SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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OF THE SECURITIES EXCHANGE ACT OF 1934
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NETWORKS ASSOCIATES, INC.
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[NETWORK LOGO]
2002 NOTICE OF ANNUAL
STOCKHOLDERS' MEETING
AND PROXY STATEMENT
MAY 15, 2002
2:00 P.M.
TECH MART
5201 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
[NETWORK LOGO]
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
APRIL 11, 2002
Dear Network Associates Stockholder:
You are cordially invited to join us at the annual meeting of stockholders
of Network Associates on May 15, 2002.
It is important that your shares are represented and voted at the annual
meeting. Whether or not you plan to attend the annual meeting, please complete,
sign, date and promptly return the accompanying proxy in the enclosed
postage-paid envelope or vote by telephone or internet by following the
instructions on the proxy card. Returning the proxy does not deprive you of your
right to attend the annual meeting. If you decide to attend the annual meeting
and wish to change your proxy vote, you may do so by voting in person at the
annual meeting.
On behalf of the board of directors, I would like to thank you for your
continued interest in Network Associates. I look forward to seeing you at the
annual meeting.
Sincerely,
/s/ George Samenuk
George Samenuk
Chairman of the Board
and Chief Executive Officer
[NETWORK LOGO]
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 15, 2002
------------------------
The Annual Meeting of Stockholders of Networks Associates, Inc., will be
held on Wednesday May 15, 2002, at 2:00 p.m. Pacific Daylight Time at the Tech
Mart, 5201 Great America Parkway, Santa Clara, California 95054, for the
following purposes:
1. To elect one director for a three-year term;
2. To amend our 1997 Stock Incentive Plan;
3. To ratify the adoption of our 2002 Employee Stock Purchase Plan;
4. To ratify the appointment of PricewaterhouseCoopers LLP as our
independent public accountants for the year ended December 31, 2002; and
5. To transact any other business as may properly come before the meeting.
Only stockholders owning our shares at the close of business on April 5,
2002 are entitled to attend and vote at the meeting. For ten days prior to the
meeting, a complete list of these stockholders will be available during ordinary
business hours at our principal office.
By order of the Board of Directors,
/s/ Kent Roberts
Kent H. Roberts
Secretary
Santa Clara, California
April 11, 2002
TABLE OF CONTENTS
PAGE
----
PROCEDURAL INFORMATION...................................... 1
PROPOSALS TO BE VOTED ON.................................... 2
BOARD OF DIRECTORS.......................................... 4
Biographies............................................... 4
Meetings of the Board of Directors........................ 5
Compensation of Directors................................. 5
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 6
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..... 8
AUDIT COMMITTEE REPORT...................................... 10
COMPARISON OF STOCKHOLDER RETURN............................ 11
EXECUTIVE COMPENSATION AND OTHER MATTERS.................... 12
Summary Compensation Table................................ 12
Aggregate Option Exercises in 2001 and Year-End Option
Values................................................. 15
Employment and Change in Control Arrangements............. 16
Indebtedness of Management................................ 17
Officers and Directors Insurance.......................... 17
New Plan Benefits......................................... 18
Certain Transactions...................................... 18
OTHER INFORMATION........................................... 20
APPENDIX A -- Summary of the 1997 Stock Incentive Plan...... A-1
APPENDIX B -- Summary of the 2002 Employee Stock Purchase
Plan...................................................... B-1
NETWORKS ASSOCIATES, INC.
3965 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
The accompanying proxy is solicited by our board of directors for use at
the 2002 Annual Meeting of Stockholders to be held May 15, 2002 at 2:00 p.m.
Pacific Daylight Time or any adjournment thereof. This proxy statement contains
important information for you to consider when deciding how to vote on the
matters brought before the meeting. PLEASE READ IT CAREFULLY.
PROCEDURAL INFORMATION
Only stockholders owning our shares at the close of business on April 5,
2002 (the "record date") are entitled to attend and vote at the meeting. For ten
days prior to the meeting, a complete list of these stockholders will be
available during ordinary business hours at our principal office. As of the
record date, there were 146,741,467 shares of our common stock outstanding.
Solicitation of Proxies. The cost of soliciting proxies, including the
preparation, assembly, printing and mailing of the proxy statement, the proxy
material and any other material provided to stockholders, will be borne by us.
In addition, we will reimburse brokerage firms and other persons representing
beneficial owners of shares for their reasonable expenses in forwarding
solicitation material to such beneficial owners. We may use the services of our
officers, directors, and others to solicit proxies, personally or by telephone,
without additional compensation. We have engaged the firm of Georgeson
Shareholder Communications, Inc. to assist us in the distribution and
solicitation of proxies. We have agreed to pay Georgeson Shareholder
Communications, Inc. a fee of $14,500 plus expenses for these services.
Voting of Proxies. The required quorum for the transaction of business at
the annual meeting is a majority of the shares of the common stock issued and
outstanding on the record date. Abstentions and broker non-votes will be counted
for purposes of determining the presence or absence of the quorum for the
transaction of business, but will not be counted for purposes of determining the
number of votes cast with respect to a proposal.
Revocability of Proxies. Any proxy given pursuant to this solicitation may
be revoked by the person giving it at any time before its use by delivering to
our secretary a written notice of revocation or a duly executed proxy bearing a
later date or by attending the annual meeting and voting in person.
Quorum; Abstentions; Broker Non-votes. The required quorum for the
transaction of business at the annual meeting is a majority of the votes
eligible to be cast by holders of shares of common stock issued and outstanding
on the record date. Shares that are voted "FOR," "AGAINST," "WITHHELD" or
"ABSTAIN" will be treated as being present at the meeting for purposes of
establishing a quorum and also will be treated as shares entitled to vote at the
annual meeting (the "votes cast") with respect to such matter.
Although there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions, we believe that abstentions should be
counted for the purposes of determining both (i) the presence or absence of
quorum for the transaction of business and (ii) the total number of votes cast
with respect to a proposal (other than election of directors). In the absence of
controlling precedent to the contrary, we intend to treat abstentions in this
manner. Accordingly, abstentions will have the same effect as a vote against the
proposal.
Broker non-votes will be counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but such broker
non-votes will not be counted for purposes of determining the number of votes
cast with respect to the particular proposal on which the broker has expressly
not voted. Accordingly, a broker non-vote will not affect the outcome of the
voting on a proposal.
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Deadline for Receipt of Stockholder Proposals. Proposals by our
stockholders which are intended to be presented by such stockholders at our 2003
Annual Meeting must be submitted in accordance with the provisions of our bylaws
and must be received by us no later than December 12, 2002 in order to be:
- considered for inclusion in the proxy statement and form of proxy
relating to that meeting; and
- considered at the meeting.
Stockholder proposals, including stockholder nominations for directors,
must be delivered to us at our offices at 3965 Freedom Circle, Santa Clara,
California 95054, on or prior to the deadline of December 12, 2002. Stockholders
wishing to make stockholder proposals should contact the corporate secretary for
details of the information to be included in such proposals.
PROPOSALS TO BE VOTED ON
PROPOSAL NO. 1 -- ELECTION OF DIRECTOR
The nominee for election at the annual meeting is Ms. Liane Wilson. Ms.
Wilson is a Class I director. If elected, Ms. Wilson will serve as a director
until the annual meeting in 2005. Ms. Virginia Gemmell's and Mr. Edwin Harper's
terms as directors will conclude at the 2002 Annual Meeting and they are not
standing for reelection. At such time, our board of directors will consist of
eight directors with three vacancies.
The nominee receiving the highest number of affirmative votes of the shares
entitled to vote on this matter shall be elected as a Class I director. Votes
withheld from any director will be counted for purposes of determining the
presence or absence of a quorum but are not counted as affirmative votes. A
broker non-vote will be counted for the purpose of determining the presence or
absence of a quorum, but, under Delaware law, it will have no legal effect upon
the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEE.
PROPOSAL NO. 2 -- AMENDMENT TO THE 1997 STOCK INCENTIVE PLAN
We believe that stock options are an important factor in attracting,
motivating, and retaining qualified personnel who are essential to our success.
The 1997 Stock Incentive Plan is intended to offer a significant incentive by
allowing employees to purchase our common stock. With limited exceptions,
options to purchase our common stock are granted under our 1997 Stock Incentive
Plan at a price equal to the fair market value on the date stock options are
granted. Other than limited cases, options granted under the 1997 Stock
Incentive Plan only become valuable if the price of our common stock increases
over time and as the options vest.
Currently, a maximum of 27.48 million shares may be granted under the 1997
Stock Incentive Plan. As of March 15, 2002, 23.82 million shares had been issued
and 3.66 million shares remained available for grant.
The amendment would increase the number of shares issuable under the 1997
Stock Incentive Plan by 5.0 million shares, bringing the total that may be
granted under the 1997 Incentive Plan to 32.48 million shares.
The affirmative vote of the holders of a majority of the shares of common
stock present or represented and voting at the annual meeting will be required
to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE 1997
STOCK INCENTIVE PLAN.
If you would like more information about the 1997 Stock Incentive Plan, a
summary of its terms is included in Appendix A to this proxy statement.
PROPOSAL NO. 3 -- APPROVAL OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN
Our 1994 Employee Qualified Stock Purchase Plan terminated in January 2002.
Our board of directors determined that it is in our best interests and the best
interests of our stockholders to adopt a new employee
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stock purchase plan. If our stockholders approve the adoption of the new
employee stock purchase plan, the total number of shares available to be issued
under such plan will be 2,000,000.
The affirmative vote of the holders of a majority of the shares of common
stock present or represented and voting at the annual meeting will be required
to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE 2002
EMPLOYEE STOCK PURCHASE PLAN.
If you would like more information about the 2002 Employee Stock Purchase
Plan, a summary of its terms is included in Appendix B to this proxy statement.
PROPOSAL NO. 4 -- SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Our board of directors has selected PricewaterhouseCoopers LLP as
independent accountants to audit our financial statements for the fiscal year
ending December 31, 2002. PricewaterhouseCoopers LLP has acted in this capacity
since its appointment during the fiscal year ended December 31, 1991. A
representative of PricewaterhouseCoopers LLP is expected to attend the annual
meeting in order to respond to questions from stockholders and will have the
opportunity to make a statement.
AUDIT FEES
Audit fees billed to us by PricewaterhouseCoopers LLP during our 2001
fiscal year for the audit of our consolidated annual financial statements and
review of the consolidated financial statements included in our quarterly
reports on Form 10-Q totaled $1,593,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
In 2001, we completed the implementation project for our ERP system. As
part of that project, PricewaterhouseCoopers LLP was engaged to review the
system design and controls. These fees totaled $303,000.
