a change of
control could cause an event of default under, or be prohibited or limited by,
the terms of senior indebtedness that we may incur in the future. As a result,
any repurchase of the notes would, absent a waiver, be prohibited under the
subordination provisions of the indenture until the senior indebtedness is paid
in full. Further, we cannot assure you that we would have the financial
resources, or would be able to arrange financing, to pay the repurchase price
for all the notes that might be delivered by holders of notes seeking to
exercise the repurchase right. Any failure by us to repurchase the notes when
required following a change of control would result in an event of default under
the indenture, whether or not such repurchase is permitted by the subordination
provisions of the indenture. Any such default may, in turn,
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cause a default under other indebtedness, including senior indebtedness, that we
may incur in the future. See "Subordination of Notes" below.
SUBORDINATION OF NOTES
The notes are subordinated to the prior payment in full in cash or other
payment satisfactory to the holders of senior indebtedness of all of our
existing and future senior indebtedness. The subordination provisions of the
indenture will not prevent the occurrence of any event of default under the
indenture.
In the event we distribute our assets upon our dissolution, winding up,
bankruptcy, insolvency, liquidation, reorganization, or similar proceeding,
holders of our senior indebtedness will be entitled to receive payment in full,
in cash or other payment satisfactory to the holders of senior indebtedness,
before we may make any payments of principal of, or premium, if any, and
interest, including any additional interest, on the notes. Until all senior
indebtedness is paid in full in cash or other payment satisfactory to the
holders of senior indebtedness, any payment on the notes to which the holders of
notes would be entitled shall be made to the holders of senior indebtedness. In
the event of our dissolution, winding up, bankruptcy, insolvency, liquidation,
reorganization or similar proceeding, holders of senior indebtedness may receive
more, ratably, and the holders of notes may receive less, ratably, than our
other creditors.
If the notes are declared due and payable prior to maturity because of
an event of default, we are obligated to notify promptly holders of senior
indebtedness. We may not make any payments on the notes until 120 days have
passed after the occurrence of this acceleration of the notes. We may then make
payments on the notes if we are permitted to make such payments under the
indenture at that time.
We may not make any payment on the notes if:
- a payment default on senior indebtedness occurs and is continuing,
without regard to any applicable period of grace, or
- any other nonpayment default occurs and is continuing on designated
senior indebtedness that permits holders of the designated senior
indebtedness to accelerate its maturity and the trustee receives a
payment blockage notice from us or from a representative of the
designated senior indebtedness.
We may resume payments on the notes:
- in case of a payment default, the earlier of the date on which the
payment default is cured, waived or ceases to exist, and
- in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured, waived, or ceases to exist, or 179 days
after the date on which the applicable payment blockage notice is
received by the trustee if the terms of the indenture otherwise permit
payment at that time.
No new period of payment blockage for a non-payment default may be commenced
pursuant to a payment blockage notice unless and until 365 days have elapsed
since the initial effectiveness of the immediately prior payment blockage
notice. No nonpayment default that existed or was continuing on the date of
delivery of any payment blockage notice to the trustee shall be, or shall be
made, the basis for a subsequent payment blockage notice unless such default
shall not have been cured or waived for a period of not less than 90 days.
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"senior indebtedness" means the principal of, premium, if any, interest,
including any interest accrued after bankruptcy, original issue discount, rent,
end of term payments, fees, costs, expenses, liquidated damages, indemnities,
repurchase and other put obligations and other amounts on indebtedness, whether
outstanding on the date of the indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by us, including all deferrals,
renewals, extensions, refundings, amendments, modifications or supplements to
the above.
However, senior indebtedness does not include:
(1) any indebtedness of Network Associates that is not secured, but
this requirement shall only apply so long as there is at least
$60 million aggregate principal amount at maturity of our
debentures outstanding;
(2) the notes;
(3) the debentures;
(4) indebtedness to any subsidiary of Network Associates, a majority
of the voting stock of which is owned, directly or indirectly, by
Network Associates:
(5) accounts payable or other indebtedness to trade creditors created
or assumed by us in the ordinary course of business; and
(6) any particular indebtedness in which the instrument creating or
evidencing the same or the assumption or guarantee thereof
expressly provides that the indebtedness shall not be senior in
right of payment to, or is on the same basis with, or is
subordinated or junior to, the notes.
"indebtedness" means:
- all of our obligations and other liabilities for borrowed money,
including overdrafts, foreign exchange contracts, currency exchange
agreements, interest rate protection agreements, and any loans or
advances from banks;
- all of our obligations and other liabilities evidenced by bonds,
debentures, notes or similar instruments, whether or not the
recourse of the lender is to the whole of our assets or to only a
portion of our assets;
- all of our reimbursement obligations and other liabilities with
respect to letters of credit, bank guarantees or bankers'
acceptances;
- all of our obligations and liabilities in respect of leases
required, in conformity with generally accepted accounting
principles, to be accounted for as capitalized lease obligations on
our balance sheet;
- all of our obligations and liabilities in respect of leases
required, in conformity with generally accepted accounting
principles, to be accounted for as operating lease, provided either
(A) such operating lease requires, at the end of the term thereof,
that we make any payment other than accrued periodic rent in the
event that we do not acquire the leased real property and related
fixtures subject to such lease, or (B) we have an option to acquire
the leased real property and related
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fixtures, whether such option is exercisable at any time or under
specified circumstances;
- all of our obligations with respect to an interest rate swap, cap or
collar agreement or other similar instrument or agreement;
- all of our direct or indirect guaranties or similar agreements in
respect of, and obligations or liabilities to purchase or otherwise
acquire or otherwise assure a creditor against loss in respect of
indebtedness, obligations or liabilities of another person of the
kind described in the above bullet points;
- any indebtedness or other obligations described in the above bullet
points secured by any mortgage, pledge, lien or other encumbrance
existing on property which is owned or held by us
- regardless of whether the indebtedness or other obligation secured
thereby shall have been assumed by us; and
- any and all deferrals, renewals, extensions, refundings, amendments,
modifications or supplements, to any indebtedness, obligation or
liability of the kind described in the above bullet points.
"designated senior indebtedness" means any particular senior
indebtedness that expressly provides that such senior indebtedness shall be
"designated senior indebtedness" for purposes of the indenture, however such
agreement may place limitations and conditions on the right of such senior
indebtedness to exercise the rights of designated senior indebtedness.
The notes are obligations exclusively of Network Associates. Since a
significant portion of our operations are conducted through our subsidiaries,
our cash flow and our consequent ability to service debt, including the notes,
are dependent upon the earnings of our subsidiaries and the distribution of
those earnings to us, or upon loans or other payments of funds by those
subsidiaries to, us. These subsidiaries are separate and distinct legal entities
and have no obligation to make any payments on the notes or to make any funds
available for payments on the notes, whether by dividends, loans or otherwise.
In addition, the ability of our subsidiaries to make dividend payments or loans
or advances to us may be subject to statutory or contractual restrictions and
may be contingent on the earnings of the subsidiaries. Although Network
Associates currently has no intention to have any of its subsidiaries enter into
contractual arrangements that prohibit the making of loans or payment of
dividends to it, these subsidiaries may in the future enter into contractual
arrangements that contain such provisions.
