-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UtNleQ2hNFFqE065yIoB4oEpUbUrwOWJI4wGLRD7TbbFxGWPpnoZJe3+BghsPiLD law+h/s3SpPO8lEHHrFZPQ== 0000912057-96-017217.txt : 19960813 0000912057-96-017217.hdr.sgml : 19960813 ACCESSION NUMBER: 0000912057-96-017217 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK GENERAL CORPORATION CENTRAL INDEX KEY: 0000844643 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770115204 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17431 FILM NUMBER: 96608986 BUSINESS ADDRESS: STREET 1: 4200 BOHANNON DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 154732000 MAIL ADDRESS: STREET 2: 4200 BOHANNON DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) __ |_X_| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended...June 30, 1996 ------------- OR __ |__| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to_____________ Commission file number 0-17431 NETWORK GENERAL CORPORATION ---------------------------- (Exact name of registrant as specified in its charter) Delaware 77-0115204 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4200 Bohannon Drive, Menlo Park, California 94025 - ------------------------------------------------------------------------------- (address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (415) 473-2000 -------------- Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of July 1, 1996, there were outstanding 43,680,413 shares of the Registrant's Common Stock (par value $0.01 per share). This report, including exhibits, consists of 120 pages. The exhibit index begins on page twelve. FORM 10-Q INDEX PAGE ---- Cover Page 1 Index 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 1996 and March 31, 1996 3 Condensed Consolidated Statements of Income - three months ended June 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows - three months ended June 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements - June 30, 1996 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 - 14 Signatures 14 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) June 30, 1996 March 31, 1996 ------------- -------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $55,953 $34,180 Marketable securities 72,975 81,417 Accounts receivable, net 37,905 34,043 Inventories 5,146 4,863 Prepaid expenses and deferred tax assets 12,818 11,303 ---------- ---------- Total current assets 184,797 165,806 Property and Equipment, at cost: Demonstration and rental equipment 10,714 9,968 Office and development equipment 28,823 27,443 Leasehold improvements 2,902 2,771 ---------- ---------- 42,439 40,182 Less accumulated depreciation and amortization (25,336) (23,006) ---------- ---------- Net property and equipment 17,103 17,176 Long-term Investments 24,763 37,139 Other Assets 4,353 3,209 ---------- ---------- $231,016 $223,330 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $4,854 $4,300 Accrued liabilities 17,998 14,749 Deferred revenue 22,338 20,916 ---------- ---------- Total current liabilities 45,190 39,965 Long-term Deferred Revenue and Taxes 3,346 3,248 Stockholders' Equity: Common stock - - $.01 par value Authorized - - 50,000,000 shares Issued - - 46,570,413 shares at June 30, 1996 and 46,068,302 shares at March 31, 1996 466 461 Additional paid-in-capital 131,285 127,482 Retained earnings 100,484 91,799 Less treasury stock, at cost - - 2,890,000 shares at June 30, 1996 2,490,000 shares at March 31, 1996 (49,755) (39,625) ---------- ---------- Total stockholders' equity 182,480 180,117 ---------- ---------- $231,016 $223,330 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Three Months Ended June 30, 1996 1995 -------- -------- (Unaudited) Revenues: Products $40,639 $31,830 Services 11,041 7,910 -------- -------- Total Revenues 51,680 39,740 Cost of Revenues: Products 9,661 6,904 Services 3,312 2,217 -------- -------- Total Cost of Revenues 12,973 9,121 -------- -------- Gross profit 38,707 30,619 Operating Expenses: Sales and marketing 17,022 13,596 Research and development 7,176 5,791 General and administrative 3,704 2,631 -------- -------- Total Operating Expenses 27,902 22,018 Income from operations 10,805 8,601 Interest Income, net 1,691 1,746 -------- -------- Income before provision for income taxes 12,496 10,347 Provision for Income Taxes 3,811 3,156 -------- -------- Net income $8,685 $7,191 -------- -------- -------- -------- Earnings Per Share $.19 $.16 -------- -------- -------- -------- Weighted Average Common and Common Equivalent Shares Outstanding 46,145 45,414 -------- -------- -------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) For the Three Months Ended June 30, 1996 1995 ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $8,685 $7,191 Adjustments to reconcile net income to net cash provided by operating activities : Depreciation and amortization 2,219 1,754 Deferred taxes, net (692) 1,839 Net change in certain assets and liabilities (790) 1,813 ---------- ---------- Net cash provided by operating activities 9,422 12,597 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of held-to-maturity investments (33,816) (38,105) Purchases of available-for-sale investments (8,900) - Proceeds from maturities of held-to-maturity investments 50,046 26,058 Proceeds from sales/maturities of available-for-sale investments 13,600 - Net additions to property and equipment (2,257) (3,463) ---------- ---------- Net cash provided by (used in) investing activities 18,673 (15,510) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net of issuance costs 3,808 931 Repurchase of common stock (10,130) (6,122) ---------- ---------- Net cash used in financing activities (6,322) (5,191) Net increase (decrease) in cash and cash equivalents 21,773 (8,104) Cash and cash equivalents at beginning of period 34,180 18,950 ---------- ---------- Cash and cash equivalents at end of period $55,953 $10,846 ---------- ---------- ---------- ---------- Supplemental Disclosures Cash paid during the period for: Income taxes $1,982 $148
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Network General Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles of interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended March 31, 1996 included in the Company's 1996 Annual Report on Form 10-K. The results of operations for the three months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1997. Certain prior year interim balances have been reclassified to conform to the fiscal 1997 presentation. B. CASH AND CASH EQUIVALENTS, MARKETABLE DEBT SECURITIES, AND LONG-TERM INVESTMENTS For purposes of the condensed consolidated statements of cash flows, the Company considers certificates of deposits, commercial paper, money market funds, and other similar financial instruments with an original maturity date of three months or less to be cash equivalents. SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE: Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the company has the positive intent and ability to hold the securities to maturity. Marketable debt securities not classified as held-to-maturity are classified as available-for-sale. Held-to- maturity investments are stated at cost, adjusted for amortization of premiums and accretion of discounts to maturity. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity, if significant. As of June 30, 1996, the following is a summary of held-to-maturity and available-for-sale securities: HELD-TO-MATURITY SECURITIES
(In thousands) Amortized Aggregate Unrealized Cost Fair Value Gains --------- --------- --------- Debt securities issued by the U.S. Treasury and other U.S. government agencies $30,347 $30,398 $51 Debt securities issued by states of the United States and political subdivisions of the state 40,159 40,206 47 -------- -------- -------- $70,506 $70,604 $98 -------- -------- -------- -------- -------- -------- AVAILABLE-FOR-SALE SECURITIES (In thousands) Amortized Aggregate Unrealized Cost Fair Value Gains --------- --------- --------- Debt securities issued by the U.S. Treasury and other U.S. government agencies $1,000 $1,003 $3 Debt securities issued by states of the United States and political subdivisions of the state 26,232 26,524 292 -------- -------- -------- $27,232 $27,527 $295 -------- -------- -------- -------- -------- --------