ALL OTHER FEES
All other fees billed to us by PricewaterhouseCoopers LLP during our fiscal
year 2001 totaled $2,146,000, of which $1,405,000 were for tax related services
and $741,000 were for audit related services, primarily statutory audits of
foreign entities, securities filings and consulting on accounting matters.
The audit committee of the board of directors has made a determination that
the provision of services by PricewaterhouseCoopers LLP other than for audit
related services is compatible with maintaining the independence of
PricewaterhouseCoopers LLP as our independent accountants.
The affirmative vote of the holders of a majority of the shares of common
stock present or represented and voting at the annual meeting will be required
to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT ACCOUNTANTS.
3
BOARD OF DIRECTORS
We have a classified board of directors which is divided into three classes
with staggered three-year terms. At each annual meeting, the term of one class
expires. Pursuant to our bylaws, eight directors are authorized for our board of
directors. After our annual meeting, our board of directors will consist of five
serving directors and three vacancies.
The table below shows the continuing directors and director nominees.
YEAR OF
EXPIRATION DIRECTOR
NAME AGE PRINCIPAL OCCUPATION OF TERM SINCE
---- --- -------------------- ---------- --------
Nominee for Class I Director:
Liane Wilson......................... 59 Consultant 2005 2002
Continuing Class II Directors:
Leslie Denend........................ 61 Director, Exponent, Inc., Rational 2003 1995
Software Corp. and USAA
George Samenuk....................... 46 Chairman of the Board and Chief 2003 2001
Executive Officer, Networks Associates,
Inc.
Continuing Class III Directors:
Robert Dutkowsky..................... 47 President and CEO, J.D. Edwards 2004 2001
Robert Pangia........................ 50 Consultant 2004 2001
BIOGRAPHIES
Liane Wilson has been a director of the company since April 2002. Since
March 2001, Ms. Wilson has been self-employed as a consultant. From June 1999 to
March 2001, Ms. Wilson served as vice chairman of Washington Mutual, Inc. From
February 1985 to March 2001, Ms. Wilson held a number of other senior level
positions with Washington Mutual, including executive vice president for
corporate operations and administration and senior vice president of information
systems. During her tenure at Washington Mutual, she was responsible for
corporate technology and integration activities relating to mergers and
acquisitions.
Leslie Denend has been a director of the company since June 1995. From
December 1997 to April 1998, Mr. Denend was president of the company. From June
1993 to December 1997, Mr. Denend was chief executive officer and president of
Network General Corporation. From February 1993 to June 1993, Mr. Denend was
senior vice president of Network General Corporation. Mr. Denend serves as a
director of Exponent, Inc, Rational Software Corp. and United Services
Automobile Association (USAA).
George Samenuk joined the company in January 2001 as chief executive
officer, and was appointed as a director at that time. In April 2001, Mr.
Samenuk was named chairman of the board of directors. From January 2000 to
January 2001, Mr. Samenuk served as president and chief executive officer of
TradeOut, Inc., a private online exchange company. From April 1999 to January
2000, Mr. Samenuk served as general manager, Americas at IBM Corporation. From
August 1996 to April 1999, Mr. Samenuk was general manager, ASEAN/South Asia at
IBM Corporation. Mr. Samenuk has been a director of McAfee.com Corporation since
January 2001, and has served as the chairman of its board since March 2001.
Robert Dutkowsky has been a director of the company since April 2001. Since
January 2002, Mr. Dutkowsky has served as president and CEO of J.D. Edwards &
Company and in March 2002, Mr. Dutkowsky was named chairman of its board of
directors. From October 2001 to January 2002, Mr. Dutkowsky served as president
of the assembly test division of Teradyne, Inc. From April 2000 to October 2001,
Mr. Dutkowsky served as president and chief executive officer of GenRad Inc.,
which was acquired by Teradyne, Inc. in October 2001. From September 1999 to
April 2000, Mr. Dutkowsky served as executive vice president, Markets and
Channels of EMC Corporation. From September 1997 to September 1999, Mr.
Dutkowsky served as president of Data General, a division of EMC. Prior to
joining EMC, Mr. Dutkowsky spent 20 years with IBM Corporation, in a series of
sales, marketing and senior management roles.
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Robert Pangia has been a director of the company since April 2001. Since
1996, Mr. Pangia has been self-employed as a consultant. From April 1987 to
December 1996, Mr. Pangia held a number of senior level management positions at
PaineWebber Incorporated, including director of Investment Banking. Mr. Pangia
currently serves on the board of directors of ICOS Corporation and IDEC
Pharmaceuticals Corporation.
MEETINGS OF THE BOARD OF DIRECTORS
During 2001, the board of directors held six meetings. Each director
attended at least 75% of all board and applicable committee meetings during
2001.
THE AUDIT COMMITTEE reviews, acts and reports to our board of directors on
various auditing and accounting matters, including the appointment of our
independent accountants, the scope of our annual audits, fees to be paid to the
independent accountants, the performance of our independent accountants and our
accounting practices. The audit committee held four meetings during 2001. In
2001, Robert Pangia, Edwin Harper and Virginia Gemmell were members of the audit
committee. Mr. Harper and Ms. Gemmell will leave the audit committee at the end
of their terms as a Class I directors. Ms. Wilson and Mr. Dutkowsky will be
added to our audit committee after our annual meeting.
The audit committee has adopted a written charter. Each member of our audit
committee is "independent" as defined under the New York Stock Exchange
corporate governance standards.
THE COMPENSATION COMMITTEE reviews and approves executive salary levels and
stock option grants. The compensation committee held three meetings during 2001.
In 2001, Robert Dutkowsky, Virginia Gemmell and Edwin Harper were members of the
compensation committee. Mr. Harper and Ms. Gemmell will leave the compensation
committee at the end of their terms as a Class I directors. Mr. Denend and Mr.
Pangia will be added to our compensation committee after our annual meeting.
COMPENSATION OF DIRECTORS
Directors fees, paid only to directors who are not employees, are as
follows:
- $7,500 quarterly retainer (an additional $1,500 quarterly retainer is
paid to the chairpersons of our committees),
- $1,500 for each regular board meeting attended,
- $1,000 for each special board meeting attended,
- expenses of attending board and committee meetings, and
- medical insurance benefits for directors and their families.
Under our Stock Option Plan for Outside Directors, non-employee directors
are automatically granted an option to purchase 45,000 shares of our common
stock, when they first become a director. Each year after the initial grant,
they are entitled to receive an additional option grant to purchase up to 20,000
shares of our common stock. All options are granted at the fair market value on
the date of grant. The initial grant vests one-third each year over three years
from the date of grant. The subsequent grants vest in full three years from the
date of grant. All options granted under this plan become fully exercisable in
the event of certain mergers, sales of assets or sales of the majority of our
voting stock. In October 2001, we increased the quarterly retainer to $7,500
from $5,000 and provided for a $1,500 quarterly retainer for committee
chairpersons. At that time we also increased the number of common shares
non-employee directors are granted when they first become a director to 45,000
shares from 37,500 shares and increased the annual grant to outside directors to
20,000 shares of common stock from 15,000 shares. The changes made in October
2001 became effective on January 1, 2002.
Our employee directors are eligible to receive options and be issued shares
of common stock directly under the 1997 Stock Incentive Plan and will be
eligible to participate in our 2002 Employee Stock Purchase Plan and, if an
executive officer, to participate in the Executive Bonus Plan.
5
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table shows as of March 15, 2002, the number of shares of our
common stock owned by (i) the chief executive officer, each of the five other
most highly compensated executive officers during fiscal 2001, (ii) each of our
current directors and nominees, and (iii) each stockholder known by us as of
that date to be the beneficial owner of more than 5% of our common stock.
Included in our five highest paid executive officers is Srivats Sampath,
currently the chief executive officer of McAfee.com, our publicly traded
subsidiary. As of March 15, 2002, McAfee.com had 47,790,998 outstanding shares
of its common stock, consisting of 11,790,998 shares of Class A common stock and
36,000,000 shares of Class B common stock. As of March 15, 2002, we owned all
shares of the McAfee.com Class B common stock, entitled to three votes per share
and representing approximately 75.3% of McAfee.com's outstanding common stock
and 90.2% of its total voting power.
NUMBER OF PERCENT OF
SHARES RIGHT TO OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED(1) ACQUIRE(2) SHARES(3)
------------------------------------- ---------- ---------- -----------
George Samenuk(4)....................... 403,000 947,000 *
Liane Wilson............................ -- -- *
Leslie Denend........................... 6,300 343,112 *
Robert Dutkowsky........................ 50 12,500 *
Robert Pangia........................... -- 12,500 *
Virginia Gemmell........................ 250 106,875 *
Edwin Harper............................ 1,305 70,313 *
Stephen Richards(5)..................... 25,000 600,000 *
Gene Hodges(6).......................... -- 98,485 *
Arthur Matin(7)......................... 100,000 500,000 *
Zachary Nelson(8)....................... -- 684,333 *
Srivats Sampath(9)...................... -- 140,625 *
FMR Corp.(10)........................... 13,501,469 -- 9.3%
82 Devonshire St., Boston MA 02109
Putnam Investments, LLC(11)............. 6,957,891 -- 5.0%
One Post Office Square, Boston MA
02109
Executive officers and directors as a
group (12 persons).................... 535,905 3,515,743 2.7%
---------------
* Less than 1%.
(1) Ownership includes direct and indirect (beneficial) ownership, as defined
by SEC rules. To our knowledge, each person has sole voting and investment
power over the shares unless otherwise noted. The SEC rules for the
determination of beneficial ownership are very complex. Generally, however,
shares owned directly, plus those controlled (e.g., owned by members of
their immediate families), are considered beneficially owned. Excludes
shares that may be acquired through stock option exercises.
(2) Consists of options that are currently exercisable or will become
exercisable within 60 days of March 15, 2002.
(3) Total shares owned (column 1) plus option shares (column 2) divided by
145,934,353 shares outstanding as of March 15, 2002.
(4) Mr. Samenuk holds 200,000 shares of stock acquired upon the exercise of
options that are subject to our repurchase right. The repurchase right for
these shares lapses on January 3, 2003, the second anniversary date of Mr.
Samenuk's employment commencement. Mr. Samenuk holds 47,000 options that
are immediately exercisable. If Mr. Samenuk exercises these options our
repurchase right for these shares will lapse in full on January 15, 2005.