Our right to receive assets of any of our subsidiaries upon their
liquidation or reorganization, and your consequent right to participate in those
assets, will be effectively subordinated to any claims creditors may have
against our subsidiaries, including trade creditors, unless we are recognized as
a creditor to the subsidiary.
As of December 31, 2001, we had no indebtedness outstanding that would
have constituted senior indebtedness, and as December 31, 2001 our subsidiaries
had approximately $142.5 million of indebtedness and other liabilities
outstanding, excluding intercompany liabilities and liabilities of a type not
required to be reflected on a balance sheet in accordance with generally
accepted accounting principles, to which the notes would have been effectively
subordinated. In addition, the notes will rank on the same basis as our $498.5
million principal amount at maturity of debentures outstanding as of December
31, 2001 so long as there is at least $60 million aggregate principal amount at
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maturity of the debentures remaining outstanding. Neither we nor our
subsidiaries are limited from incurring additional indebtedness, including
senior indebtedness, under the indenture.
If either the trustee or any holder of the notes receives any payment or
distribution of our assets in contravention of any of the subordination
provisions of the indenture on the notes before all senior indebtedness is paid
in full in cash or other payment satisfactory to the holders of senior
indebtedness, then such payment or distribution will be held by the recipient in
trust for the benefit of holders of senior indebtedness or their representatives
to make payment in full in cash or other payment satisfactory to the holders of
senior indebtedness of all senior indebtedness.
We will be obligated to pay reasonable compensation to the trustee and
to indemnify the trustee against any losses, liabilities or expenses incurred by
it in connection with its duties relating to the notes. The trustee's claims for
such payments will be senior to those of holders of the notes in respect of all
funds collected or held by the trustee.
EVENTS OF DEFAULT
Each of the following constitutes an event of default under the
indenture:
(1) our failure to pay when due the principal of or premium, if any,
on any of the notes at maturity, upon redemption or exercise of a
repurchase right or otherwise, whether or not such payment is
prohibited by the subordination provisions of the indenture;
(2) our failure to pay an installment of interest on any of the notes
for 30 days after the date when due, whether or not such payment
is prohibited by the subordination provisions of the indenture;
(3) our failure to perform or observe any other term, covenant or
agreement contained in the notes or the indenture for a period of
60 days after written notice of such failure, requiring us to
remedy the same, shall have been given to us by the trustee or to
us and the trustee by the holders of at least 25% in aggregate
principal amount of the notes then outstanding;
(4) (A) we or one of our significant subsidiaries fails to make any
payment at maturity, including any grace period, in respect of
any obligation for borrowed money evidenced by a bond, debenture,
note or similar instrument (an "instrument") in an amount in
excess of $25 million and such failure continues or (B) we or one
of our significant subsidiaries defaults with respect to any
instrument, which default results in the acceleration of
indebtedness evidenced by such instrument in an amount in excess
of $25 million without such indebtedness having been discharged
or such acceleration having been cured, waived, rescinded or
annulled, in case of (A) and (B) above, for a period of 60 days
after written notice to us by the trustee or to us and the
trustee by the holders of not less than 25% in principal amount
of the notes, provided that if any such failure, default or
acceleration referred to above shall cease or be cured, waived,
rescinded or annulled, then the event of default shall be deemed
to be likewise cured and any acceleration with respect thereto
rescinded; or
(5) certain events of bankruptcy, insolvency or reorganization with
respect to us or one of our significant subsidiaries.
The indenture provides that the trustee shall, within 90 days of the
occurrence of a default, give to the registered holders of the notes notice of
all uncured defaults known to it, but the trustee shall be protected
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in withholding such notice if it, in good faith, determines that the withholding
of such notice is in the best interest of such registered holders, except in the
case of a default in the payment of the principal of, or premium, if any, or
interest on, any of the notes when due or in the payment of any redemption or
repurchase obligation.
If an event of default specified in clause (5) above occurs and is
continuing with respect to us, then automatically the principal of and premium,
if any, of all the outstanding notes and the interest thereon shall become
immediately due and payable. If an event of default shall occur and be
continuing, other than with respect to clause (5) above (the default not having
been cured or waived as provided under "Modifications, Amendments and Meetings"
below), the trustee or the holders of at least 25% in aggregate principal amount
of the notes then outstanding may declare the notes due and payable at their
principal amount and premium, if any, together with accrued interest, and
thereupon the trustee may, at its discretion, proceed to protect and enforce the
rights of the holders of notes by appropriate judicial proceedings. Such
declaration may be rescinded or annulled either with the written consent of the
holders of a majority in aggregate principal amount of the notes then
outstanding or a majority in aggregate principal amount of the notes represented
at a meeting at which a quorum (as specified under "Modifications, Amendments
and Meetings" below) is present, in each case upon the conditions provided in
the indenture.
The indenture contains a provision entitling the trustee, subject to the
duty of the trustee during default to act with the required standard of care, to
be indemnified by the holders of notes before proceeding to exercise any right
or power under the indenture at the request of such holders. The indenture
provides that the holders of a majority in aggregate principal amount of the
notes then outstanding through their written consent, or the holders of a
majority in aggregate principal amount of the notes then outstanding represented
at a meeting at which a quorum is present by a written resolution, may direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or exercising any trust or power conferred upon the trustee.
We are required to furnish annually to the trustee a statement as to the
fulfillment of our obligations under the indenture.
CONSOLIDATION, MERGER OR ASSUMPTION
We may, without the consent of the holders of notes, consolidate with,
merge into or transfer all or substantially all of our assets to any other
corporation, limited liability company, partnership, trust or other business
entity organized under the laws of the United States or any of its political
subdivisions provided that:
- the surviving corporation, limited liability company, partnership, trust
or other business entity assumes all our obligations under the indenture
and the notes;
- at the time of such transaction, no event of default, and no event
which, after notice or lapse of time, would become an event of default,
shall have happened and be continuing; and
- certain other conditions are met.
We will be discharged of our obligations under the notes upon the
surviving entity assuming our obligations under the indenture and the notes and
meeting the other requirements specified in the indenture.
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MODIFICATIONS, AMENDMENTS AND MEETINGS
Changes Requiring Approval Of Each Affected Holder
The indenture (including the terms and conditions of the notes) cannot
be modified or amended without the written consent or the affirmative vote of
the holder of each note affected by such change to:
- change the maturity of the principal of or any installment of interest
on any note;
- reduce the principal amount of, or any premium or interest on any note;
- change the currency of payment of such note or interest thereon;
- impair the right to institute suit for the enforcement of any payment on
or with respect to any note;
- modify our obligations to maintain an office or agency in New York City;
- except as otherwise permitted or contemplated by the indenture,
adversely affect the repurchase option of holders upon a change of
control or the conversion rights of holders of the notes;
- modify the subordination provisions of the indenture in a manner adverse
to the holders of notes;
- modify the redemption provisions of the indenture in a manner adverse to
the holders of notes;
- reduce the percentage in aggregate principal amount of notes outstanding
necessary to modify or amend the indenture or to waive any past default;
or
- reduce the percentage in aggregate principal amount of notes outstanding
required for the adoption of a resolution or the quorum required at any
meeting of holders of notes at which a resolution is adopted.