6 C. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and related manufacturing overhead. Inventories consist of: (In thousands) June 30, 1996 March 31, 1996 ------------- -------------- Purchased parts $3,627 $2,650 Finished goods 1,519 2,213 ------ ------ $5,146 $4,863 ------ ------ ------ ------ D. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of fiscal year 1997 and there was no impact on the Company's financial statements. E. EARNINGS PER SHARE Earnings per share are computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share are the same as primary earnings per share. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements within the meaning of section 27A of the Securities and Exchange Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which reflect the Company's current judgment on those issues. Because such statements apply to future events, they are subject to risks and uncertainties that could cause the actual results to differ materially. Important factors which could cause actual results to differ materially are described in the following paragraphs and are particularly noted under BUSINESS RISKS on pages 10 and 11 and the Company's reports on Forms 10-K and 10-Q on file with the Securities and Exchange Commission. RESULTS OF OPERATIONS Revenues for the quarter ended June 30, 1996 were $51,680,000, an increase of 30% over revenues of $39,740,000 for the quarter ended June 30, 1995. Domestic revenues increased 22% to $38,900,000 for the quarter ended June 30, 1996 compared to $31,769,000 for quarter ended June 30, 1995. International revenues increased 60% for the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996, growing from $7,971,000 to $12,780,000. Pacific Rim and Latin America revenues increased 65% quarter over quarter while European revenues grew 53%. International revenues increased to 25% of total revenues for the quarter ended June 30, 1996, compared to 20% for the quarter ended June 30, 1995. The following table presents the Company's revenues for each of its product lines in absolute dollars and as a percentage of revenues for each of the periods shown below: Three Months Ended June 30, --------------------------- (dollars in thousands) SOURCES OF REVENUES 1996 1995 ------- ------- Tool Products (1) $27,036 $20,424 System Products (2) 13,603 11,406 ------- ------- Subtotal Products Revenues 40,639 31,830 Services (3) 11,041 7,910 ------- ------- Total Revenues $51,680 $39,740 ------- ------- ------- ------- PERCENTAGES OF REVENUES 1996 1995 ------- ------- Tool Products 52% 51% System Products 27% 29% ------- ------- Subtotal Products Revenues 79% 80% Services 21% 20% ------- ------- Total Revenues 100% 100% ------- ------- ------- ------- (1) Tool products include revenues from the Sniffer-Registered Trademark- Network Analyzer products, the Progressive Computing, Inc. ("PCI") line of Wide Area Network (WAN) analysis products, product rentals and royalties from license agreements. (2) System products consist of revenues from the Distributed Sniffer System analysis products, performance measurement analysis products, the Distributed Sniffer System-Registered Trademark- monitoring products and the Sharpshooter monitoring products. (3) Services revenues include first-year warranty revenues as defined by Statement of Position ("SOP") 91-1 and revenues from software support and maintenance contracts, training and consulting services. 8 The Company's tool products revenues increased 32% to $27,036,000 for the quarter ended June 30, 1996 compared to $20,424,000 for the quarter ended June 30, 1995. Sniffer Network Analyzer products accounted for substantially all of the Company's tool products revenues in both periods. Tool products revenues represented approximately 52% of Network General's revenues for the first fiscal quarter ended June 30, 1996, compared to 51% for the same period in fiscal 1995. Revenues for the quarter ended June 30, 1996 included $13,603,000 in system products revenues, a 19% increase compared to $11,406,000 of system products revenues for the same period in fiscal 1996. The Distributed Sniffer System (DSS) analysis products accounted for the majority of the Company's system products revenues in both periods. System products revenues represented approximately 27% of Network General's revenues for the quarter ended June 30, 1996, a slight decrease from 29% for the quarter ended June 30, 1995, due to faster growth in tools and services revenues. Services revenues include revenues from software support and maintenance contracts, training, and consulting services, as well as those revenues from the first year warranty period of customer support which have been deferred in accordance with SOP 91-1, "Software Revenue Recognition". For the first fiscal quarter ended June 30, 1996, services revenues increased 40% to $11,041,000, from $7,910,000 for the same quarter in fiscal 1996. The increase in services revenues resulted from increases in all categories of services revenues. As a percentage of total revenues, services revenues represented approximately 21% of Network General's revenues for the first fiscal quarter ended June 30, 1996, an increase from 20% for the same period ended June 30, 1995. Cost of revenues consists of manufacturing costs, cost of services, royalties, and warranty expenses. Gross profit as a percentage of revenues decreased to 75% for the quarter ended June 30, 1996 from 77% for the quarter ended June 30, 1995, primarily resulting from the impact of promotional pricing activities for an older product platform. Gross profit and gross profit percent may vary as a result of a number of factors, including the mix between tool products (which include sales of third party platforms which have lower margins than the Company's own products), system products and services, and the mix of international and domestic sales. Sales and marketing expenses were $17,022,000 in the first quarter of fiscal 1997, an increase of 25% compared to $13,596,000 in the first quarter of fiscal 1996. The increase was primarily due to increased staffing, commission expense and promotional activity required to support increased sales volumes. As a percentage of revenues, sales and marketing expenses decreased to 33% from 34% for the quarters ended June 30, 1996 and 1995, respectively, due to increased productivity and increased use of alternative distribution channels to sell the Company's products and services. Research and development expenses were $7,176,000 in the first quarter of fiscal 1997, compared to $5,791,000 in the first quarter of fiscal 1996. As a percentage of revenues, research and development expenses were 14% for the quarter ended June 30, 1996 compared to 15% for the quarter ended June 30, 1995. The increase in spending was a result of increased staffing and equipment expense to support accelerated development efforts for high speed network technology. The Company believes continued commitment to research and development is required to remain competitive. Research and development expenses are accounted for in accordance with Statement of Financial Accounting Standards No. 86, under which the Company is required to capitalize software development costs after technological feasibility is established. Capitalizable software development costs incurred to date have not been significant and, thus, the Company has charged all software development costs to research and development expenses in the consolidated statements of income. General and administrative expenses were $3,704,000 for the quarter ended June 30, 1996 and $2,631,000 for the quarter ended June 30, 1995. Increased spending for general and administrative expenses was primarily the result of increased staffing to support operations. General and administrative expenses as a percentage of revenues were 7% for both quarters ended June 30, 1996 and 1995. Earnings per share for the quarter ended June 30, 1996 increased to $0.19 compared to $0.16 per share earned in the quarter ended June 30, 1995. The increase was due to increased revenues and gross margin dollars, as well as lower operating expenses as a percentage of revenues. The number of weighted average common stock equivalents increased from 45,414,000 in the first quarter of fiscal 1996 to 46,145,000 in the first quarter of fiscal 1997. 