1.2 million options were issued to Mr. Samenuk on January 3, 2001 and are
immediately exercisable. 25% of these shares vested on January 3, 2002, the
first year anniversary of Mr. Samenuk's employment commencement, and the
remaining shares vest at a
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rate of 1/48 per month for the remaining 36 months of the vesting period.
If Mr. Samenuk exercises these stock options with respect to unvested
shares, we have repurchase rights with respect to those unvested shares.
(5) Mr. Richards holds 600,000 options that are immediately exercisable. 25% of
the shares vested on April 4, 2002, the first anniversary of Mr. Richards'
employment commencement and the remaining shares vest at a rate of 1/48 per
month for the remaining 36 months of the vesting period. If Mr. Richards
exercises these stock options with respect to unvested shares, we have
repurchase rights with respect to those unvested shares.
(6) Mr. Hodges holds options to acquire 2,500 shares of McAfee.com Class A
common stock. These shares represent less than 1% of the outstanding
capital stock of McAfee.com.
(7) Mr. Matin holds 500,000 options that are immediately exercisable. 25% of
these shares vest on October 30, 2002, the first anniversary of Mr. Matin's
employment commencement, and the remaining shares vest at a rate of 1/48
per month for the remaining 36 months of the vesting period. If Mr. Matin
exercises the stock options with respect to unvested shares, we have
repurchase rights with respect to those unvested shares.
(8) Since October 1, 2001, Mr. Nelson has served as a special advisor to us and
is not currently an officer of ours. Prior to October 1, 2001, Mr. Nelson
served as our chief strategy officer.
(9) Mr. Sampath owns 9,394 shares of McAfee.com Class A common stock and has
options to acquire 950,000 shares of McAfee.com Class A common stock,
633,333 shares of which are exercisable within 60 days of March 15, 2002.
These shares represent 5.5% of the outstanding Class A common stock of
McAfee.com.
(10) According to amended Schedule 13G filed on February 14, 2002. FMR Corp.,
Edward C. Johnson 3d, Abigail P. Johnson and certain subsidiaries of FMR
Corp. may be deemed to be members of a "group" as such term is defined in
the rules promulgated by the SEC. FMR Corp. is the beneficial holder of our
common stock as a result of the investment-related activities of certain
subsidiaries of FMR Corp., members of the Edward C. Johnson 3d family and
trusts for their benefit are the predominant owners of Class B Shares of
common stock of FMR Corp., representing approximately 49% of its voting
power. Mr. Johnson 3d, the chairman of FMR Corp., owns 12.0% of the
aggregate outstanding voting stock of FMR Corp. and Ms. Johnson, a director
of FMR Corp., owns 24.5% of the aggregate outstanding voting stock of FMR
Corp. The number of shares of our common stock owned by the group at
December 31, 2001 included 811,229 shares of common stock resulting from
the assumed conversion of $14,659,000 principal amount of our 5.25%
convertible subordinated notes due 2006.
(11) According to Schedule 13G filed February 5, 2002 by Putnam Investments, LLC
on behalf of itself, Marsh & McLennan Companies, Inc. (its parent holding
company), Putnam Investment Management, LLC (a wholly-owned subsidiary of
Putnam Investments, LLC and investment adviser to the Putnam family of
mutual funds) and The Putnam Advisory Company, LLC (a wholly-owned
subsidiary of Putnam Investments, LLC and investment adviser to Putnam's
institutional clients). Both Putnam Investment Management, LLC and The
Putnam Advisory Company, LLC have dispositive power over the shares as
investment managers. However, each of the mutual fund's trustees has voting
power over the shares held by each fund, and The Putnam Advisory, LLC has
shared voting power over the shares held by institutional clients. Putnam
Investments, LLC and The Putnam Advisory Company, LLC have shared voting
power with respect to approximately 681,537 of such shares. Putnam
Investments, LLC has shared dispositive power with respect to approximately
6,957,898 shares, The Putnam Advisory Company, LLC has shared dispositive
power with respect to 1,373,108 shares and Putnam Investments, LLC has
shared dispositive power with respect to approximately 5,584,790 shares.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 2001, the compensation committee of the board of directors consisted
of Mr. Dutkowsky, Ms. Gemmell and Mr. Harper, none of whom served as our
employee or officer at any time. The compensation committee is responsible for
setting and administering policies governing compensation of executive officers,
including the annual Executive Bonus Plan, the 2000 Nonstatutory Stock Option
Plan and the 1997 Stock Incentive Plan. In addition, the compensation committee
reviews compensation levels of other management level employees, evaluates the
performance of management and reviews other compensation-related issues.
COMPENSATION POLICIES
Our compensation policy is designed to enable us to attract, retain and
reward executive officers who are likely to contribute to our long-term success.
The compensation committee also believes that a strong correlation should exist
between executive compensation, business objectives and our overall performance.
In preparing the performance graph for this proxy statement, we have
selected the CRSP Total Return Industry Index for NASDAQ Computer and Data
Processing Services Stock Index ("CRSP Index"). The companies which we use for
comparison of salary and compensation information are not necessarily those
included in the CRSP Index, because they were determined not to be competitive
with us for executive talent or because compensation information was not
available.
COMPONENTS OF COMPENSATION
There are three components of our executive compensation program that are
intended to attract and retain executive officers and to motivate them to
improve our financial position and to create value for our shareholders.
Salary
We strive to offer salaries to our executive officers which are competitive
with salaries offered by companies of similar size and capitalization in the
software industry. Base salaries are reviewed on an annual basis and are subject
to adjustment based upon the individual's contribution to us and changes in
salary levels offered by comparable companies. In determining executive
officers' salaries, the compensation committee considers information provided by
our chief executive officer with respect to individual officer responsibilities
and performance, as well as salary surveys and similar data available from
independent sources.
Bonuses
Awards under our Executive Bonus Plan for 2001 were contingent upon us
achieving certain performance goals established by the board of directors. For
executive officers other than the chief executive officer, awards were also
contingent on the achievement of individual performance objectives. Target
amounts of bonuses for each executive officer are set annually by the
compensation committee and are specifically weighted for identified financial,
management, strategic and operational goals. The compensation committee reviews
performance against the goals and approves payment of the bonuses. In 2001,
bonuses awarded under the plan to Mr. Samenuk, our chief executive officer,
totaled $540,000. The bonus received by Mr. Samenuk under the plan was 28% of
his total cash compensation. Bonuses awarded under the plan in 2001 to other
executive officers represented between 0% and 40% of their total cash
compensation. Bonuses awarded to Mr. Samenuk under this plan were in addition to
the $800,000 bonus we awarded Mr. Samenuk in connection with his joining the
company.
Equity Incentives
The compensation committee believes that employee equity ownership is
highly motivating, provides a major incentive to employees in building
stockholder value and serves to align the interests of employees with the
interests of our stockholders. In determining the amount of equity compensation
to be awarded to
8
executive officers in any fiscal year, the compensation committee considers the
position of the officer, the current stock ownership of the officer, the number
of shares which continue to be subject to vesting under outstanding options and
the expected future contribution of the officer to our performance, giving
primary weight to the officer's position and his expected future contributions.
In addition, we compare the stock ownership and options held by each officer
with the other officers' equity positions and the officer's experience and value
to us.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
George Samenuk's annual base salary for 2001 was $720,000. Mr. Samenuk was
paid a performance-based bonus of $540,000, and $600,000 out of an $800,000
sign-on bonus in 2001. The remaining portion of Mr. Samenuk's sign-on bonus will
be paid in 2002. Mr. Samenuk's annual base salary for 2002 is $720,000 and Mr.
Samenuk is eligible for a bonus in 2002. In determining these compensation
adjustments, the compensation committee considered, among other things,
compensation data for chief executives of comparable companies and Mr. Samenuk's
performance in 2001.
The chief executive officer evaluates the performance of all other
executive officers on an annual basis and recommends salary adjustments, which
are subject to review and approval by the compensation committee. Performance
evaluations for individual executive officers are based on predetermined
individual goals proposed by management and approved by the compensation
committee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code limits deductions for federal
income tax purposes, certain executive compensation exceeding $1,000,000 for any
executive officer in any year. Our 1997 Stock Incentive Plan enables
compensation recognized in connection with the exercise of options to qualify as
an exception to the deduction limit. The compensation committee will continue to
evaluate the issues relating to executive compensation and will take appropriate
action where necessary. The compensation committee's policy is to qualify its
executive compensation for deductibility under applicable tax laws, where
possible.
COMPENSATION COMMITTEE
Virginia Gemmell, Chair
Robert Dutkowsky
Edwin Harper
9
AUDIT COMMITTEE REPORT
During 2001, the audit committee consisted of three independent directors.
In connection with the audited consolidated financial statements contained in
our 2001 Annual Report on Form 10-K, the audit committee:
- reviewed the audited consolidated financial statements with our
management and PricewaterhouseCoopers LLP (PwC), our independent public
accountants;
- discussed with PwC the materials required to be discussed by Statement of
Auditing Standard 61, or SAS 61;
- reviewed the written disclosures and the letter from PwC required by
Independent Standards Board No. 1, Independence Discussions with Audit
Committees;
- discussed with representatives of PwC the accounting firm's independence
from us and management;
- considered whether the provision by PwC of non-audit services is
compatible with maintaining PwC's independence; and
- based on the foregoing review and discussion, recommended to the board of
directors that the audited financial statements be included in our 2001
Annual Report on Form 10-K.
AUDIT COMMITTEE
Robert Pangia, Chair
Edwin Harper
Virginia Gemmell
10
COMPARISON OF STOCKHOLDER RETURN
The following graph shows a five-year comparison of cumulative total
returns for our common stock, the CRSP Total Return Index for the NASDAQ Stock
Market and the CRSP Total Return Industry Index for NASDAQ Computer and Data
Processing Services Stocks, each of which assumes an initial value of $100 and
reinvestment of dividends. The information presented in the graph and table is
as of the end of each fiscal year ended December 31.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
[LINE GRAPH]
-----------------------------------------------------------------------------------------------------------
Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01
-----------------------------------------------------------------------------------------------------------
Networks Associates, Inc. 100 120.2 225.9 91.0 14.3 88.1
NASDAQ Stock Market-US 100 122.5 172.7 320.9 193.0 153.1
NASDAQ Computer & Data Processing 100 122.9 219.2 481.8 221.9 178.7
Pursuant to the SEC's proxy rules, the Compensation Committee Report, the
Audit Committee Report and the Stock Performance Graph are not deemed filed with
the SEC and are not deemed incorporated by reference into any filings with the
SEC. Performance for 2001 reflects a December 31, 2001 closing market price on
the Nasdaq National Market of $25.85. Since February 12, 2002, our common stock
has been listed for trading on the New York Stock Exchange and is no longer
traded on the Nasdaq National Market.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"exchange act"), requires the company's officers and directors, and persons who
own more than ten percent of a registered class of the company's equity
securities, to file certain reports of ownership with the Securities and
Exchange Commission (the "SEC") and with the National Association of Securities
Dealers, Inc. Such officers, directors and stockholders are also required by SEC
rules to furnish us with copies of all Section 16(a) forms they file. All
reports required to be filed during fiscal year 2001 pursuant to Section 16(a)
of the exchange act by directors, executive officers and 10% beneficial owners
were filed on timely basis, except as follows: Edwin Harper purchased 1,305
shares of common stock in November of 2001 in a transaction that was not
reported in a timely manner to the SEC.