Changes Requiring Majority Approval
The indenture, including the terms and conditions of the notes, may be
modified or amended either:
- With the written consent of the holders of at least a majority in
aggregate principal amount of the notes at the time outstanding; or
- by the adoption of a resolution at a meeting of a quorum of holders by
at least a majority in aggregate principal amount of the notes
represented at such meeting.
Changes Requiring No Approval
The indenture, including the terms and conditions of the notes, may be
modified or amended by us and the trustee, without the consent of the holder of
any note, for the purposes of, among other things:
- adding to our covenants for the benefit of the holders of notes;
- adding collateral to secure the obligations under the notes;
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- surrendering any right or power conferred upon us;
- providing for conversion rights of holders of notes if any
reclassification or change of our common stock or any consolidation,
merger or sale of all or substantially all of our assets occurs;
- providing for the assumption of our obligations to the holders of notes
in the case of a merger, consolidation, conveyance, transfer or lease,
adding guarantors or obligors on the notes in addition to Network
Associates;
- reducing the conversion price, provided that the reduction will not
adversely affect the interests of the holders of notes;
- complying with the requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act of 1939, as amended;
- curing any ambiguity or correcting or supplementing any defective
provision contained in the indenture; provided that such modification or
amendment does not, in the good faith opinion of Network Associates and
the trustee, adversely affect the interests of the holders of notes in
any material respect; or
- adding or modifying any other provisions with respect to matters or
questions arising under the indenture which we and the trustee may deem
necessary or desirable and which will not adversely affect the interests
of the holders of notes in any material respect.
Meetings
The indenture contains provisions for convening meetings of the holders
of notes to consider matters affecting their interests.
Quorum
The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the notes at
the time outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of such aggregate principal amount.
SATISFACTION AND DISCHARGE
We may satisfy and discharge our obligations under the indenture while
notes remain outstanding, subject to certain conditions, if:
- all outstanding notes will become due and payable at their scheduled
maturity within one year; or
- all outstanding notes are scheduled for redemption within one year,
and, in either case, we have deposited with the trustee an amount sufficient to
pay and discharge all outstanding notes on the date of their scheduled maturity
or the scheduled date of redemption.
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REGISTRATION RIGHTS
We have filed a registration statement, of which this prospectus is a
part, pursuant to a resale registration rights agreement we entered into with
the initial purchaser in the initial private placement of the notes. Pursuant to
the agreement, we will use our reasonable efforts to have this shelf
registration statement declared effective by February 13, 2002 and to keep it
effective until the earliest of:
- two years after the last date of original issuance of any of the notes;
- the date when the holders of the notes and the common stock issuable
upon conversion of the notes are able to sell all such securities
immediately without restriction pursuant to the volume limitation
provisions of Rule 144 under the Securities Act; and
- the date when all of the notes and the common stock issuable upon
conversion of the notes of those holders that complete and deliver in a
timely manner the selling securityholder election and questionnaire
described below are registered under the shelf registration statement
and disposed of in accordance with the shelf registration statement.
If:
- the shelf registration statement has not been declared effective prior
to or on February 13, 2002; or
- at any time after February 13, 2002, the registration statement ceases
to be effective or fails to be usable and (1) we do not cure the
registration statement within five business days by a post-effective
amendment or a report filed pursuant to the Exchange Act or (2) if
applicable, we do not terminate the suspension period related to
disclosure of material non-public information by the 45th or 90th day,
as the case may be (or any applicable extension thereof) (each, a
"registration default"), then
additional interest will accrue on the notes that are registrable securities
from and including the day following the registration default to but excluding
the day on which the registration default has been cured. Additional interest
will be paid semiannually in arrears, with the first semiannual payment due on
each February 15 and August 15, and will accrue at a rate per year equal to:
- 0.25% of the principal amount of a note to and including the 90th day
following such registration default; and
- 0.50% of the principal amount of a note from and after the 91st day
following such registration default.
In no event will additional interest accrue at a rate per year exceeding
0.50%. If a holder has converted some or all of its notes that are registrable
securities into common stock, the holder will be entitled to receive equivalent
amounts based on the principal amount of the notes converted to the extent such
shares are registrable securities.
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GOVERNING LAW
The indenture and the notes will be governed by, and construed in
accordance with, the law of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
State Street Bank and Trust Company of California, N.A., as trustee
under the indenture, has been appointed by us as paying agent, conversion agent,
registrar and custodian with regard to the notes. Equiserve is the transfer
agent and registrar for our common stock. The trustee or its affiliates may from
time to time in the future provide banking and other services to us in the
ordinary course of their business.
GLOBAL NOTES; BOOK-ENTRY FORM
The notes are represented by one or more global notes deposited with and
registered in the name of DTC or its nominee. Thus, we will not issue
certificated securities to you for the notes, except in the limited
circumstances described below. Each global note will be issued to DTC, which
will keep a computerized record of its participants whose clients have purchased
the notes. Each participant will then keep a record of its clients. Unless it is
exchanged in whole or in part for a certificated note, a global note may not be
transferred. DTC, its nominees and their successors may, however, transfer a
global note as a whole to one another, and these transfers are required to be
recorded on our records or a register to be maintained by the trustee.
Beneficial interests in a global note will be shown on, and transfers of
beneficial interests in the global note will be made only through, records
maintained by DTC and its participants. DTC has provided us with the following
information: DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities that its direct
participants deposit with DTC. DTC also records the settlements among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for direct participants'
accounts. This eliminates the need to exchange certificated securities. Direct
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
direct participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
When you purchase notes through the DTC system, the purchases must be
made by or through a direct participant, which will receive credit for the notes
on DTC's records. When you actually purchase the notes, you will become their
beneficial owner. Your ownership interest will be recorded only on the direct or
indirect participants' records. DTC will have no knowledge of your individual
ownership of the notes. DTC's records will show only the identity of the direct
participants and the amount of the notes held by or through them. You will not
receive a written confirmation of your purchase or sale or any periodic account
statement directly from DTC. You should instead receive these from your direct
or indirect participant. As a
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result, the direct or indirect participants are responsible for keeping accurate
account of the holdings of their customers. The trustee will wire payments on
the notes to DTC's nominee. We and the trustee will treat DTC's nominee as the
owner of each global note for all purposes. Accordingly, we, the trustee and any
paying agent will have no direct responsibility or liability to pay amounts due
on a global note to you or any other beneficial owners in that global note. Any
redemption notices will be sent by us directly to DTC, which will, in turn,
inform the direct participants (or the indirect participants), which will then
contact you as a beneficial holder.
It is DTC's current practice, upon receipt of any payment of
distributions or liquidation amounts, to proportionately credit direct
participants' accounts on the payment date based on their holdings. In addition,
it is DTC's current practice to pass through any consenting or voting rights to
such participants by using an omnibus proxy. Those participants will, in turn,
make payments to and solicit votes from you, the ultimate owner of notes, based
on their customary practices. Payments to you will be the responsibility of the
participants and not of DTC, the trustee or our company.