9 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $9,422,000 for the three months ended June 30, 1996 and $12,597,000 for the three months ended June 30, 1995. The primary source of these funds was net income in fiscal 1997 and 1996, as well as net changes in deferred taxes and certain assets and liabilities in fiscal 1996. Net cash provided by investing activities was $18,673,000 for the three months ended June 30, 1996, compared to net cash used in investing activities of $15,510,000 for the three months ended June 30, 1995. Net cash from investing activities in the first three months of fiscal 1997 reflects proceeds from sales/maturities of held-to-maturity and available-for-sale investments reinvested in cash and cash equivalents, net of additions to property and equipment and purchases of held-to-maturity and available-for-sale investments. The Company used net cash of $6,322,000 in the three month period ended June 30, 1996 relating to financing activities. Repurchases of common stock totaling $10,130,000 were offset by $3,808,000 from proceeds from the issuance of common stock. Net cash used in financing activities for the quarter ended June 30, 1995 was comprised of stock repurchases totaling $6,122,000, offset by proceeds from stock issuances totaling $931,000. As of June 30, 1996, the Company's principal sources of liquidity included cash, cash equivalents, marketable securities and long-term investments totaling $153,691,000, including $24,763,000 of long-term investments. The Company currently has no outstanding bank borrowings and has no established lines of credit. The Company believes cash generated from operations, together with existing cash and investment balances, will be sufficient to satisfy operating cash and capital expenditure requirements through at least the next twelve months. BUSINESS RISKS The Company's future operating results may be adversely affected by certain factors and trends of its market which are beyond its control. The market for Network General's products is characterized by rapidly changing technology and evolving industry standards. Included in such technology changes is the development of switching technologies for the transmission of data along local area and wide area networks, such as asynchronous transfer mode ("ATM") and switched-Ethernet. Network General believes its future success will depend, in part, on its ability to continue to develop, introduce and sell new products. The Company is committed to continuing investments in research and development; however, there is no assurance these efforts will result in the development of products for the appropriate platforms or operating systems, or the timely release or market acceptance of new products. The Company's results may be adversely affected by the actions of existing or future competitors including established and emerging computer, communications, intelligent network wiring, network management and test instrument companies. New and competitive entrants into the field of network fault and performance management may come from such diverse entities as established network hardware companies which have embedded systems in their network hardware and smaller companies which market their software products as having "network management" functionality. There can be no assurance Network General will be able to compete successfully in the future with existing or future competitors. New entrants, new technology and new marketing techniques may cause customer confusion, thereby lengthening the sales cycle process for the Company. Increased competition may also lead to downward pricing pressure on the Company's products. In addition, the Company's expansion of its indirect channels of distribution may lead to channel conflict and downward pricing pressure. The Company is in the final stages of a revised distribution strategy in Europe which includes a combination of third party distributors and direct sales and, as a result, there may be fluctuating results in European sales efforts until the strategy is fully implemented. 10 Network General does not carry a significant level of backlog. The majority of the Company's revenues in each quarter are a result of shippable orders booked in that quarter. Orders in the most recent quarter were received by the Company later in the fiscal quarter than they have been in prior quarters. It is anticipated this trend will continue into the near future. To the extent orders are received late in the fiscal quarter, there is more risk the Company may not attain quarterly revenue targets. Since the Company's expense levels are based on expectations of future revenues, failure of the Company to achieve quarterly revenue targets would, therefore, have an adverse effect on the Company's operating results. Network General products may be considered by certain customers to be capital purchases. An adverse change in general economic conditions could cause certain of the Company's customers to reduce their capital spending, which may adversely affect the Company's operating results. In September 1995, the Company acquired the remaining 90% of voting interest of AIM. The successful combination of companies in the high technology industry may be more difficult to accomplish than in other industries. There can be no assurance Network General will be successful in developing products based on AIM's engineering expertise and technology, that Network General will be successful in integrating its own distribution channels with those of AIM, that Network General will be successful in penetrating AIM's customer base, that Network General will be successful in selling AIM's products to its own customer base, that the combined companies will retain their key personnel or that Network General will realize any of the benefits anticipated at the time of the merger. There has been substantial litigation regarding patent and other intellectual property rights in the software industry. As is typical in the software industry, the Company has received from time to time notices from third parties alleging infringement claims. Although there are currently no pending lawsuits against Network General regarding any possible infringement claims, there can be no assurance infringement claims will not be asserted in the future or that such assertions will not materially adversely affect the Company's business, financial condition and results of operations. If any such claims are asserted against Network General, the Company may need to seek to obtain a license under the third party's intellectual property rights. There can be no assurance a license will be available on reasonable terms or at all. Failure to obtain a necessary license on commercially reasonable terms would materially adversely affect the Company's business, financial condition and results of operations. Network General could decide, in the alternative, to resort to litigation to challenge such claims. Such litigation could be expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of operations. For certain critical components of its products, Network General relies on a limited number of suppliers. In addition, some of the Company's products are designed around specific computer platforms which are only available from certain manufacturers. As a result of product transitions by these computer platform manufacturers, the Company has found it increasingly necessary to purchase and inventory computer platforms for resale to its customers. Any significant shortage of computer platforms or other critical components for the Company's products could lead to cancellations or delays of purchases of the Company's products which would materially adversely affect the Company's operating results. If purchases of computer platforms or other components exceed demand, the Company would incur expenses for disposing of the excess inventory, which would also adversely affect the Company's operating results. TRADEMARKS Sniffer and Distributed Sniffer Systems are registered trademarks of Network General and/or its wholly owned subsidiaries. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: From time to time the Company has been, or may become, involved in litigation proceedings incidental to the conduct of its business. The Company does not believe any such proceedings presently pending will have a material adverse affect on the Company's financial position or its results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: 1) Exhibits Exhibit Number Exhibit Title - -------- ------------- 3.1 Third restated certificate of Incorporation of Network General Corporation, a Delaware corporation. 3.2 Amended and Restated Bylaws of Network General Corporation. 4.1 Registration Rights Agreement between the Company and certain investors dated December 31, 1987, which is incorporated by reference to Exhibit 4.2 of the Company's Registration Statement No. 33-26107 on Form S-1, which became effective February 2, 1989 ("Form S-1"). 4.2 Rights Agreement between the Company and Chemical Trust Company of California dated June 26, 1992, as amended, which is incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended March 31, 1993. 10.1 Standard Business Lease (Net) for the Company's principal facility dated June 18, 1991, between the Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the year ended March 31, 1991. 10.2 First Amendment to Lease dated June 10, 1992, between the Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the year ended March 31, 1992 ("1992 Form 10-K"). 10.3 Standard Business Lease (Net) for the Company's principal facility dated March 11, 1992, between the Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.4 of the 1992 Form 10-K. 10.4 First Amendment to Lease dated June 18, 1992, between the Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.5 of the 1992 Form 10-K. 10.5 Lease dated March 31, 1992, between the Company and Equitable Life Assurance Society of the United States, which is incorporated by reference to Exhibit 10.4 of the 1992 Form 10-K. 10.6 Description of Company's Cash Bonus Plan, which is incorporated by reference to Exhibit 10.6 of the Form S-1. 10.7 Form of Director and Officer Indemnification Agreement, which is incorporated by reference to Exhibit 10.7 of the Form S-1. 10.8 1989 Outside Directors Stock Option Plan and related documentation, as amended August 9, 1996. 12 10.9 OEM Agreement dated August 3, 1991 between the Company and NCR Corporation which is incorporated by reference to Exhibit 10.18 of the Company's Registration Statement No. 33-45580 on Form S-3 which became effective on April 6, 1992. 10.10 Agreement dated April 8, 1994 between the Company and PNJ Engineering providing for a lump sum settlement of a royalty obligation between the Company and PNJ engineering which is incorporated by reference to Exhibit 10.19 of the 1994 Form 10-K. 10.11 Employment agreement dated April 6, 1994 between the Company and Leslie Denend, which is incorporated by reference to Exhibit 10.21 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 ("June 1994 Form 10-Q"). 10.12 Employment agreement dated April 6, 1994 between the Company and James T. Richardson, which is incorporated by reference to Exhibit 10.22 of the June 1994 Form 10-Q. 10.13 Employment agreement dated April 6, 1994 between the Company and Richard Lewis, which is incorporated by reference to Exhibit 10.23 of the June 1994 Form 10-Q. 10.14 Second Amendment to Lease dated February 1, 1995 between the Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 ("December 1994 Form 10-Q"). 10.15 Third Amendment to Lease dated February 1, 1995 between the Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.23 of the December 1994 Form 10-Q. 10.16 Fourth Amendment to Lease dated May 31, 1995 between the Company and Menlo Oaks Partners, L.P. which is incorporated by reference to Exhibit 10.27 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 10-Q ("June 1995 form 10-Q"). 10.17 Fifth Amendment to Lease dated June 13, 1995 between the Company and Menlo Oaks Partners, L.P. which is incorporated by reference to Exhibit 10.28 of the June 1995 Form 10-Q. 10.18 Network General Corporation 1989 Employee Stock Option Plan and related documentation, as amended August 9, 1996. 10.19 Network General Corporation 1989 Employee Stock Purchase Plan and related documentation, as amended August 9, 1996. 10.20 Employment Agreement dated August 19, 1995 between the Company and Michael Kremer which is incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended March 31, 1996. 10.21 Lease dated July 3, 1996, between the Company and Campbell Avenue Associates. 13 2) Form 8-K The Company did not file any reports on Form 8-K during the three months ended June 30, 1996. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETWORK GENERAL CORPORATION (Registrant) Date: August 12, 1996 by S/JAMES T. RICHARDSON ---------------- ----------------------------------- James T. Richardson Senior Vice President, Corporate Operations, Chief Financial Officer and Assistant Secretary (authorized officer) Date: August 12, 1996 by S/BERNARD J. WHITNEY --------------- ----------------------------------- Bernard J. Whitney Vice President, Controller and Chief Accounting Officer (authorized officer) 14 EX-10.8 2 EXHIBIT 10.8 EXHIBIT 10.8 NETWORK GENERAL CORPORATION 1989 OUTSIDE DIRECTORS STOCK OPTION PLAN (As Amended August 9, 1996) 1. PURPOSE. The Network General Corporation 1989 Outside Directors Stock Option Plan (the "Plan") is established effective as of April 6, 1989 (the "Effective Date") to create additional incentive for the outside directors of Network General Corporation and any successor corporation thereto (collectively referred to as the "Company"), to promote the financial success and progress of the Company. 2. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references to the Board shall also mean the committee if it has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. The Board shall have no authority, discretion, or power to select the non- employee directors of the Company who will receive options under the Plan, to set the exercise price of the options granted under the Plan, to determine the number of shares of common stock to be granted under option or the time at which such options are to be granted, to establish the duration of option grants, or alter any other terms or conditions specified in the Plan, except in the sense of administering the Plan subject to the provisions of the Plan. All questions of interpretation of the Plan or of any options granted under the Plan (an "Option") shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan and/or any Option. All Options shall be nonqualified stock options. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 3. ELIGIBILITY AND TYPE OF OPTION. The Options may be granted only to directors of the Company who are not employees of the Company or any present or future parent and/or subsidiary corporations of the Company. Options granted to eligible directors of the Company ("Outside Directors") shall be nonqualified stock options; that is, options which are not treated as having been granted under section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. 4. SHARES SUBJECT TO OPTION. Options shall be options for the purchase of the authorized but unissued common stock or treasury shares of common stock of the Company (the "Stock"), subject to adjustment as provided in paragraph 8 below. The maximum number of shares of Stock which may be issued under the Plan shall be 1,020,000 shares. In the event that any outstanding Option for any reason expires or is terminated and/or shares of Stock subject to 1 repurchase are repurchased by the Company, the shares allocable to the unexercised portion of such Option, or such repurchased shares, may again be subjected to an Option. Notwithstanding the foregoing, any such shares shall be made subject to a new Option only if the grant of such new Option and the issuance of such shares pursuant to such new Option would not cause the Plan or any Option granted under the Plan to contravene Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and as amended from time to time or any successor rule or regulation ("Rule 16b-3"). 