11
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table summarizes the compensation paid to our chief executive
officer and our five other most highly compensated executive officers as of
December 31, 2001, based on salary and bonus figures.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------------
------------------------------------------- SECURITIES SECURITIES
OTHER UNDERLYING UNDERLYING
ANNUAL NAI MCAFEE.COM ALL OTHER
NAME AND PRINCIPAL POSITION AGE YEAR SALARY(1) BONUS COMPENSATION OPTIONS(#) OPTIONS(#) COMPENSATION
--------------------------- --- ---- --------- -------- ------------ ---------- ---------- ------------
George Samenuk............. 46 2001 $714,922(2) $540,000 $1,971,000(3) 1,600,000 -- $696,428(4)
Chairman of the Board and
Chief Executive Officer
Stephen Richards........... 48 2001 $259,807(5) $175,000 $ 299,500(6) 650,000 -- $ 608(7)
Chief Operating Officer
and
Chief Financial Officer
Gene Hodges................ 50 2001 $290,000 $108,596 -- 600,000 $ 1,242(7)
President
Arthur Matin............... 45 2001 $ 53,077(8) -- $1,894,000(9) 600,000 -- $ 68(10)
President, McAfee Product
Group
Zachary Nelson(11)......... 40 2001 $250,010 $130,000 -- 400,000 $ 43,719(12)
Chief Strategy Officer 2000 $225,009 $137,955 -- -- -- $ --
1999 $300,013 $156,434 -- 200,000 180,000(13) $ 3,250(14)
Srivats Sampath(15)........ 42 2001 $272,083 $ 29,250 -- -- 250,000 $ 538(16)
President and Chief 2000 $240,000 $ 57,479 -- -- -- $ --
Executive Officer 1999 $240,000 $ 62,608 -- -- 900,000(13) $ 3,250(14)
McAfee.com
---------------
(1) Salary includes amounts deferred under our 401(k) Plan.
(2) Mr. Samenuk joined us on January 3, 2001. Mr. Samenuk's 2001 earnings
reflect an annual salary of $720,000.
(3) Represents the difference between the market price of our common stock and
the exercise price of Mr. Samenuk's 400,000 share option on January 3,
2001, the date of exercise, multiplied by the shares exercised.
(4) Includes the payment of $600,000 of Mr. Samenuk's $800,000 sign-on bonus
with the balance to be paid in 2002. Also includes relocation benefits of
$95,618 and group term life insurance coverage of $810.
(5) Mr. Richards joined us on April 4, 2001. Mr. Richards' 2001 earnings
reflect an annual base salary of $350,000.
(6) Represents the difference between the market price of our common stock and
the exercise price of Mr. Richards' 50,000 share option on April 4, 2001,
the date of exercise, multiplied by the shares exercised.
(7) Represents group term life insurance coverage paid by us.
(8) Mr. Matin joined us on October 30, 2001. Mr. Matin's 2001 earnings reflect
an annual base salary of $400,000.
(9) Represents the difference between the market price of our common stock and
the exercise price of Mr. Matin's 100,000 share option on October 30, 2001,
the date of exercise, multiplied by the shares exercised.
(10) Represents group term life insurance coverage paid by us. Mr. Matin will be
paid a sign-on bonus of $500,000 in 2002.
(11) Since October 1, 2001, Mr. Nelson has served as a special advisor to us and
is not currently an officer of the company. In 2000, Mr. Nelson served as
chief executive officer of myCIO.com, our wholly-owned subsidiary and was
granted 800,000 options for my.CIO.com common stock. In February 2001, we
announced our plan to reintegrate my.CIO.com's operations with our own.
While my.CIO.com options
12
held by Mr. Nelson continue to vest and become exercisable while Mr. Nelson
is employed by us, the fair market value of his my.CIO.com options are
significantly less than the $5.13 per share exercise price.
(12) Represents payment of Mr. Nelson's accrued paid time off balance of $43,269
and group term life insurance coverage of $450.
(13) In January 1999, options to purchase shares of McAfee.com Class A common
stock were granted to our then chief executive officer and our four most
highly compensated executive officers, including Srivats Sampath, the chief
executive officer of McAfee.com.
(14) Represents contributions made by us pursuant to our 401(k) Plan.
(15) Mr. Sampath was under McAfee.com's compensation plan in 2001, 2000 and 1999
and therefore received no Network Associates options. Compensation
information for Mr. Sampath includes amounts paid by McAfee.com. Network
Associates did not pay Mr. Sampath compensation in 2001, 2000 and 1999.
(16) Represents group term life insurance coverage paid by McAfee.com.
William Larson and Prabhat Goyal served as our chief executive officer and
chief financial officer, respectively, until January 2, 2001. From January 2,
2001 until January 2, 2002 and January 31, 2002, respectively, Messrs. Larson
and Goyal served as special advisors to us and were not officers during this
time. Under the terms of their employment agreements, during 2001 we paid Mr.
Larson $420,000 in salary, $580,008 in bonus, $60,574 for payment of his accrued
paid time off balance and $810 for group term life insurance and we paid Mr.
Goyal $300,012 in salary, $200,004 in bonus, $43,269 for payment of his accrued
paid time off balance and $810 for group term life insurance.
George Samenuk joined the company in January 2001 as chief executive
officer, and was appointed as a director. In April 2001, Mr. Samenuk was named
chairman of the board of directors. From January 2000 to January 2001, Mr.
Samenuk served as president and chief executive officer of TradeOut, Inc., a
private online exchange company. From April 1999 to January 2000, Mr. Samenuk
served as general manager, Americas at IBM Corporation. From August 1996 to
April 1999, Mr. Samenuk was general manager, ASEAN/South Asia at IBM
Corporation. Mr. Samenuk has been a director of McAfee.com since January 2001,
and has served as the chairman of its board of directors since March 2001.
Stephen Richards joined the company in April 2001 as executive vice
president and chief financial officer. In April 2001, Mr. Richards was named a
director of McAfee.com Corporation. In November 2001, Mr. Richards was also
named chief operating officer. From April 1996 to August 2000, Mr. Richards
served in several senior level executive positions with E*Trade Group, Inc.,
including chief financial officer. From October 1984 to March 1996, Mr. Richards
served as managing director and chief financial officer of the Correspondent
Clearing Division of Bear Stearns. He has also held management positions with
A.G. Becker Paribas, Jefferies Group, Inc. and Coopers & Lybrand LLP. Mr.
Richards is a director of TradeStation Group.
Gene Hodges has served as president of the company since November 2001. Mr.
Hodges served as president of the McAfee product group from January 2000 to
November 2001, and from August 1998 to January 2000, he served as vice president
of security marketing. Mr. Hodges joined Network Associates in 1995 and served
in numerous other management positions with the company. Prior to joining
Network Associates, Mr. Hodges was vice president of Marketing for a wireless
data startup and managed a business unit for Digital Equipment Corporation.
Arthur Matin is currently the president of the company's McAfee product
group. Mr. Matin joined the company in October 2001. From May 2000 to October
2001, Mr. Matin was senior vice president of worldwide sales and marketing at
CrossWorlds Software Inc. From January 2000 to May 2000, Mr. Matin served as
senior vice president of worldwide sales for CrossWorlds. From January 1999 to
January 2000, Mr. Matin served as vice president of the industrial sector at
IBM. From 1980 to 1999, Mr. Matin held various other management positions at
IBM, including general manager, Industries, Asia Pacific, general manager,
Product Management, Asia Pacific and vice president of Sales, Manufacturing
Industry.
13
Zachary Nelson joined the company in March 1997 as vice president and
general manager of Network Management. From December 1999 to April 2001, Mr.
Nelson served as president and chief executive officer of myCIO.com, our wholly
owned subsidiary. In April 2001, Mr. Nelson became chief strategy officer of the
company. In September 2001, Mr. Nelson's employment as chief strategy officer
was terminated. Mr. Nelson continues to serve as a special advisor to the
company.
Srivats Sampath is currently the chief executive officer and a director of
McAfee.com Corporation. Mr. Sampath joined the company in June 1998 as vice
president of Worldwide Marketing and became president and chief executive
officer of McAfee.com in December 1998. From June 1996 to December 1997, Mr.
Sampath was vice president of Product Marketing for Netscape Communications, a
provider of Internet software and services.
Our officers serve at the discretion of the board of directors. There are
no family relationships among any of our directors and executive officers.
This table shows stock option grants made by Network Associates and
McAfee.com to our chief executive officer and our five other most highly
compensated executive officers during the year ended December 31, 2001:
OPTION GRANTS IN 2001
INDIVIDUAL GRANTS
-----------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET
UNDERLYING GRANTED TO PRICE ON
COMPANY OPTIONS EMPLOYEES EXERCISE DATE OF
GRANTING GRANTED IN FISCAL PRICE GRANT EXPIRATION
NAME OPTION (#)(1) YEAR ($/SH)(2) ($/SH) DATE
---- -------- ---------- ---------- --------- -------- ----------
George Samenuk....... NET 1,200,000 6.52% 4.9375 4.9375 1/3/11
NET 400,000 2.17% 0.01 4.9375 1/3/02
Stephen Richards..... NET 600,000 3.26% 6.00 6.00 4/4/11
NET 50,000 0.27% 0.01 6.00 4/4/02
Gene Hodges.......... NET 300,000 1.63% 4.1875 4.1875 1/2/11
NET 300,000 1.63% 15.59 15.59 10/9/11
Arthur Matin......... NET 500,000 2.72% 18.95 18.95 10/30/11
NET 100,000 0.54% 0.01 18.95 10/30/02
Zachary Nelson....... NET 400,000 2.17% 4.1875 4.1875 1/2/11
Srivats Sampath...... NET -- -- -- -- --
MCAF 250,000 13% 4.969 4.969 1/3/11
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
APPRECIATION FOR
OPTION TERMS(3)
-------------------------------------
NAME 0% 5% 10%
---- ---------- ---------- -----------
George Samenuk....... $ -- $3,726,201 $ 9,442,924
$1,971,000 $2,069,750 $ 2,168,500
Stephen Richards..... $ -- $2,264,021 $ 5,737,473
$ 299,500 $ 314,500 $ 329,500
Gene Hodges.......... $ -- $ 790,049 $ 2,002,139
$ -- $2,941,340 $ 7,453,933
Arthur Matin......... $ -- $5,958,777 $15,100,710
$1,894,000 $1,988,750 $ 2,083,500
Zachary Nelson....... $ -- $1,053,398 $ 2,669,519
Srivats Sampath...... $ -- -- --
$ -- $ 781,244 $ 1,979,827
---------------
* Less than 1%
(1) Except as noted below, all of the above options for Network Associates'
common stock granted in 2001 vest at the rate of one-fourth (or 25%) one
year from the date of grant and 1/48 per month after that. Mr. Sampath's
McAfee.com options vest in the same manner as Network Associates' options.