Notes represented by one or more global notes will be exchangeable for
certificated securities with the same terms in authorized denominations only if:
- DTC is unwilling or unable to continue as depositary or ceases to be a
clearing agency registered under applicable law, and a successor is not
appointed by us within 90 days; or
- we decide to discontinue the book-entry system.
If the global note is exchanged for certificated securities, the trustee
will keep the registration books for the notes at its corporate office and
follow customary practices and procedures regarding those certificated
securities.
RESTRICTIONS ON TRANSFER; LEGENDS
The notes are subject to certain restrictions on transfer set forth on
the notes and in the indenture, and certificates evidencing the notes bear a
legend regarding such transfer restrictions.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This section summarizes the material U.S. federal income tax
considerations relating to the purchase, ownership, and disposition of the notes
and of common stock into which the notes may be converted. This summary does not
provide a complete analysis of all potential tax considerations. The information
provided below is based on existing authorities. These authorities may change,
or the Internal Revenue Service, or "IRS," might interpret the existing
authorities differently. In either case, the tax consequences of purchasing,
owning or disposing of notes or common stock could differ from those described
below. The summary generally applies only to "U.S. holders" that purchase notes
in the initial offering at their issue price and hold the notes or common stock
as "capital assets" (generally, for investment). For this purpose, U.S. holders
include citizens or residents of the United States and corporations organized
under the laws of the United States or any state. Trusts are U.S. holders if
they are subject to the primary supervision of a U.S. court and the control of
one of more U.S. persons. Special rules apply to nonresident alien individuals
and foreign corporations or trusts or "non-U.S. holders." This summary describes
some, but not all, of these special rules. For U.S. federal income tax purposes,
income earned through a foreign or domestic partnership or similar entity is
attributed to its owners. Consequently, the tax treatment of income earned
through a partnership depends on the status of the partner. The summary
generally does not address tax considerations that may be relevant to particular
investors because of their specific circumstances, or because they are subject
to special rules. Finally, the summary does not describe the effect of the
federal estate and gift tax laws on U.S. holders or the effects of any
applicable foreign, state, or local laws.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FEDERAL ESTATE OR GIFT TAX LAWS,
FOREIGN, STATE, OR LOCAL LAWS, AND TAX TREATIES.
U.S. HOLDERS
Taxation of Interest
U.S. holders will be required to recognize as ordinary income any
interest paid or accrued on the notes, in accordance with their regular method
of accounting. In general, if the terms of a debt instrument entitle a holder to
receive payments other than fixed periodic interest that exceed the issue price
of the instrument, the holder may be required to recognize additional interest
as "original issue discount" over the term of the instrument. We believe that
the notes were not issued with original issue discount. In certain
circumstances, investors in our notes could receive payments in excess of
principal or stated interest. First, we may be required to make additional
payments to holders of the notes as liquidated damages if we do not file or
cause to be declared effective a registration statement, as described under
"Description of the Notes--Registration Rights." Second, if, upon a change of
control, a holder requires us to repurchase some or all of the holder's notes
and we elect to pay the repurchase price in shares of our common stock, the
value of the stock could exceed the principal amount of the notes and accrued
and unpaid interest. The original issue discount rules allow contingent payments
such as these to be disregarded in computing a holder's interest income if the
contingency is "remote." We believe that the possibility is remote that a change
of control would occur or that we would be required to pay additional interest
because of a failure to provide registration rights. Our determination in this
regard is binding on U.S. holders unless they disclose their contrary position.
If, contrary to expectations, we pay additional interest, U.S. holders would be
required to recognize additional interest income.
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Sale, Exchange or Redemption of the Notes
A U.S. holder will generally recognize capital gain or loss if the
holder disposes of a note in a sale, redemption or exchange other than a
conversion of the note into common stock. The holder's gain or loss will equal
the difference between the proceeds received by the holder and the holder's
adjusted tax basis in the note. The proceeds received by the holder will include
the amount of any cash and the fair market value of any other property received
for the note. The holder's tax basis in the note will generally equal the amount
the holder paid for the note. The portion of any proceeds that is attributable
to accrued interest will not be taken into account in computing the holder's
capital gain or loss. Instead, that portion will be recognized as ordinary
interest income to the extent that the holder has not previously included the
accrued interest in income. The gain or loss recognized by a holder on a
disposition of the note will be long-term capital gain or loss if the holder
held the note for more than one year. Long-term capital gains of non-corporate
taxpayers are taxed at lower rates than those applicable to ordinary income. The
deductibility of capital losses is subject to limitation.
If, upon a change of control, a holder requires us to repurchase some or
all of the holder's notes and we elect to pay the repurchase price in whole or
in part with shares of our common stock, and if the notes are "securities" for
U.S. federal income tax purposes, the holder would generally not recognize any
loss on the exchange and would recognize any gain realized only to the extent of
any cash received. If the holder receives cash in lieu of a fractional share of
common stock, however, the holder would be treated as if he received the
fractional share and then had the fractional share redeemed for cash. The holder
would recognize gain or loss equal to the difference between the cash received
and that portion of his basis in the stock attributable to the fractional share.
In addition, the value of any portion of the common stock received that is
attributable to accrued interest on the notes will be taxed as ordinary income.
The holder's aggregate basis in the common stock received in exchange for the
notes (including any fractional share for which cash is paid but excluding any
shares attributable to accrued interest) would equal his adjusted basis in the
note, increased by any gain recognized on the exchange and decreased by the
amount of any cash received. The holder's holding period for the common stock so
received would include the period during which he held the note. The holder's
basis in any shares of common stock attributable to accrued interest would equal
the fair market value of those shares when received, and the holding period of
those shares would begin on the day after the holder's receipt of those shares.
If the notes are not securities for U.S. federal income tax purposes, the
holder's exchange of notes upon a change of control would be subject to the
general rules for exchanges of notes described in the preceding paragraph,
regardless of whether the holder receives shares of our common stock in payment
of all or part of the redemption price. The classification of debt instruments
as securities for U.S. federal income tax purposes depends on the extent to
which the instruments represent an investment in the issuer's business. Because
the decided cases turn on the specific facts in each case, we cannot predict
whether our notes will be treated as securities for U.S. federal income tax
purposes.
Conversion of the Notes
A U.S. holder generally will not recognize any income, gain or loss on
converting a note into common stock. If the holder receives cash in lieu of a
fractional share of stock, however, the holder would be treated as if he
received the fractional share and then had the fractional share redeemed for the
cash. The holder would recognize gain or loss equal to the difference between
the cash received and that portion of his basis in the stock attributable to the
fractional share. The holder's aggregate basis in the common stock (including
any fractional share for which cash is paid) will equal his adjusted basis in
the note. The holder's holding period for the stock will include the period
during which he held the note.
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Dividends
If, after a U.S. holder converts a note into common stock, we make a
distribution in respect of that stock, the distribution will be treated as a
dividend, taxable to the U.S. holder as ordinary income, to the extent it is
paid from our current or accumulated earnings and profits. If the distribution
exceeds our current and accumulated earnings and profits, the excess will be
treated first as a tax-free return of the holder's investment, up to the
holder's basis in its common stock. Any remaining excess will be treated as
capital gain. If the U.S. holder is a U.S. corporation, it would generally be
able to claim a deduction equal to a portion of any dividends received.