5. TIME FOR GRANTING OPTIONS. All Options shall be granted, if at all, within ten (10) years from the Effective Date. 6. TERMS, CONDITIONS AND FORM OF OPTIONS. Options granted pursuant to the Plan shall be evidenced by written agreements specifying the number of shares of Stock covered thereby, in the two forms attached hereto as EXHIBIT A and EXHIBIT B, respectively, and incorporated herein by reference (the "Option Agreements"), and shall comply with and be subject to the following terms and conditions: (a) AUTOMATIC GRANT OF OPTIONS. Subject to execution by each Outside Director of the appropriate Option Agreement: (i) On the Effective Date, each Outside Director shall be granted an Option to purchase one hundred and twenty thousand (120,000) shares of Stock. Each Outside Director who is first elected to serve on the Board after the Effective Date shall be granted an Option to purchase one hundred and twenty thousand (120,000) shares of Stock upon such election; provided, however, that on and after November 1, 1993, such number shall be forty thousand (40,000). (ii) Each Outside Director shall be granted an Option to purchase twenty thousand (20,000) shares of Stock upon each Anniversary Date of such Outside Director; provided, however, that for Anniversary Dates occurring on and after November 1, 1993, such number shall be ten thousand (10,000). (iii) The Anniversary Date of an Outside Director who was elected to the Board prior to the Effective Date shall be the date which is twelve (12) months after the Effective Date and successive anniversaries thereof. The Anniversary Date of an Outside Director who is elected to the Board after the Effective Date shall be the date which is twelve (12) months after such election and successive anniversaries thereof. (iv) Notwithstanding the foregoing, any Outside Director may elect not to receive an Option granted pursuant to this paragraph 6(a) by delivering written notice of such election to the Board (1) in the case of an initial Option grant, no later than the date upon which such Outside Director commences service on the Board, or (2) in the case of an Option grant pursuant to paragraph 6(a)(ii), no later than six (6) months prior to the date on which such Option would otherwise be granted. 2 (v) Notwithstanding any other provision of the Plan, no Option shall be granted to an Outside Director on his Anniversary Date when he is no longer serving as a director of the Company on such Anniversary Date. (b) OPTION PRICE. The option price per share for an Option shall be the fair market value, as determined by the average of the high and low prices of a sale of a share of Stock on the National Association of Securities Dealer's Automated Quotations System (the "NASDAQ System") or other national securities exchange, on the date of the granting of the Option. If the date of the granting of the Option does not fall on a day on which the Company's Stock is trading on the NASDAQ System or other national securities exchange, the date on which the option price per share shall be established shall be the last day on which the Company's Stock was so traded prior to the date of the granting of the Option. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying with the provisions of section 424(a) of the Code. (c) EXERCISE PERIOD OF OPTIONS. Any Option granted hereunder shall be exercisable for a term of ten (10) years. (d) PAYMENT OF OPTION PRICE. Payment of the option price for the number of shares of Stock being purchased pursuant to any Option shall be made in cash, by check, or in cash equivalent. (e) STOCKHOLDER APPROVAL. Any Option granted pursuant to the Plan shall be subject to obtaining stockholder approval of the Plan at the first annual meeting of stockholders after the Effective Date. Notwithstanding the foregoing, stockholder approval shall not be necessary in order to grant any Option granted on the Effective Date; provided, however, that the exercise of any such Option shall be subject to obtaining stockholder approval of the Plan. 7. AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of the Option Agreements set forth as EXHIBIT A and EXHIBIT B, respectively, either in connection with the grant of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of such revised or amended stock option agreements shall be in accordance with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are immediately exercisable subject to the Company's right to repurchase any unvested shares of stock acquired by the Optionee on exercise of an Option in the event such Optionee's service as a director of the Company is terminated for any reason. 8. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN. Appropriate adjustments shall be made in the number and class of shares of Stock subject to the Plan and to any outstanding Options and in the option price of any outstanding Options in the event of a stock dividend, stock split, reverse stock split, combination, reclassification or like change in the capital structure of the Company. 9. TRANSFER OF CONTROL. A "Transfer of Control" shall be deemed to have occurred in the event any of the following occurs with respect to the Company. 3 (a) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the stock of the Company where the stockholders of the Company before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company; (b) a merger in which the stockholders of the Company before such merger do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company; (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Company before such sale, exchange or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). In the event of a Transfer of Control, any unexercisable and/or unvested portion of the outstanding Options shall be immediately exercisable and vested as of a date prior to the Transfer of Control, as the Board so determines. The exercise and/or vesting of any Option that was permissible solely by reason of this paragraph 9 shall be conditioned upon the consummation of the Transfer of Control. Any Options which are not exercised as of the date of the Transfer of Control shall terminate effective as of the date of the Transfer of Control. 10. OPTIONS NON-TRANSFERABLE. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 11. TERMINATION OR AMENDMENT OF PLAN. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan at any time; provided, however, that without the approval of the stockholders of the Company, there shall be (a) no increase in the total number of shares of Stock covered by the Plan (except by operation of the provisions of paragraph 8 above), and (b) no expansion in the class of persons eligible to receive Options; and provided, further, that the provisions of the Plan addressing eligibility to participate in the Plan and the amount, price and timing of grants of Options shall not be amended more than once every six (6) months, other than to comport to changes in the Code, or the rules thereunder. In addition to the foregoing, the approval of the Company's stockholders shall be sought for any amendment to the Plan for which the Board deems stockholder approval necessary in order to comply with Rule 16b-3. In any event, no amendment may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing Network General Corporation 1989 Outside Directors Stock Option Plan was duly amended by the Board of Directors of the Company on the 9th day of August, 1996. 4 NETWORK GENERAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (INITIAL GRANT) Network General Corporation (the "Company"), granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement. 