1/8 of Mr. Samenuk's option for 400,000 shares vested on each of April 3,
2001, July 3, 2001, October 3, 2001 and January 3, 2002, the remaining
shares vest in full on January 3, 2003. Mr. Richards' option for 50,000
shares was fully vested upon grant. Mr. Matin's option for 100,000 shares
was fully vested upon grant. Under the 1997 Stock Incentive Plan, the board
of directors is allowed to modify the terms of outstanding options. The
exercisability of options may be accelerated upon a change in control.
Options are cancelled on an optionee's termination of employment under
certain specified circumstances.
(2) Other than options granted with exercise prices of $0.01 per share, all
options were granted at an exercise price equal to the fair market value of
the common stock on the date of grant. Options granted with an exercise
price below the fair market value of the common stock on the date of grant
have a one-year term.
(3) These columns present hypothetical future values that might be realized on
exercise of the options, less the exercise price. These values assume that
the market price of our stock appreciates at a zero, five and ten percent
compound annual rate over the term of the options. The five and ten percent
rates of stock price appreciation are presented as examples pursuant to the
SEC's proxy rules and do not necessarily reflect management's assessment of
our future stock price performance. The potential realizable values
14
presented are not intended to indicate the value of the options. For options
granted with an exercise price below the market price on the date of grant, the
potential realizable values in the zero percent appreciation column reflect the
difference between the option exercise price and the market price on the
date of grant.
The following table shows stock option exercises and the value of
unexercised stock options held by our chief executive officer and our five other
most highly compensated executive officers during the year ended December 31,
2001:
AGGREGATE OPTION EXERCISES IN 2001
AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
COMPANY ACQUIRED OPTIONS AT 12/31/01(#) 12/31/01(1)
GRANTING ON VALUE --------------------------- ---------------------------
NAME OPTION EXERCISE(#) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------- ----------- ----------- ----------- ------------- ----------- -------------
George Samenuk(3)..... NET 400,000 $1,971,000 1,200,000 0 $25,095,000 $ --
Stephen Richards(4)... NET 50,000 $ 299,500 600,000 0 $11,910,000 $ --
Gene Hodges........... NET -- $ -- 134,821 649,949 $ 1,812,344 $10,046,096
MCAF -- $ -- 5,000 -- $ 136,800 $ --
Arthur Matin(5)....... NET 100,000 $1,894,000 500,000 0 $ 3,450,000 $ --
Zachary Nelson........ NET 76,000 $ 598,940 594,313 404,687 $ 8,133,799 $15,226,319
MCAF 53,900 $ 398,704 -- -- $ -- $ --
myCIO.com -- $ -- 316,666 483,334 $ -- $ --
Srivats Sampath....... NET -- $ -- 125,000 25,000 $ -- $ --
MCAF 200,000 $3,660,410 456,250 493,750 $13,798,506 $14,607,054
---------------
(1) Calculated by taking the closing market price on December 31, 2001, of
$25.85 for Network Associates and $33.91 for McAfee.com, as applicable, less
the exercise price, multiplied by the number of options exercisable or
unexercisable. The amounts in these columns may not represent amounts
actually realized by these executive officers.
(2) Calculated by taking the market price on the date of exercise, less the
exercise price, multiplied by the number of options exercised.
(3) Mr. Samenuk holds 200,000 shares of stock acquired upon the exercise of
options that are subject to our repurchase right. The repurchase right for
these shares lapses on January 3, 2003, the second year anniversary date of
Mr. Samenuk's employment commencement. 1.2 million options were issued to
Mr. Samenuk on January 3, 2001 and are immediately exercisable. 25% of these
shares vested on January 3, 2002, the first anniversary of Mr. Samenuk's
employment commencement, and the remaining shares vest at a rate of 1/48 per
month for the remaining 36 months of the vesting period. If Mr. Samenuk
exercises these stock options with respect to the unvested shares, we have
repurchase rights with respect to those unvested shares.
(4) Mr. Richards holds 600,000 options that are immediately exercisable. 25% of
the shares vested on April 4, 2002, the first anniversary of Mr. Richards'
employment commencement and the remaining shares vest at a rate of 1/48 per
month for the remaining 36 months of the vesting period. If Mr. Richards
exercises these stock options with respect to the unvested shares, we have
repurchase rights with respect to those unvested shares.
(5) Mr. Matin holds 500,000 options that are immediately exercisable. 25% of
these shares vest on October 30, 2002, the first anniversary of Mr. Matin's
employment commencement and the remaining shares vest at a rate of 1/48 per
month for the remaining 36 months of the vesting period. If Mr. Matin
exercises the stock options with respect to the unvested shares, we have
repurchase rights with respect to those unvested shares.
15
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
George Samenuk entered into an agreement with us dated January 2, 2001,
which provides for his at will employment as our chief executive officer. This
agreement also provides that if Mr. Samenuk is terminated other than for cause
or resigns for good reason, he will be entitled to the following severance
benefits: (i) twelve months of additional vesting for stock options and
restricted stock grants, (ii) 24 months of severance payments based on Mr.
Samenuk's base salary and targeted bonus, (iii) any unpaid amount of Mr.
Samenuk's sign-on bonus, and (iv) continued health and other welfare and fringe
benefits through the earlier of (x) 18 months from termination or (y) until Mr.
Samenuk is covered by similar plans by a new employer. If Mr. Samenuk is
terminated other than for cause, or resigns with good reason after (i) the
occurrence of a transaction where our stockholders do not own at least 50% of
the stock of the surviving corporation, (ii) the acquisition of more than 50% of
our stock by another party, or (iii) the sale of substantially all of our
assets, Mr. Samenuk will be entitled to all of the severance benefits noted
above, all of his stock options will become fully vested and any repurchase
rights on his shares of restricted stock will lapse.
Stephen Richards entered into an agreement with us dated April 3, 2001,
which provides for his at will employment as our chief financial officer. The
agreement also provides that if Mr. Richards is actually or constructively
terminated other than for cause he will be entitled to severance benefits equal
to twelve months of base salary and targeted bonus, plus twelve months of
accelerated stock option vesting. If Mr. Richards is actually or constructively
terminated other than for cause, after (i) the occurrence of a transaction where
our stockholders do not own at least 50% of the stock of the surviving
corporation, (ii) the acquisition of more than 50% of our stock by another party
or (iii) the sale of substantially all of our assets, Mr. Richards will be
entitled to the severance noted above, all of his stock options will become
fully vested, and he will be provided with continued health care coverage
through the earlier of twelve months from termination or until he is covered by
similar plans by a new employer.
Gene Hodges entered into an agreement with us dated December 3, 2001, which
provides for his at will employment as our president. This agreement provides
that if Mr. Hodges is terminated for any reason, he shall be entitled to a pro
rata targeted bonus if the relevant goals for the quarter are met, in addition
to his accrued salary and vacation pay. If Mr. Hodges is terminated other than
for cause or resigns for good reason, he will be entitled to the following
severance benefits: (i) twelve months of severance payments based on Mr. Hodges'
base salary and one-third of his targeted bonus, (ii) continued health and other
welfare and fringe benefits through the earlier of (x) twelve months from
termination or (y) until Mr. Hodges is covered by similar plans by a new
employer and (iii) all of Mr. Hodges' stock options will become fully vested
and, if applicable, repurchase rights on his shares of restricted stock will
lapse. After (i) the occurrence of a transaction where our stockholders do not
own at least 50% of the stock of the surviving corporation, (ii) the acquisition
of more than 50% of our stock by another party, or (iii) the sale of
substantially all of our assets, Mr. Hodges' stock options will become fully
vested and, if applicable, any repurchase rights on his shares of restricted
stock will lapse. Under this agreement, we will indemnify Mr. Hodges for any
parachute tax payments that arise pursuant to the agreement.
Arthur Matin entered into an agreement with us dated October 30, 2001,
which provides for his at will employment as the president of our McAfee product
group. This agreement also provides that if Mr. Matin is terminated other than
for cause or resigns for good reason, he will be entitled to the following
severance benefits: (i) twelve months of additional vesting for stock options,
(ii) twelve months of severance payments based on Mr. Matin's base salary and
targeted bonus and (iii) continued health and other welfare and fringe benefits
through the earlier of (x) twelve months from termination or (y) until Mr. Matin
is covered by similar plans by a new employer. If Mr. Matin is terminated other
than for cause, or resigns with good reason after (i) the occurrence of a
transaction where our stockholders do not own at least 50% of the stock of the
surviving corporation; (ii) the acquisition of more than 50% of our stock by
another party; or (iii) the sale of substantially all of our assets, Mr. Matin
will be entitled to all of the severance benefits noted above, all of his stock
options will become fully vested.
Zachary Nelson entered into an agreement with us dated March 20, 1997,
which provides that if his employment with us is terminated other than for cause
within three months of our merger or a sale of
16
substantially all of our assets due to such transaction, all of his outstanding
options will become fully vested and immediately exercisable ten days prior to
the consummation of the transaction. In addition, the agreement was amended on
May 11, 1999 to provide that in the event that his employment is involuntarily
terminated other than for cause in connection with a change in control, he will
be entitled to receive severance payments for twelve months after such a
termination. Mr. Nelson's prior agreements were supplemented and amended in an
agreement with us dated January 1, 2001, which provides for Mr. Nelson's
employment as a senior executive. The agreement provides that prior to December
31, 2001, either (i) Mr. Nelson may resign from his senior executive position
and become a special advisor to us for a one year term, or (ii) we may remove
Mr. Nelson from his position and have him serve as a special advisor for a one
year term. On October 1, 2001, Mr. Nelson became a special advisor and, in
accordance with the agreement, he will continue to serve as such until October
1, 2002.