The terms of the notes allow for changes in the conversion price of the
notes in certain circumstances. A change in conversion price that allows
noteholders to receive more shares of common stock on conversion may increase
the noteholders' proportionate interests in our earnings and profits or assets.
In that case, the noteholders would be treated as though they received a
distribution in the form of our stock. Such a constructive stock distribution
could be taxable to the noteholders, although they would not actually receive
any cash or other property. A taxable constructive stock distribution would
result, for example, if the conversion price is adjusted to compensate
noteholders for distributions of cash or property to our shareholders. Not all
changes in conversion price that allow noteholders to receive more stock on
conversion, however, increase the noteholders' proportionate interests in the
company. For instance, a change in conversion price could simply prevent the
dilution of the noteholders' interests upon a stock split or other change in
capital structure. Changes of this type, if made by a bona fide, reasonable
adjustment formula, are not treated as constructive stock distributions.
Conversely, if an event occurs that dilutes the noteholders' interests and the
conversion price is not adjusted, the resulting increase in the proportionate
interests of our shareholders could be treated as a taxable stock distribution
to them. Any taxable constructive stock distributions resulting from a change
to, or failure to change, the conversion price would be treated like dividends
paid in cash or other property. They would result in ordinary income to the
recipient, to the extent of our current or accumulated earnings and profits,
with any excess treated as a tax-free return of capital or as capital gain.
Sale of Common Stock
A U.S. holder will generally recognize capital gain or loss on a sale or
exchange of common stock. The holder's gain or loss will equal the difference
between the proceeds received by the holder and the holder's adjusted tax basis
in the stock. The proceeds received by the holder will include the amount of any
cash and the fair market value of any other property received for the stock. The
gain or loss recognized by a holder on a sale or exchange of stock will be
long-term capital gain or loss if the holder held the stock for more than one
year.
SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS
Taxation of Interest
Payments of interest to nonresident persons or entities are generally
subject to U.S. federal income tax at a rate of 30 percent, collected by means
of withholding by the payor. Payments of interest on the notes to most non-U.S.
holders, however, will qualify as "portfolio interest." and thus will be exempt
from the withholding tax, if the holders certify their nonresident status as
described below. The portfolio interest exception will not apply to payments of
interest to a non-U.S. holder that
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- owns at least 10 percent of our voting stock (taking into account stock
owned directly and also stock owned indirectly under specific
attribution rules), or
- is a "controlled foreign corporation" that is related to us.
In general, a foreign corporation is a controlled foreign corporation if
at least 50 percent of its stock is owned, directly or indirectly, by one or
more U.S. persons that each owns, directly or indirectly, at least 10 percent of
the corporation's voting stock.
The portfolio interest exception and several of the special rules for
non-U.S. holders described below apply only if the holder certifies its
nonresident status. A non-U.S. holder can meet this certification requirement by
providing a Form W-8BEN or appropriate substitute form to us, or our paying
agent. If the holder holds the note through a financial institution or other
agent acting on the holder's behalf, the holder will be required to provide
appropriate documentation to the agent. The holder's agent will then be required
to provide certification to us or our paying agent, either directly or through
other intermediaries.
For payments made to a foreign partnership, the certification
requirements generally apply to the partners rather than the partnership.
Sale, Exchange or Redemption of Notes
Non-U.S. holders generally will not be subject to U.S. federal income
tax on any gain realized on the sale, exchange, or other disposition of notes.
This general rule, however, is subject to several exceptions. For example, the
gain would be subject to U.S. federal income tax if
- the gain is effectively connected with the conduct by the non-U.S.
holder of a U.S. trade or business,
- the non-U.S. holder was a citizen or resident of the United States and
thus is subject to special rules that apply to expatriates, or
- the rules of the Foreign Investment in Real Property Tax Act, or
"FIRPTA" (described below), treat the gain as effectively connected with
a U.S. trade or business.
The FIRPTA rules may apply to a sale, exchange or other disposition of
notes if we are, or were within five years before the transaction, a "U.S. real
property holding corporation, or "USRPHC." In general, we would be a USRPHC if
interests in U.S. real estate comprised most of our assets. We do not believe
that we are a USRPHC or that we will become one in the future. So long as our
common stock continues to be regularly traded, the FIRPTA rules would apply to a
disposition of notes by a non-U.S. holder only if the holder owned, directly or
indirectly, more than 5 percent of our common stock (or, if the notes were
considered to be "regularly traded," more than 5 percent of our notes) within
five years before the holder's disposition of the notes. For this purpose, the
non-U.S. holder would be treated as owning the stock that the holder could
acquire on conversion of the holder's notes. If all of these conditions were
met, and the FIRPTA rules applied to the sale, exchange, or other disposition of
notes by a non-U.S. holder, then any gain recognized by the holder would be
treated as effectively connected with a U.S. trade or business, and would thus
be subject to U.S. federal income tax.
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Conversion of the Notes
A non-U.S. holder generally will not recognize any income, gain or loss
on converting a note into common stock. Any recognized as a result of the
holder's receipt of cash in lieu of a fractional share gain recognize of stock
would also generally not be subject to U.S. federal income tax. See "Special Tax
Rules Applicable to non-U.S. holders -- Sale of Common Stock" below.
Dividends
Dividends paid to a non-U.S. holder on common stock received on
conversion of a note will generally be subject to U.S. withholding tax at a 30
percent rate. The withholding tax might not apply, however, or might apply at a
reduced rate, under the terms of a tax treaty between the United States and the
non-U.S. holder's country of residence. A non-U.S. holder must demonstrate its
entitlement to treaty benefits by certifying its nonresident status. Some of the
common means of meeting this requirement are described above under "Special Tax
Rules Applicable to Non-U.S. Holders -- Taxation of Interest."
Sale of Common Stock
Non-U.S. holders will generally not be subject to U.S. federal income
tax on any gains realized on the sale, exchange, or other disposition of common
stock. This general rule, however, is subject to exceptions, some of which are
described under "Special Tax Rules Applicable to Non-U.S. Holders -- Sale,
Exchange or Redemption of Notes."
Income or Gains Effectively Connected with a U.S. Trade or Business
The preceding discussion of the tax consequences of the purchase,
ownership or disposition of notes or common stock by a non-U.S. holder assumes
that the holder is not engaged in a U.S. trade or business. If any interest on
the notes, dividends on common stock, or gain from the sale, exchange or other
disposition of the notes or stock is effectively connected with a U.S. trade or
business conducted by the non-U.S. holder, then the income or gain will be
subject to U.S. federal income tax at the regular graduated rates. If a
partnership is engaged in a U.S. trade or business, the partners of the
partnership are also treated as being engaged in that trade or business. If a
non-U.S. holder is eligible for the benefits of a tax treaty between the United
States and the holder's country of residence, any "effectively connected" income
or gain will be subject to U.S. federal income tax only if it is also
attributable to a permanent establishment maintained by the holder in the United
States. Payments of dividends that are effectively connected with a U.S. trade
or business, and therefore included in the gross income of a non-U.S. holder,
will not be subject to the 30 percent withholding tax. To claim exemption from
withholding, the holder must certify its qualification, which can be done by
filing a Form W-8ECL If the non-U.S. holder is a corporation, that portion of
its earnings and profits that is effectively connected with its U.S. trade or
business would generally be subject to a "branch profits tax." The branch
profits tax rate is generally 30 percent, although an applicable tax treaty
might provide for a lower rate.