1. DEFINITIONS: (a) "Optionee" shall mean_____________________________. (b) "Date of Option Grant" shall mean____________________. (c) "Number of Option Shares" shall mean____________________shares of common stock of the Company as adjusted from time to time pursuant to paragraph 9 below. (d) "Exercise Price" shall mean $_______________per share as adjusted from time to time pursuant to paragraph 9 below. (e) "Initial Exercise Date" shall be the date occurring one (1) year after the Date of Option Grant. (f) "Initial Vesting Date" shall be the date occurring one (1) year after the Date of Option Grant. (g) Determination of "Vested Ratio": Vested Ratio ------------ On Date of Option Grant 0 On Initial Vesting Date provided the 1/4 Optionee has continuously served as a director of the Company from the Date of Option Grant until the Initial Vesting Date PLUS For each full month of Optionee's 1/48 continuous service as a director of the Company from the Initial Vesting Date In no event shall the Vested Ratio exceed 1/1. 1 (h) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Company" shall mean Network General Corporation, a Delaware corporation, and any successor corporation thereto. (k) "Plan" shall mean the Network General Corporation 1989 Outside Directors Stock Option Plan. 2. STATUS OF OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent reference herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. The Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company's stockholders in order for the Option to comply with the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior to such stockholder approval if the Optionee is subject to Section 16(b) of the Exchange Act. (b) METHOD OF EXERCISE. The Option shall be exercisable by written notice to the Company which shall state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Such written notice shall be signed by the Optionee and 2 shall be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Company, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by full payment of the exercise price for the number of shares being purchased. (c) FORM OF PAYMENT OF OPTION PRICE. Such payment shall be made in cash, by check, or in cash equivalent. (d) WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, or (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option. (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTION ON GRANT OF OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent or distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following the Optionee's termination of service as a director of the Company as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 3 7. TERMINATION OF SERVICE AS A DIRECTOR. (a) TERMINATION OF DIRECTOR STATUS. If the Optionee ceases to be a director of the Company for any reason other than the Optionee's death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be a director, may be exercised by the Optionee at any time prior to the expiration of three (3) months from the date the Optionee's service as a director of the Company terminated, but in any event no later than the Option Term Date. If the Optionee ceases to be a director of the Company because of the death of the Optionee or disability of the Optionee within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date of such death or disability, may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of six (6) months from the date the Optionee's service as a director of the Company terminated, but in any event no later than the Option Term Date. The Optionee's service as a director of the Company shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of service as a director of the Company. (b) EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's service as a director of the Company terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. (c) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth above would subject the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of service as a director of the Company, or (iii) the Option Term Date. 8. TRANSFER OF CONTROL. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Company. (a) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the stock of the Company; (b) a merger in which the Company is a party; or (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). 4 A "Transfer of Control" shall mean an Ownership Change in which the stockholders of the Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company. In the event of a Transfer of Control, any unexercisable portion of the Option shall be immediately exercisable as of a date prior to the Transfer of Control, as the Board determines. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is not exercised as of the date of the Transfer of Control. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reclassification or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change) shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. 11. LEGENDS. The Company may at any time place legends referencing any applicable federal and/or state securities law restrictions on this Option Agreement and/or all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company this Option Agreement and/or any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 12. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Company with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth 5 or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of this Option and shall remain in full force and effect. 15. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. NETWORK GENERAL CORPORATION By: ------------------------------------ Title: --------------------------------- The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Date: ---------------------------------- --------------------------------- Optionee's Signature --------------------------------- Printed Name of Optionee 6 NETWORK GENERAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (SUBSEQUENT GRANT) Network General Corporation (the "Company"), granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement. 1. DEFINITIONS: (a) "Optionee" shall mean____________________________________. (b) "Date of Option Grant" shall mean___________________________. (c) "Number of Option Shares" shall mean___________________ shares of common stock of the Company as adjusted from time to time pursuant to paragraph 9 below. (d) "Exercise Price" shall mean $_______ per share as adjusted from time to time pursuant to paragraph 9 below. (e) "Initial Exercise Date" shall be the date occurring thirty-seven (37) months after the Date of Option Grant. (f) "Initial Vesting Date" shall be the date occurring thirty-seven (37) months after the Date of Option Grant. (g) Determination of "Vested Ratio": Vested Ratio ------------ On Date of Option Grant 0 On Initial Vesting Date provided the 1/12 Optionee has continuously served as a director of the Company from the Date of Option Grant until the Initial Vesting Date PLUS For each full month of Optionee's 1/12 continuous service as a director of the Company from the Initial Vesting Date. In no event shall the Vested Ratio exceed 1/1. 1 (h) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Company" shall mean Network General Corporation, a Delaware corporation, and any successor corporation thereto. (k) "Plan" shall mean the Network General Corporation 1989 Outside Directors Stock Option Plan. 2. STATUS OF OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent reference herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. The Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company's stockholders in order for the Option to comply with the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior to such stockholder approval if the Optionee is subject to Section 16(b) of the Exchange Act. (b) METHOD OF EXERCISE. The Option shall be exercisable by written notice to the Company which shall state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Such written notice shall be signed by the Optionee and 2 shall be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Company, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by full payment of the exercise price for the number of shares being purchased. (c) FORM OF PAYMENT OF OPTION PRICE. Such payment shall be made in cash, by check, or in cash equivalent. (d) WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, or (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option. (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTION ON GRANT OF OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent or distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following the Optionee's termination of service as a director of the Company as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 3 7. TERMINATION OF SERVICE AS A DIRECTOR. (a) TERMINATION OF DIRECTOR STATUS. If the Optionee ceases to be a director of the Company for any reason other than the Optionee's death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be a director, may be exercised by the Optionee at any time prior to the expiration of three (3) months from the date the Optionee's service as a director of the Company terminated, but in any event no later than the Option Term Date. If the Optionee ceases to be a director of the Company because of the death of the Optionee or disability of the Optionee within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date of such death or disability, may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of six (6) months from the date the Optionee's service as a director of the Company terminated, but in any event no later than the Option Term Date. The Optionee's service as a director of the Company shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of service as a director of the Company. (b) EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's service as a director of the Company terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. (c) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth above would subject the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of service as a director of the Company, or (iii) the Option Term Date. 8. TRANSFER OF CONTROL. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Company. (a) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the stock of the Company; (b) a merger in which the Company is a party; or (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). 4 A "Transfer of Control" shall mean an Ownership Change in which the stockholders of the Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company. In the event of a Transfer of Control, any unexercisable portion of the Option shall be immediately exercisable as of a date prior to the Transfer of Control, as the Board determines. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is not exercised as of the date of the Transfer of Control. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reclassification or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change) shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. 11. LEGENDS. The Company may at any time place legends referencing any applicable federal and/or state securities law restrictions on this Option Agreement and/or all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company this Option Agreement and/or any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 12. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 13. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Company with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth 5 or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of this Option and shall remain in full force and effect. 15. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. NETWORK GENERAL CORPORATION By: ------------------------------------ Title: --------------------------------- The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Date: --------------------------------- --------------------------------- Optionee's Signature --------------------------------- Printed Name of Optionee 6 EX-10.18 3 EXHIBIT 10.18 EXHIBIT 10.18 NETWORK GENERAL CORPORATION 1989 EMPLOYEE STOCK OPTION PLAN (As Amended August 9, 1996) 1. PURPOSE. The Network General Corporation 1989 Stock Option Plan (the "Plan") is established to create additional incentive for key employees, directors and consultants of Network General Corporation and any successor corporation thereto (collectively referred to as the "Company"), and any present or future parent and/or subsidiary corporations of such corporation (all of whom along with the Company being individually referred to as a "Participating Company" and collectively referred to as the "Participating Company Group"), to promote the financial success and progress of the Participating Company Group. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. ADMINISTRATION. (a) ADMINISTRATION BY BOARD AND/OR COMMITTEE. The Plan shall be administered by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All questions of interpretation of the Plan or of any options granted under the Plan (an "Option") shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan and/or any Option. (b) OPTIONS AUTHORIZED. Options may be either incentive stock options as defined in section 422 of the Code ("Incentive Stock Options") or nonqualified stock options. (c) AUTHORITY OF OFFICERS. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. (d) DISINTERESTED ADMINISTRATION. With respect to the participation in the Plan of officers or directors of the Company subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan shall be administered by the Board in compliance with the "disinterested administration" requirement of Rule 16b-3, as promulgated 1 under the Exchange Act and amended from time to time or any successor rule or regulation ("Rule 16b-3"). (e) COMPLIANCE WITH SECTION 162(m) OF THE CODE. In the event a Participating Company is a "publicly held corporation" as defined in paragraph (2) of section 162(m) of the Code, as amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66), and the regulations promulgated thereunder ("Section 162(m)"), the Company may establish a committee of outside directors meeting the requirements of paragraph 4(C)(i) of Section 162(m) to approve the grant of Options which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 3. ELIGIBILITY. The Options may be granted only to employees (including officers and directors who are also employees) of the Participating Company Group or to individuals who are rendering services as consultants or other independent contractors to the Participating Company Group. The Board shall, in the Board's sole discretion, determine which persons shall be granted Options (an "Optionee"). An individual who is rendering services as a consultant or other independent contractor shall be eligible to be granted only a nonqualified stock option. An Optionee may, if otherwise eligible, be granted additional Options. 4. SHARES SUBJECT TO OPTION. Options shall be for the purchase of shares of the authorized but unissued common stock or treasury shares of common stock of the Company (the "Stock"), subject to adjustment as provided in paragraph 9 below. The maximum number of shares of Stock which may be issued under the Plan shall be Sixteen Million (16,000,000) shares. Subject to adjustment as provided in paragraph 9 below, at any such time as a Participating Company is a "publicly held corporation" as defined in paragraph 2 of Section 162(m), no person shall be granted within any fiscal year of the Company Options which in the aggregate cover more than Six Hundred Thousand (600,000) shares; provided, however, that the foregoing limit shall be One Miilion Two Hundred Thousand (1,200,000) shares with respect to Options granted to any person during the first fiscal year of such person's employment with the Company (the "Per Optionee Limit"). In the event that any outstanding Option for any reason expires or is terminated or canceled and/or shares of Stock subject to repurchase are repurchased by the Company, the shares allocable to the unexercised portion of such Option, or such repurchased shares, may again be subject to an Option grant. Notwithstanding the foregoing, any such shares shall be made subject to a new Option only if the grant of such new Option and the issuance of such shares pursuant to such new Option would not cause the Plan or any Option granted under the Plan to contravene Rule 16b-3. 5. TIME FOR GRANTING OPTIONS. All Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the shareholders of the Company. 