Srivats Sampath entered into a change of control agreement with McAfee.com
dated July 14, 2000. If prior to or within 12 months of a change of control (as
defined in the agreement) of McAfee.com, Mr. Sampath is terminated other than
for cause or voluntarily terminates his employment for good reason (each as
defined in the change of control agreement), then, among other things, Mr.
Sampath is entitled to: (a) salary and a pro-rated portion of his target bonus
for the year through the date of termination; (b) 12 months of total earnings
(salary and targeted bonus); (c) all McAfee.com options granted to Mr. Sampath
become fully vested and exercisable; and (d) continued health care benefits for
up to one year from termination. This agreement was amended on August 1, 2001 to
revise the definitions of change of control and good reason as used in the
agreement to include a termination following Network Associates' acquisition of
all or substantially all outstanding McAfee.com common stock.
INDEBTEDNESS OF MANAGEMENT
Under the terms of Mr. Samenuk's amended and restated employment agreement,
we agreed to loan Mr. Samenuk the funds necessary to pay the taxes due on each
vesting date for the 400,000 shares of restricted stock granted to Mr. Samenuk
on January 3, 2001. As of January 3, 2002, we have extended 4 separate loans to
Mr. Samenuk in the aggregate amount of $1,051,752. The loans each have a
two-year maturity and bear interest at the applicable federal rate. The loans
are full recourse and secured by Mr. Samenuk's restricted stock.
We agreed to loan Mr. Samenuk the funds necessary to pay the taxes due on
the 3,000 shares of stock granted to Mr. Samenuk on January 15, 2002. In January
2002 we extended Mr. Samenuk a $27,305 loan for this purpose. This loan has a
two-year maturity and bears interest at the applicable federal rate. This loan
is full recourse and secured by Mr. Samenuk's 3,000 shares.
Under the terms of Mr. Matin's employment agreement, we agreed to loan Mr.
Matin the funds necessary to pay the taxes due upon the exercise of his 100,000
share option grant. In 2001, we extended a $864,413 loan to Mr. Matin. This loan
has a two-year maturity and bears interest at the applicable federal rate. The
loan is full recourse and secured by Mr. Matin's 100,000 shares.
OFFICERS AND DIRECTORS INSURANCE
We maintain an insurance policy covering officers and directors to cover
any claims made against them for wrongful acts that they may otherwise be
required to pay or for which we are required to indemnify them, subject to
certain exclusions.
17
NEW PLAN BENEFITS
As of April 1, 2002, no benefits or amounts relating to the additional
5,000,000 options to acquire shares of common stock added to the 1997 Stock
Incentive Plan and no benefits relating to the 2002 Employee Stock Purchase
Plan, both subject to stockholder approval, have been received by, or allocated
to, any individuals under such plans.
NUMBER OF
NAME AND POSITION OPTIONS
----------------- ---------
Named officers.............................................. N/A
All Current Executive Officers as a Group................... N/A
All Current Non-Employee Directors as a Group............... N/A
All Current Non-Executive Employees as a Group.............. N/A
CERTAIN TRANSACTIONS
Transactions between us and McAfee.com
We have entered into certain agreements with McAfee.com for the purpose of
defining our ongoing relationship. These agreements were developed in the
context of a parent/subsidiary relationship and therefore are not the result of
arms-length negotiations between independent parties.
Corporate Management Services Agreement. On January 1, 1999, we entered
into a Corporate Management Services Agreement with McAfee.com under which we
provide McAfee.com services relating to tax, accounting, insurance, employee
benefits administration, corporate record keeping, payroll, information
technology infrastructure, and facilities management. In addition, McAfee.com
may request that we provide certain additional services from time to time in the
future, with the fee for such additional services subject to negotiation between
the parties. From January 1, 1999 to December 31, 2000, the monthly fee that we
received for services under the agreement was a portion of the costs we incurred
(based on headcount) plus a 10% mark-up. During the year ended December 31,
2000, we charged McAfee.com $5.8 million under this agreement. In January 2001,
we entered into an amended corporate management services agreement with
McAfee.com whereby McAfee.com will pay $400,000 per calendar quarter for
services related to tax, accounting, insurance, employee benefits and
administration, corporate record keeping, payroll, information technology
infrastructure, and facilities management. Under the amended agreement,
McAfee.com will pay to us 110% of the direct rent paid by us for the use of
facilities made available to McAfee.com. During the year ended December 31,
2001, we charged McAfee.com $1,600,000 under the amended agreement.
The Corporate Management Services Agreement may be terminated either by us
when we cease to own a majority of McAfee.com's outstanding voting stock or by
McAfee.com upon 30 days notice to us.
Cross License Agreement. We, through one of our wholly-owned subsidiaries,
entered into a technology cross license agreement with McAfee.com. Under this
agreement, we granted McAfee.com worldwide non-exclusive patent licenses and
exclusive copyright licenses for the sale or licensing of software products or
software services to certain OEMs and end users solely via the Internet.
Eligible end users include only single-node, individual consumers. In
consideration for the license and rights granted under this license, McAfee.com
is required to pay us a 7% royalty on revenues from related product and
subscription sales. Also under this agreement, McAfee.com granted us
non-exclusive patent licenses and exclusive copyright licenses for the sale of
products to enterprise customers through any method of distribution including
the Internet and to end users through any method excluding the Internet. In
consideration for the rights granted under this license, we are required to pay
McAfee.com a royalty of $250,000 per quarter. Under this cross license
agreement, we will provide end user support to McAfee.com customers. Charges for
such support are equal to a portion of the costs to us plus a 10% markup. During
the year ended December 31, 2000 and 2001, we charged McAfee.com $2.2 million
and $2.4 million for royalties and support services, respectively.
Reseller Agreements. In March 2001, we entered into reseller agreements
with McAfee.com. Under these agreements, McAfee.com may resell our products to
business customers and, in certain countries, we
18
may sell McAfee.com products to OEMs and end-users directly or through ASPs.
During the year ended December 31, 2001, we charged McAfee.com approximately
$1.7 million under the reseller agreements.
Japanese Distribution Agreement. On April 28, 2000, Network Associates Co.,
Ltd. ("NAC"), at that time a majority-owned, and as of June 27, 2001, a
wholly-owned Japanese subsidiary of ours, entered into a Master OEM Distributor
Agreement, effective as of January 1, 2000, with McAfee.com. Under the terms of
the agreement, NAC will be the exclusive distributor of certain of McAfee.com's
products in the Japanese PC OEM channel, subject to certain terms and conditions
set forth in the agreement, for an initial term of three years. McAfee.com will
receive a license fee and will in turn pay NAC ten percent (10%) of net sales
revenue McAfee.com initially receives from PC OEM customers that subsequently
purchase a subscription to McAfee Clinic. During the years ended December 31,
2000 and 2001, NAC paid license revenue to McAfee.com of $861,000 and $1.8
million respectively.
In June 2001, McAfee.com and Sourcenext Corporation entered into a Japanese
distribution agreement. At that time, notwithstanding our technology cross
license agreement and the reseller agreements, we agreed Sourcenext was
authorized to distribute to both OEM and retail customers in Japan, Japanese
language versions of our and McAfee.com consumer products. Other than sales to
specified OEMs, during the term of the Sourcenext distribution agreement, we and
our Japanese subsidiary, NAC, have not agreed to distribute the covered products
in Japan to retail customers and OEMs.
Tax-Sharing Agreement. We have entered into a tax-sharing agreement with
McAfee.com under which McAfee.com calculates its income taxes on a separate
return basis. McAfee.com will be included in our consolidated group for federal
income tax purposes as long as it is eligible to do so. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the tax-sharing agreement allocates tax liabilities between McAfee.com and us,
during the period in which McAfee.com is included in our consolidated group, we
could be liable in the event that any federal tax liability is incurred, but not
discharged, by McAfee.com or any other members of our consolidated group.
Under the tax-sharing agreement, McAfee.com and each other member has
agreed to indemnify us if we are required to pay any tax liability amount in
excess of our hypothetical separate income tax liability, provided we are not in
default of our obligation to pay our hypothetical separate income tax liability.
The tax-sharing agreement will terminate if McAfee.com is no longer
eligible to join us in the filing of a consolidated federal income tax return.
In the event of such termination, any net operating losses or other carryforward
amounts would not be available to McAfee.com upon departure from the group.
Under the tax-sharing agreement, McAfee.com will not be reimbursed for any such
loss of tax benefits.
Joint Cooperation Agreement. We have entered into a Joint Cooperation and
Master Services Agreement with McAfee.com which governs the provision of
technology services among the parties. Under this agreement, our anti-virus
emergency response team (AVERT) will provide McAfee.com with research and
solutions for virus events. The agreement also contains standard terms and
conditions governing the provision of technology services from one party to the
other under statements of work that may be negotiated from time to time.
Currently, McAfee.com has entered into one such statement of work under which
McAfee.com provides us infrastructure and technical support services for our web
site. We pay McAfee.com a fee for these services in an amount equal to 10% of
McAfee.com's total quarterly technology costs plus a ten-percent (10%) service
charge. McAfee.com is obligated to provide these services until December 31,
2000 under this statement of work. During the years ended December 31, 2000 and
2001, we were charged approximately $200,000 and $0, respectively.
Indemnification and Voting Agreement. We have entered into an
Indemnification and Voting Agreement with McAfee.com which became effective on
December 2, 1999. Except under certain specified circumstances, we will
indemnify McAfee.com for all losses related to any third party claims relating
to events or circumstances arising out of our actions or inactions, including
those of our subsidiaries and officers and directors, on or prior to December 2,
1999. Additionally, for so long as we own at least 20% of McAfee.com's
19
outstanding voting power, we will vote our shares of McAfee.com's common stock
in favor of the election of two independent McAfee.com directors.
Registration Rights Agreement. We have entered into a registration rights
agreement with McAfee.com that entitles us to include the shares of common stock
we own in McAfee.com in any future registration of common stock McAfee.com
makes, other than any registration statement relating to an acquisition or a
stock option plan. In addition, we or certain of our transferees can request
that McAfee.com file a registration statement so we can publicly sell our
McAfee.com shares. McAfee.com has agreed pursuant to the terms of this
registration rights agreement to pay all costs and expenses, other than
underwriting discounts and commissions, related to shares to be sold by us or
certain of our transferees in connection with any such registration.