U.S. Federal Estate Tax
The estates of nonresident alien individuals are subject to U.S. federal
estate tax on property with a U.S. situs. The notes will not be U.S. situs
property as long as interest on the notes paid immediately before the death of
the holder would have qualified as portfolio interest, exempt from withholding
tax as described above under "Special Tax Rules Applicable to Non-U.S. Holders
-- Taxation of Interest." Because we are a U.S. corporation, our common stock
will be U.S. situs property, and therefore will be included in the taxable
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estate of a nonresident alien decedent. The U.S. federal estate tax liability of
the estate of a nonresident alien may be affected by a tax treaty between the
United States and the decedent's country of residence.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Internal Revenue Code and the Treasury regulations require those who
make specified payments to report the payments to the IRS. Among the specified
payments are interest, dividends, and proceeds paid by brokers to their
customers. The required information returns enable the IRS to determine whether
the recipient properly included the payments in income. This reporting regime is
reinforced by "backup withholding" rules. These rules require the payors to
withhold tax from payments subject to information reporting if the recipient
fails to cooperate with the reporting regime by failing to provide his taxpayer
identification number to the payor, furnishing an incorrect identification
number, or repeatedly failing to report interest or dividends on his returns.
The withholding tax rate is currently 30.5 percent, but will be reduced in
stages to 28 percent beginning in 2006. The information reporting and backup
withholding rules do not apply to payments to corporations, whether domestic or
foreign.
Payments of interest or dividends to individual U.S. holders of notes or
common stock will generally be subject to information reporting, and will be
subject to backup withholding unless the holder provides us or our paying agent
with a correct taxpayer identification number.
Payments to non-U.S. holders will generally be subject to information
reporting but not backup withholding. To avoid backup withholding, however, a
non-U.S. holder will have to certify its nonresident status. Some of the common
means of doing so are described under "Special Rules Applicable to Non-U.S.
Holders -- Taxation of Interest."
Payments made to U.S. holders by a broker upon a sale of notes or common
stock will generally be subject to information reporting and backup withholding.
If, however, the sale is made through a foreign office of a U.S. broker, the
sale will be subject to information reporting but not backup withholding. If the
sale is made through a foreign office of a foreign broker, the sale will
generally not be subject to either information reporting or backup withholding.
This exception may not apply, however, if the foreign broker is owned or
controlled by U.S. persons, or is engaged in a U.S. trade or business.
Payments made to non-U.S. holders by a broker upon a sale of notes or
common stock will not be subject to information reporting or backup withholding
as long as the non-U.S. holder certifies its foreign status.
Any amounts withheld from a payment to a holder of notes or common stock
under the backup withholding rules can be credited against any U.S. federal
income tax liability of the holder.
THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE,
LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR
NOTES OR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN
APPLICABLE LAWS.
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SELLING SECURITYHOLDERS
We originally issued the notes in a private placement to Lehman Brothers
Inc. in August 2001 pursuant to Rule 4(2) of the Securities Act of 1933. The
notes were sold by Lehman Brothers Inc. to purchasers that are qualified
institutional buyers pursuant to Rule 144A. Those purchasers may have made
subsequent transfers of the notes pursuant to Rule 144A. We have no knowledge
whether the holders listed below received the notes on the initial distribution
or through subsequent transfers after the close of the initial private
placement. Selling securityholders may offer and sell the notes and the
underlying common stock pursuant to this prospectus.
The following table contains information as of February 11, 2002, with
respect to the selling securityholders and the principal amount of notes and the
underlying common stock beneficially owned by each selling securityholder that
may be offered using this prospectus.
PRINCIPAL
AMOUNT AT
MATURITY OF NUMBER OF
NOTES SHARES OF PERCENTAGE OF
BENEFICIALLY PERCENTAGE COMMON STOCK COMMON STOCK
OWNED THAT OF NOTES THAT MAY BE OUTSTANDING
NAME MAY BE SOLD OUTSTANDING SOLD(1) (2)
----------------------------------------------------------------- ------------ ------------ ------------ -------------
AIG/National Union Fire Insurance (3) ........................... $ 725,000 * 40,122 *
Aloha Airlines Non-Pilots Pension Trust (3) ..................... 55,000 * 3,044 *
Aloha Pilots Retirement Trust (3) ............................... 35,000 * 1,937 *
Alta Partners Holdings, LDC ..................................... 17,500,000 5.07% 968,456 *
Arbitex Master Fund LP .......................................... 13,900,000 4.03% 769,231 *
Arkansas PERS (3) ............................................... 1,010,000 * 55,894 *
Associated Electric & Gas Insurance Services Limited (4) ........ 400,000 * 22,136 *
B.C. McCabe Foundation (5) ...................................... 150,000 * 8,301 *
Bank Austria Cayman Islands LTD (6) ............................. 5,375,000 1.56% 297,454 *
Boilermakers Blacksmith Pension Trust (3) ....................... 1,285,000 * 71,112 *
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PRINCIPAL
AMOUNT AT
MATURITY OF NUMBER OF
NOTES SHARES OF PERCENTAGE OF
BENEFICIALLY PERCENTAGE COMMON STOCK COMMON STOCK
OWNED THAT OF NOTES THAT MAY BE OUTSTANDING
NAME MAY BE SOLD OUTSTANDING SOLD(1) (2)
----------------------------------------------------------------- ------------ ------------ ------------ -------------
BTES-Convertible Arbitrage ...................................... 1,000,000 * 55,340 *
BTPO-Growth Vs Valle ............................................ 3,000,000 * 166,021 *
C & H Sugar, Inc. (3) ........................................... 85,000 * 4,704 *
CALAMOS(R) Convertible Growth and Income Fund -
CALAMOS(R) Investment Trust .................................. 2,900,000 * 160,487 *
CALAMOS(R) Convertible Technology Fund - CALAMOS(R)
Investment Trust ............................................. 70,000 * 3,874 *
CIBC World Markets .............................................. 500,000 * 27,670 *
Conseco Fund Group - Conseco Convertible Securities Fund ........ 250,000 * 13,835 *
Convertible Securities Fund ..................................... 80,000 * 4,427 *
Delaware PERS (3) ............................................... 1,425,000 * 78,860 *
Deutsche Banc Alex Brown Inc. ................................... 11,500,000 3.33% 636,414 *
Dodeca, L.P. .................................................... 2,000,000 * 110,681 *
Drury University (3) ............................................ 25,000 * 1,384 *
Duke Endowment (3) .............................................. 245,000 * 13,558 *