OTHER INFORMATION
We know of no other matters to be submitted at the annual meeting. If any
other matters properly come before the annual meeting, it is the intention of
the persons named in the enclosed proxy card to vote the shares they represent
as our board of directors may recommend.
By order of the Board of Directors,
-s- Kent Roberts
Kent H. Roberts
Secretary
April 11, 2002
20
APPENDIX A
SUMMARY OF THE 1997 STOCK INCENTIVE PLAN
The key provisions of the Incentive Plan are summarized below. This
summary, however, is not intended to be a complete description of all terms of
the Incentive Plan. A copy of the plan text will be furnished to any stockholder
upon request. Such a request should be directed to the Corporate Secretary at
the company's principal executive office at 3965 Freedom Circle, Santa Clara, CA
95054.
ADMINISTRATION AND ELIGIBILITY. The Compensation Committee administers the
Incentive Plan. Employees, non-employee directors and consultants of the company
are eligible to participate in the Incentive Plan, although incentive stock
options may be granted only to employees. As of March 15, 2002, approximately
3,705 employees and consultants would have been eligible to participate in the
Incentive Plan.
FORM OF AWARDS. Awards under the Incentive Plan may take the form of
options to acquire common stock of the company, stock appreciation rights
("SARs"), restricted shares or stock units, or any combination of these. No
payment is required upon the grant of an award, except for the payment of the
par value of any Restricted Stock awarded.
Options may include nonstatutory stock options ("NSOs") as well as
incentive stock options ("ISOs") intended to qualify for special tax treatment.
The term of an option cannot exceed 10 years. The exercise price of an ISO must
be equal to or greater than the fair market value of the common stock on the
date of grant, while the exercise price of an NSO must be equal to or greater
than 85% of fair market value. As of March 15, 2002, the closing price of the
company's common stock on the New York Stock Exchange was $27.61 per share.
The exercise price of an option may be paid in any legal form permitted by
the Compensation Committee, including:
- a full-recourse promissory note;
- the surrender of shares of common stock; or
- the surrender of restricted shares already owned by the optionee.
The Compensation Committee may also permit optionees to pay off their
withholding tax obligation upon exercise of an NSO by surrendering a portion of
their option shares to the company. The Incentive Plan also allows the optionee
to pay the exercise price of an option through a "cashless exercise" in a broker
assisted transaction.
At any point in time, the Compensation Committee may offer to buy out an
outstanding option for cash or give an optionee the right to give up their
option for cash.
An SAR permits the participant to elect to receive any appreciation in the
value of the underlying stock from the company. This appreciation may be in
shares of common stock, cash or a combination of the two, with the Compensation
Committee having the discretion to determine the form in which such payment is
made. The amount payable on exercise of an SAR is measured by the difference
between the market value of the underlying stock at exercise and the exercise
price. All SARs intended to be exempt from the section 162(m) limit will be
granted with an exercise price equal to or greater than 100% of the fair market
value of the common stock on the date of grant. SARs may, but need not, be
granted in conjunction with options. Upon exercise of an SAR granted in tandem
with an option, the corresponding portion of the related option must be
surrendered and cannot thereafter be exercised. Conversely, upon exercise of an
option to which an SAR is attached, the SAR may no longer be exercised to the
extent that the corresponding option has been exercised.
Restricted shares are shares of common stock that are subject to forfeiture
in the event that the applicable vesting conditions are not satisfied.
Restricted shares have the same voting and dividend rights as other shares of
common stock. The recipient of restricted shares may pay all projected
withholding taxes relating to the award with shares of common stock rather than
cash.
A-1
A stock unit is an unfunded bookkeeping entry representing the equivalent
of one share of common stock. A holder of stock units has no voting rights or
other privileges as a stockholder but may be entitled to receive dividend
equivalents equal to the amount of dividends paid on the same number of shares
of common stock. Dividend equivalents may be converted into additional stock
units or settled in the form of cash, common stock or a combination of both.
Stock units, when vested, may be settled by distributing shares of common stock
or by a cash payment corresponding to the fair market value of an equivalent
number of shares of common stock, or a combination of both. Vested stock units
are settled at the time determined by the Compensation Committee. If the time of
settlement is deferred, interest or additional dividend equivalents may be
credited on the deferred payment. The recipient of stock units may pay all
withholding taxes relating to the settlement of the award with common stock
rather than cash.
VESTING CONDITIONS. The Compensation Committee determines the vesting and
other conditions. The vesting conditions may be based on:
- the length of the recipient's service;
- his or her individual performance;
- the company's performance; and
- other appropriate criteria.
In the case of restricted shares and stock units, vesting is based on the
company's performance.
Where company performance is used as a vesting or issuance condition,
performance goals are based on business criteria specified by the Compensation
Committee, selected from one or more of the following:
- cash flow, - return on capital,
- earnings per share, - return on stockholder equity,
- gross margin, - growth with respect to any of the foregoing
- net income, measures,
- operating income, - expense reduction,
- operating margin, - growth in bookings,
- pre-tax profit, - growth in revenue, and
- return on assets, - stock price increase.
Vesting may be accelerated in the event of the recipient's death,
disability or retirement or in the event of a transfer of control with respect
to the company. Transfer of control is defined in the Incentive Plan as:
- the direct or indirect sale or exchange by the stockholders of the
company of all or substantially all of the voting stock of the company;
- a merger in which the company is a party; or
- the sale, exchange or transfer of all or substantially all of the assets
of the company.
A transfer of control will also occur in the event of a liquidation or
dissolution of the company.
DEFERRAL OF AWARDS. The Compensation Committee may permit or require the
recipient of an award to:
- have cash that otherwise would be paid to him or her, as a result of the
exercise of an SAR or the settlement of stock units, credited to a
deferred compensation account established for him or her as an entry on
the company's books;
- to have shares of common stock that otherwise would be delivered to him
or her as a result of the exercise of an option or SAR converted into an
equal number of stock units; or
- to have shares that otherwise would be delivered to him or her as a
result of the exercise of an option or SAR or the settlement of stock
units converted into an amount credited to a deferred compensation
account established for him or her on the company's books.
A-2
The amount to be credited is measured by reference to the fair market value
of common stock as of the date when shares otherwise would have been delivered
to the award recipient. A deferred compensation account established under this
provision may be credited with interest or other forms of investment return, as
determined by the Compensation Committee.
NUMBER OF RESERVED SHARES AND MAXIMUM AWARDS. The total number of shares of
the company's common stock that may be issued under the Incentive Plan, subject
to shareholder approval, is 32.48 million. Under the terms of the Incentive
Plan, if:
- any options, SARs, restricted shares or stock units are forfeited;
- if options or SARs terminate for any other reason prior to exercise;
- if options currently outstanding under the Predecessor Plan are forfeited
or otherwise terminate unexercised; or
- if stock units are settled,
then only the number of shares (if any) actually issued in settlement of such
stock units reduces the number of shares available under the Incentive Plan and
the balance again becomes available for awards under the Plan. If SARs are
exercised, then only the number of shares (if any) actually issued in settlement
of such SARs reduces the number available and the balance again becomes
available for awards. No individual may receive options or SARs covering more
than one million shares in any calendar year (subject to anti-dilution
adjustments), except that the limit is 1.5 million shares for a new employee in
the year in which he or she is hired. In the case of an award that is subject to
performance vesting conditions, no individual may receive more than 300,000
restricted shares or stock units in any calendar year (subject to anti-dilution
adjustments).
NEW PLAN BENEFITS. Awards under the Incentive Plan are discretionary.
Therefore, it is not possible to determine the benefits that will be received in
the future by participants in the Incentive Plan.
FEDERAL TAX CONSEQUENCES
The federal income tax consequences of awards under the Incentive Plan are
summarized as follows:
Options
The award of stock options will have no federal income tax consequences to
the company or the optionee at the time of the option grant.
For ISOs the exercise will not result in any regular taxable income to the
optionee at the time and neither will the company be entitled to any deduction,
however, at the time of exercise, the excess of the fair market value over the
exercise price is an adjustment for purposes of computing alternative minimum
taxable income. If the optionee holds the shares for the required statutory
period, the difference between the sale price and the exercise price generally
will be taxed as a capital gain or loss. If the optionee holds the shares for
less than the statutory period, the optionee will generally recognize ordinary
income at the time of the sale equal to the excess of the fair market value of
the shares at exercise (or if less, the sales proceeds) over the exercise price
and the company will generally be entitled to a deduction for the same amount.
Any additional gain on the disposition will generally be taxed as a capital
gain.
For NSOs the optionee will generally recognize taxable income equal to the
excess of the fair market value at the time of exercise over the exercise price.
This taxable income will be subject to withholding tax. Also the company can
take a deduction equal to the ordinary income recognized by the optionee. Upon
any subsequent disposition of the shares, the difference between the sale price
and the exercise price will generally be taxed as capital gain or loss.
Restricted Shares
For restricted shares, unless the purchaser elects to be taxed at the time
of issuance, these shares will generally be taxed in the same way as NSOs.
However, due to the company's right to repurchase the shares
A-3
when the purchaser stops providing services to the company, the holder does not
recognize ordinary income at the time of the sale, but at the time at which the
company's right to repurchase the shares stops. Ordinary income is measured as
the difference between the purchase price and the fair market value of the
shares on the date that the company's right to repurchase the shares stops.
Stock Appreciation Rights
For SARs, no income is recognized at the time of the grant. When the right
is exercised, the recipient will recognize taxable income equal to the amount of
the cash received and the fair market value of any common stock received. For a
recipient who is also an employee, the income recognized will be subject to
withholding and the company will be able to take a deduction equal to the same
amount of that income. For common stock received upon exercise of an SAR, the
subsequent sale will be treated in the same way as the gain or loss on an NSO.
Stock Units
The grant of a stock unit award results in no federal income tax
consequences for the participant or the company. The payment of a stock unit
award results in taxable income to the participant equal to the amount of the
payment received. The value is based on the fair market value of the common
stock on the date of the payment. The company will be able to take a deduction
equal to the same amount.
A-4
APPENDIX B
SUMMARY OF THE 2002 EMPLOYEE STOCK PURCHASE PLAN
SUMMARY OF THE PURCHASE PLAN
The key provisions of our 2002 Employee Stock Purchase Plan (the "Purchase
Plan") are summarized below. This summary, however, is not intended to be a
complete description of all terms of the Purchase Plan. A copy of the plan text
will be furnished to any stockholder upon request. Such request should be
directed to the Corporate Secretary at our principal office at 3965 Freedom
Circle, Santa Clara, CA 95054.
General. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Code. Each participant in the Purchase
Plan is granted a "purchase right" at the beginning of each offering period
under the plan, which gives the participant the right to purchase shares of our
common stock through accumulated payroll deductions.
Shares Subject to Plan. A maximum of 2,000,000 of our authorized but
unissued or reacquired shares of common stock may be issued under the Purchase
Plan, subject to appropriate adjustment in the event of any stock dividend,
stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the company, or
in the event of any merger, sale of assets or other reorganization of the
company. If a purchase right expires or terminates, the shares subject to the
unexercised portion of the purchase right will again be available for issuance
under the Purchase Plan.
Administration. The Purchase Plan is administered by the board of directors
or a duly appointed committee of the board. Subject to the provisions of the
Purchase Plan, the board determines the terms and conditions of purchase rights.
The board will interpret the Purchase Plan and purchase rights granted
thereunder, and all determinations of the board will be final and binding on all
persons having an interest in the Purchase Plan or any purchase right. The
Purchase Plan provides, subject to certain limitations, for indemnification by
the company of any director, officer or employee against all reasonable
expenses, including attorneys' fees, incurred in connection with any legal
action arising from such person's action or failure to act in administering the
plan.
Eligibility. Any employee of ours or of any present or future parent or
subsidiary corporation designated by the board for inclusion in the Purchase
Plan is eligible to participate, so long as the employee works at least 20 hours
per week and has been employed for at least 30 days. However, no employee who
owns or holds options to purchase, or who, as a result of participation in the
Purchase Plan, would own or hold options to purchase, 5% or more of the total
combined voting power or value of all classes of our stock or of any parent or
subsidiary corporation is eligible to participate in the Purchase Plan. As of
April 1, 2002, approximately 3,671 employees, including 10 executive officers,
would be eligible to participate in the Purchase Plan were it then in effect.
Offerings. Generally, the Purchase Plan will provide for sequential and
overlapping offerings of approximately 24 months duration commencing on or about
January 1 and July 1 of each year and ending on or about the last days of the
second December and June thereafter, respectively. Each offering period will
generally consist of 4 consecutive purchase periods of approximately six months
duration. The board may establish a different term for one or more offerings,
not to exceed 27 months, or different starting or ending dates for any offering
period or purchase period. If the Purchase Plan is approved by the stockholders,
the initial offering period will commence on July 1, 2002 and end on June 30,
2004.
Participation and Purchase of Shares. Participation in an offering is
limited to eligible employees who authorize payroll deductions prior to the
"offering date," which is the first day of an offering period. Payroll
deductions may not exceed 15% (or such other rate as the board determines) of an
employee's compensation on any payday during the offering period. An employee
who becomes a participant in the Purchase Plan will automatically participate in
each subsequent offering period beginning immediately after the last day of the
offering period in which he or she is a participant until the employee withdraws
from the Purchase Plan, becomes ineligible to participate, or terminates
employment.
B-1
Subject to any limitations or notice requirements which we impose, a
participant may increase or decrease his or her rate of payroll deductions or
withdraw from the Purchase Plan at any time during an offering. Upon withdrawal,
we will refund without interest the participant's accumulated payroll deductions
not previously applied to the purchase of shares. A participant who withdraws
from an offering may not again participate in the same offering. If the fair
market value of a share of common stock on the last day of a purchase period,
other than the final purchase period of an offering, is less than the fair
market value of a share of common stock on the offering date of that offering,
then, unless a participant elects otherwise, each participant will be withdrawn
automatically from the current offering after purchasing shares and enrolled in
the new offering commencing immediately following thereafter.
Subject to certain limitations, each participant in an offering is granted
a purchase right equal to the lesser of a number of whole shares determined by
dividing $50,000 by the fair market value of a share of common stock on the
offering date or 10,000 shares. In addition, no participant may purchase shares
under this plan or any other employee stock purchase plan of ours (or of our
subsidiaries) to the extent that the right to purchase shares accrues at a rate
exceeding $25,000 (based on the fair market value of the shares on the offering
date) for each calendar year in which the purchase right is outstanding.
Purchase rights are nontransferable and may only be exercised by the
participant.
On the last day of each purchase period during an offering, each
participant purchases a number of shares determined by dividing the amount of
his or her payroll deductions accumulated during the purchase period by the
purchase price, limited in any case by the number of shares subject to the
participant's purchase right for that offering.
The price at which shares are sold under the Purchase Plan is equal to 85%
of the lesser of the fair market value per share of our common stock on (i) the
offering date or (ii) the purchase date. The fair market value of our common
stock on any relevant date generally will be the closing price per share as
reported on the New York Stock Exchange. On April 1, 2002, the closing price per
share of our common stock was $23.65. Any payroll deductions under the Purchase
Plan not applied to the purchase of shares will be returned to the participant
without interest, unless the amount remaining is less than the amount necessary
to purchase an additional whole share, in which case the remaining amount may be
applied to the next purchase period.
Change in Control. In the event of a "change in control", as defined in the
Purchase Plan, the surviving, continuing, successor or purchasing corporation or
other business entity or parent thereof may assume our rights and obligations
under the Purchase Plan. However, if the acquiror elects not to assume such
rights and obligations, the purchase date of the then current purchase period
will be accelerated to a date before the change in control specified by the
board. Any purchase rights that are not assumed or exercised prior to the change
in control will terminate.
Termination or Amendment. The Purchase Plan will continue until terminated
by the board or until all of the shares reserved for issuance under the plan
have been issued. The board may at any time amend or terminate the Purchase
Plan, except that the approval of our stockholders is required within twelve
months of the adoption of any amendment increasing the number of shares
authorized for issuance under the Purchase Plan, or changing the definition of
the corporations which may be designated by the board as corporations whose
employees may participate in the Purchase Plan.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Purchase Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
Generally, there are no tax consequences to an employee of either becoming
a participant in the Purchase Plan or purchasing shares under the Purchase Plan.
The tax consequences of a disposition of shares vary depending on the period
such stock is held before its disposition. If a participant disposes of shares
within two years after the offering date or within one year after the purchase
date on which the shares are acquired (a
B-2
"disqualifying disposition"), the participant recognizes ordinary income in the
year of disposition in an amount equal to the difference between the fair market
value of the shares on the purchase date and the purchase price. Any additional
gain or resulting loss recognized by the participant from the disposition of the
shares is a capital gain or loss.
If the participant disposes of shares at least two years after the offering
date and at least one year after the purchase date on which the shares are
acquired, the participant recognizes ordinary income in the year of disposition
in an amount equal to the lesser of (i) the difference between the fair market
value of the shares on the date of disposition and the purchase price or (ii) an
amount equal to 15% of the fair market value of the shares on the offering date.
Any additional gain recognized by the participant on the disposition of the
shares is a capital gain. If the fair market value of the shares on the date of
disposition is less than the purchase price, there is no ordinary income, and
the loss recognized is a capital loss.
A capital gain or loss will be long-term if the participant holds the
shares for more than 12 months and short-term if the participant holds the
shares for 12 months or less. Currently, long-term capital gains are generally
subject to a maximum tax rate of 20%.
If the participant disposes of the shares in a disqualifying disposition,
we should be entitled to a deduction equal to the amount of ordinary income
recognized by the participant as a result of the disposition, except to the
extent such deduction is limited by applicable provisions of the Code or the
regulations thereunder. In all other cases, we are not allowed a tax deduction.
NEW PLAN BENEFITS
Because benefits under the Purchase Plan will depend on employees'
elections to participate and the fair market value of our common stock at
various future dates, it is not possible to determine the benefits that will be
received by executive officers and other employees if the Purchase Plan is
approved by the stockholders. Non-employee directors are not eligible to
participate in the Purchase Plan.
B-3
DETACH HERE
PROXY
NETWORKS ASSOCIATES, INC.
3965 Freedom Circle
Santa Clara, California 95054
This Proxy is Solicited on Behalf of the Board of Directors
You may vote by telephone, by internet or by mail, please return your
proxy in the enclosed business reply envelope.
The undersigned hereby appoints George Samenuk and Kent Roberts as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote as designated on the reverse side, all
the shares of common stock of Networks Associates, Inc. held of record by the
undersigned on April 5, 2002, at the Annual Meeting of Stockholders to be held
on May 15, 2002, or any adjournment thereof.
------------
Vote by Telephone
------------
It's fast, convenient, and immediate!
Call Toll-Free on a Touch-Tone Phone
1-877-PRX-VOTE (1-877-779-8683).
---------------------------------------------
Follow these four easy steps:
1. Read the accompanying Proxy Statement and Proxy Card.
2. Call the toll-free number.
1-877-PRX-VOTE (1-877-779-8683).
3. Enter your 14-digit Voter Control Number located on your Proxy Card
above your name.
4. Follow the recorded instructions.
----------------------------------------------
Your vote is important!
Call 1-877-PRX-VOTE anytime!
------------
Vote by Internet
------------
It's fast, convenient, and your vote is immediately confirmed and
posted.
------------------------------------------------
Follow these four easy steps:
1. Read the accompanying Proxy Statement and Proxy Card.
2. Go to the Website http://www.eproxyvote.com/net
3. Enter your 14-digit Voter Control Number located on your Proxy Card
above your name.
4. Follow the instructions provided.
-------------------------------------------------
Your vote is important!
Go to http://www.eproxyvote.com/net anytime!
Do not return your Proxy Card if you are voting by telephone or
internet.
SEE REVERSE SEE REVERSE SIDE (Continued and to be signed on reverse side)
DETACH HERE
[X] Please mark votes as in this example.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [ ]
This Proxy, when properly executed, will be voted in the manner directed herein
by the assigned stockholder. If no direction is taken this proxy will be voted
for Proposals 1, 2, 3, 4 and 5.
1. Election of Class I Director.
Nominee: Ms. Liane Wilson
[ ] For [ ] Withheld
2. To approve an amendment to the 1997 Stock Incentive Plan to increase the
number of shares of the Company's common stock reserved for issuance
thereunder by 5,000,000 shares.
[ ] For [ ] Against [ ] Abstain
3. To approve the adoption of the Company's 2002 Employee Stock Purchase
Plan.
[ ] For [ ] Against [ ] Abstain
4. To ratify the appointment of PricewaterhouseCoopers LLP as the
independent accountants for the fiscal year ending December 31, 2002.
[ ] For [ ] Against [ ] Abstain
5. At their discretion, the proxies are authorized to vote upon other
business as may properly come before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears to the left. When shares are held in
joint tenancy, all such persons should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
Signature: Date:
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Signature: Date:
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