Fidelity Advisor Series I: Fidelity Advisor Dividend
Growth Fund .................................................. 334,000 * 18,484 *
Fidelity Advisor Series I: Fidelity Advisor Equity
Value Fund ................................................... 2,000 * 111 *
Fidelity Charles Street Trust: Fidelity Asset Manager .......... 1,780,000 * 98,506 *
Fidelity Charles Street Trust: Fidelity Asset Manager:
Income ....................................................... 60,000 * 3,320 *
Fidelity Charles Street Trust: Fidelity Asset
Manager: Growth ............................................. 890,000 * 49,253 *
Fidelity Commonwealth Trust: Fidelity Mid-Cap Stock
Fund ......................................................... 1,075,000 * 59,491 *
Fidelity Devonshire Trust: Fidelity Equity - Income
Fund ......................................................... 2,330,000 * 128,943 *
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PRINCIPAL
AMOUNT AT
MATURITY OF NUMBER OF
NOTES SHARES OF PERCENTAGE OF
BENEFICIALLY PERCENTAGE COMMON STOCK COMMON STOCK
OWNED THAT OF NOTES THAT MAY BE OUTSTANDING
NAME MAY BE SOLD OUTSTANDING SOLD(1) (2)
----------------------------------------------------------------- ------------ ------------ ------------ -------------
Fidelity Financial Trust: Fidelity Convertible
Securities Fund .............................................. 8,650,000 2.51% 478,694 *
Fidelity Financial Trust: Fidelity Equity - Income II
Fund ......................................................... 2,430,000 * 134,477 *
Fidelity Puritan Trust: Fidelity Puritan Fund .................. 1,340,000 * 74,156 *
Fidelity Securities Fund: Fidelity Dividend Growth Fund ........ 2,300,000 * 127,283 *
Fidelity Trend Fund: Fidelity Trend Fund ....................... 170,000 * 9,408 *
Froley Revy Investment Convertible Security Fund ................ 145,000 * 8,024 *
Goldman Sachs and Company ....................................... 525,000 * 29,054 *
GLG Market Neutral Fund ......................................... 10,000,000 2.90% 553,403 *
Grace Brothers, Ltd. ............................................ 1,000,000 * 55,340 *
Grace Brothers Management LLC.................................... 1,000,000 * 55,340 *
Granville Capital Corporation ................................... 1,000,000 * 55,340 *
Hawaiian Airlines Employees Pension Plan - IAM (3) .............. 30,000 * 1,660 *
Hawaiian Airlines Pension Plan for Salaried Employees (3) ....... 5,000 * 277 *
Hawaiian Airlines Pilots Retirement Plan (3) .................... 50,000 * 2,767 *
Highbridge International LLC .................................... 32,730,000 9.49% 1,811,289 1.3%
ICI American Holdings Trust (3) ................................. 510,000 * 28,224 *
Jersey (IMA) Ltd.(7) ............................................ 4,000,000 1.16% 221,361 *
JMG Capital Partners, LP ........................................ 4,500,000 1.30% 249,032 *
Libertyview Fund LLC ............................................ 1,000,000 * 55,340 *
Libertyview Funds L.P. .......................................... 15,000,000 4.35% 830,105 *
Lipper Convertibles, L.P. ....................................... 12,500,000 3.62% 691,754 *
Lipper Offshore Convertibles, L.P. .............................. 10,121,000 2.93% 560,100 *
Lipper Convertibles Series II, L.P. ............................. 879,000 * 48,644 *
McMahan Securities Co. L.P. ..................................... 100,000 * 5,534 *
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PRINCIPAL
AMOUNT AT
MATURITY OF NUMBER OF
NOTES SHARES OF PERCENTAGE OF
BENEFICIALLY PERCENTAGE COMMON STOCK COMMON STOCK
OWNED THAT OF NOTES THAT MAY BE OUTSTANDING
NAME MAY BE SOLD OUTSTANDING SOLD(1) (2)
----------------------------------------------------------------- ------------ ------------ ------------ -------------
Morgan Stanley .................................................. 20,000,000 5.80% 1,106,806 *
Morgan Stanley Dean Witter Convertible Securities Trust ......... 1,500,000 * 83,011 *
National Fuel Gas Company Retirement Plan (5) ................... 50,000 * 2,767 *
Nations Convertible Securities Fund ............................. 2,620,000 * 144,992 *
New York Life Insurance and Annuity Corporation ................. 750,000 * 41,505 *
New York Life Insurance Company ................................. 4,000,000 1.16% 221,361 *
Northern Income Equity Fund ..................................... 500,000 * 27,670 *
Ondeo Nalco (3) ................................................. 180,000 * 9,961 *
Oxford, Lord Abbett & Co. ....................................... 750,000 * 41,505 *
Queen's Health Plan (3) ......................................... 20,000 * 1,107 *
R2 Investments, LDC ............................................. 15,000,000 4.35% 830,105 *
Ramius Capital Group ............................................ 425,000 * 23,520 *
RCG Latitude Master Fund LTP .................................... 1,530,000 * 84,671 *
RCG Multi Strategy LP. .......................................... 1,170,000 * 64,748 *
SG Cowen Securities Corporation ................................. 10,000,000 2.90% 553,403 *
Silvercreek II Limited .......................................... 1,000,000 * 55,340 *
Silvercreek Limited Partnership ................................. 1,000,000 * 55,340 *
Southern Farm Bureau Life Insurance (3) ......................... 725,000 * 40,122 *
Starvest Combined Portfolio (3) ................................. 755,000 * 41,782 *
State of Oregon/Equity (3) ...................................... 4,475,000 1.30% 247,648 *
State of Oregon/SAIF Corporation (3) ............................ 1,850,000 * 102,380 *
Sterling Investment Co. (3) ..................................... 700,000 * 38,738 *
Syngenta AG (3) ................................................. 240,000 * 13,282 *
-55-
PRINCIPAL
AMOUNT AT
MATURITY OF NUMBER OF
NOTES SHARES OF PERCENTAGE OF
BENEFICIALLY PERCENTAGE COMMON STOCK COMMON STOCK
OWNED THAT OF NOTES THAT MAY BE OUTSTANDING
NAME MAY BE SOLD OUTSTANDING SOLD(1) (2)
----------------------------------------------------------------- ------------ ------------ ------------ -------------
Total Fina Elf Finance USA, Inc. (5) ............................ 100,000 * 5,534 *
Van Kampen Harber Fund .......................................... 5,000,000 1.45% 276,701 *
Variable Insurance Products Fund: Equity - Income
Portfolio .................................................... 1,080,000 * 59,768 *
Wilmington Trust Company As Owner Trustee for the
Forrestal Funding Master Trust ............................... 22,000,000 6.38% 1,217,488 *
Zeneca Holdings Trust (3) ....................................... 360,000 * 19,923 *
Cede & Co. ...................................................... 67,199,000 19.48% 3,718,815 2.6%
----------------
* Less than 1%.
(1) Assumes conversion of all of the holder's notes at a conversion price of
$18.07 per share of common stock. However, this conversion price will be
subject to adjustment as described under "Description of Notes--Conversion
of Notes." As a result, the amount of common stock issuable upon
conversion of the notes may increase or decrease in the future.
(2) Calculated based on Rule 13d-3(d)(i) of the Exchange Act using 140,598,822
shares of common stock outstanding as of December 31, 2001. In calculating
this amount, we treated as outstanding the number of shares of common
stock issuable upon conversion of all of that particular holder's notes.
However, we did not assume the conversion of any other holder's notes.
(3) Froley Revy Investment Management Company, Inc. has investment control
over the securities beneficially owned by these securityholders.
(4) CALAMOS Asset Management has investment control over the securities
beneficially owned by this securityholder.
(5) Lord, Abbett & Co. has investment control over the securities beneficially
owned by these securityholders.
(6) Ramius Capital Group has investment control over the securities
beneficially owned by this securityholder.
(7) Libertyview Capital has investment control over the securities
beneficially owned by this securityholder.
We prepared this table based on the information supplied to us by the
selling securityholders named in the table.
The selling securityholders listed in the above table may have sold or
transferred, in transactions exempt from the registration requirements of the
Securities Act, some or all of their notes since the date on which the
information in the above table is presented. Information about the selling
securityholders may change from over time. Any changed information will be set
forth in prospectus supplements.
-56-
Because the selling securityholders may offer all or some of their notes
or the underlying common stock from time to time, we cannot estimate the amount
of the notes or underlying common stock that will be held by the selling
securityholders upon the termination of any particular offering. See "Plan of
Distribution."
PLAN OF DISTRIBUTION
We will not receive any of the proceeds of the sale of the notes and the
underlying common stock offered by this prospectus. The notes and the underlying
common stock may be sold from time to time to purchasers:
- directly by the selling securityholders; or
- through underwriters, broker-dealers or agents who may receive
compensation in the form of discounts, concessions or commissions from
the selling securityholders or the purchasers of the notes and the
underlying common stock.
The selling securityholders and any such broker-dealers or agents who
participate in the distribution of the notes and the underlying common stock may
be deemed to be "underwriters." As a result, any profits on the sale of the
notes and underlying common stock by selling securityholders and any discounts,
commissions or concessions received by any such broker-dealers or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
If the selling securityholders were to deemed underwriters, the selling
securityholders may be subject to certain statutory liabilities of, including,
but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
Lehman Brothers, Inc., the "initial purchaser," Morgan Stanley and
Robertson Stephens have informed us that they intend to make a market in the
notes. These entities are not obligated to make a market in the notes and any or
all of them may discontinue this market making activity at any time without
notice.
To our knowledge, CIBC World Markets, Deutsche Banc Alex Brown Inc.,
Goldman Sachs & Company, Morgan Stanley and SG Cowen Securities Corporation are
the only other selling securityholders who are registered broker-dealers. As
such, they are underwriters of the notes. We do not have a material relationship
with any of these broker-dealers and none of these broker-dealers has the right
to designate or nominate a member or members of our board of directors. These
securityholders purchased their notes in the open market, not directly from us,
and we are not aware of any underwriting plan or agreement, underwriters' or
dealers' compensation, or passive market making or stabilizing transactions
involving the purchase or distribution of these securities by these
securityholders.
If the notes and underlying common stock are sold through underwriters
or broker-dealers, the selling securityholders will be responsible for
underwriting discounts or commissions or agent's commissions.
The notes and underlying common stock may be sold in one or more
transactions at:
- fixed prices;
- prevailing market prices at the time of sale;
- varying prices determined at the time of sale; or
- negotiated prices.
These sales may be effected in transactions:
- on any national securities exchange or quotation service on which the
underlying common stock may be listed or quoted at the time of the sale,
including the Nasdaq National Market, in the case of the common stock;
- in the over-the-counter market;
-57-
- in transactions otherwise than on such exchanges or services or in the
over-the-counter market; or
- through the writing of options.
These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of the
trade.
In connection with sales of the notes and underlying common stock or
otherwise, the selling securityholders may enter into hedging transactions with
broker-dealers. These broker-dealers may in turn engage in short sales of the
notes and underlying common stock in the course of hedging their positions. The
selling securityholders may also sell the notes and underlying common stock
short and deliver notes and underlying common stock to close out short
positions, or loan or pledge notes and underlying common stock to broker-dealers
that in turn may sell the notes and underlying common stock.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes and the underlying common
stock by the selling securityholders. Selling securityholders may not sell any
or all of the notes and the underlying common stock offered by them pursuant to
this prospectus. In addition, we cannot assure you that any such selling
securityholder will not transfer, devise or gift the notes and the underlying
common stock by other means not described in this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol
"NETA." Effective February 12, 2002, our common stock will commence trading on
the New York Stock Exchange (NYSE) under the symbol "NET" and will no longer be
traded on NASDAQ. We do not intend to apply for listing of the notes on any
securities exchange or for quotation through Nasdaq. Accordingly, no assurance
can be given as to the development of liquidity or any trading market for the
notes. See "Risk Factors--We Cannot Assure You That An Active Trading Market
Will Develop For The Notes Which May Reduce Their Market Price."
There can be no assurance that any selling securityholder will sell any
or all of the notes or underlying common stock pursuant to this prospectus. In
addition, any notes or underlying common stock covered by this prospectus that
qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be
sold under Rule 144 or Rule 144A rather than pursuant to this prospectus.
The selling securityholders and any other person participating in such
distribution will be subject to the Exchange Act. The Exchange Act rules
include, without limitation, Regulation M, which may limit the timing of
purchases and sales of any of the notes and the underlying common stock by the
selling securityholders and any other such person. In addition, Regulation M of
the Exchange Act may restrict the ability of any person engaged in the
distribution of the notes and the underlying common stock to engage in
market-making activities with respect to the particular notes and the underlying
common stock being distributed for a period of up to five business days prior to
the commencement of such distribution. This may affect the marketability of the
notes and the underlying common stock and the ability of any person or entity to
engage in market-making activities with respect to the notes and the underlying
common stock.
Pursuant to the registration rights agreement filed as an exhibit to
this registration statement, we and the selling securityholders will be
indemnified by the other against certain liabilities, including certain
liabilities under the Securities Act or will be entitled to contribution in
connection with these liabilities.
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We have agreed to pay substantially all of the expenses incidental to
the registration, offering and sale of the notes and underlying common stock to
the public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
-59-
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Second Restated Certificate of Incorporation limits the liability of
directors 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
(i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
Our Restated Bylaws provide that we shall indemnify our directors and
officers and may indemnify our employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. Our Restated 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 we would have the power
to indemnify him or her against such liability under the General Corporation Law
of Delaware. We currently have secured such insurance on behalf of our officers
and directors.
We have entered into agreements to indemnify our directors and officers,
in addition to indemnification provided for in our Bylaws. Subject to certain
conditions, these agreements, among other things, indemnify our directors and
officers for certain expenses (including attorney's 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 us, arising out of such person's
services as a director or officer of ours, any subsidiary of ours or any other
company or enterprise to which the person provides services at our request.
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation's Board of Directors to grant indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities and Exchange Act of 1933, as amended. Our
Second Restated Certificate of Incorporation, as amended, and Bylaws provide for
indemnification of our officers, directors, employees and other agents to the
maximum extent permitted by Delaware Law.
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
The validity of the issuance of Networks Associates' securities offered
by this prospectus will be passed upon for Networks Associates, Inc. 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,
2001, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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