6. TERMS, CONDITIONS AND FORM OF OPTIONS. Subject to the provisions of the Plan, the Board shall determine for each Option (which need not be identical) the number of shares of 2 Stock for which the Option shall be granted, the option price of the Option, the exercisability of the Option, whether the Option is to be treated as an Incentive Stock Option or as a nonqualified stock option and all other terms and conditions of the Option not inconsistent with the Plan. Options granted pursuant to the Plan shall be evidenced by written agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish, and shall comply with and be subject to the following terms and conditions: (a) EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (i) the exercise price per share for an Option shall be not less than the fair market value, as determined by the Board, of a share of Stock on the date of the granting of the Option, and (ii) no Option granted to an Optionee who at the time the Option is granted owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of section 422(b)(6) of the Code and/or ten percent (10%) of the total combined value of all classes of stock of a Participating Company (a "Ten Percent Owner Optionee") shall have an exercise price per share less than one hundred ten percent (110%) of the fair market value of a share of Stock on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a nonqualified stock option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying with the provisions of section 424(a) of the Code. (b) EXERCISE PERIOD OF OPTIONS. The Board shall have the power to set the time or times within which each Option shall be exercisable or the event or events upon the occurrence of which all or a portion of each Option shall be exercisable and the term of each Option; provided, however, that (I) no Option shall be exercisable after the expiration of ten (10) years after the date such Option is granted and (ii) no Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the date such Option is granted. (c) PAYMENT OF EXERCISE PRICE. Payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's stock owned by the Optionee having a value, as determined by the Board (but without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company), not less than the exercise price, (iii) by the Optionee's recourse promissory note, (iv) by the assignment of the proceeds of a sale of some or all of the shares being acquired upon the exercise of an Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System), or (v) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the form of Standard Option Agreement described in paragraph 7 below, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price and/or which otherwise restrict one (1) or more forms of consideration. 3 Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of the Company's stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's stock. Furthermore, no promissory note shall be permitted if an exercise using a promissory note would be a violation of any law. Any permitted promissory note shall be due and payable not more than five (5) years after the Option is exercised and interest shall be payable at least annually and be at least equal to the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired on exercise of the Option and/or with other collateral acceptable to the Company. (x) Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of shares of the Company's stock unless such shares of the Company's stock either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (y) Unless otherwise provided by the Board, in the event the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. (z) The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve and/or terminate any program and/or procedures for the exercise of Options by means of an assignment of the proceeds of a sale of some or all of the shares of Stock to be acquired upon such exercise. 7. STANDARD FORM OF STOCK OPTION AGREEMENT. Unless otherwise provided for by the Board at the time an Option is granted or as otherwise provided for by this paragraph 7, all Options shall comply with and be subject to the terms and conditions set forth in the stock option agreement attached hereto as Exhibit A and incorporated herein by reference (the "Standard Option Agreement"). (a) MODIFICATIONS FOR INCENTIVE STOCK OPTIONS. In the event the Option is designated as an Incentive Stock Option, the Standard Option Agreement for such Option shall be the Standard Option Agreement attached hereto as Exhibit A as modified as set forth below unless otherwise specified by the Board: (i) The title and paragraph 2 of the Standard Option Agreement shall reflect the Option's status as an Incentive Stock Option. 4 (ii) Paragraph 7(f) of the Standard Option Agreement, regarding an Optionee who is a director or consultant but not an employee of the Company, shall be deleted and shall not apply to the Option. (iii) A new paragraph 13 shall be added to the Standard Option Agreement providing, among other things, that the Optionee give the Company notice of sales upon disqualifying dispositions of shares of Stock acquired pursuant to the exercise of Incentive Stock Options as follows: 13. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year from the date the Optionee exercises all or part of the Option or within two (2) years of the date of grant of the Option. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after exercise of the Option and the two-year period immediately after grant of the Option. At any time during the one-year or two-year periods set forth above, the Company may place a legend or legends on any certificate or certificates representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate or certificates pursuant to the preceding sentence. (iv) Paragraph 13 of the Standard Option Agreement shall be renumbered as paragraph 14 and a new paragraph 14(a) shall be added to the Standard Option Agreement providing for a legend regarding Incentive Stock Options to be placed on each certificate representing shares of Stock acquired pursuant to the Option as follows: (a) "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER HEREOF MADE ON OR BEFORE . THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE." 5 (v) Paragraph 15 of the Standard Option Agreement shall be renumbered as paragraph 16 and shall be modified to provide that amendments to the Standard Option Agreement may be made without the Optionee's consent if such amendments are required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option. (vi) The remaining paragraphs of such modified Standard Option Agreement for Incentive Stock Options shall be renumbered accordingly. (b) STANDARD TERM FOR OPTIONS. Unless otherwise provided for by the Board in the grant of an Option, any Option granted hereunder shall be exercisable for a term of ten (10) years. 8. AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of the Standard Option Agreement either in connection with the grant of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of such revised or amended standard form or forms of stock option agreement shall be in accordance with the terms of the Plan. Such authority shall include, but not by way of limitation, the authority to grant Options which are immediately exercisable subject to the Company's right to repurchase any unvested shares of Stock acquired by an Optionee on exercise of an Option in the event such Optionee's employment with the Participating Company Group is terminated for any reason, with or without cause. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN. Appropriate adjustments shall be made in the number and class of shares of Stock subject to the Plan, to the Per Optionee Limit set forth in paragraph 4 above, and to any outstanding Options and in the exercise price of any outstanding Options in the event of a stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or like change in the capital structure of the Company. 10. TRANSFER OF CONTROL. A "Transfer of Control" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company. For purposes of applying this paragraph 10, the "Control Company" shall mean the Participating Company whose stock is subject to the Option. (a) the direct or indirect sale or exchange by the stockholders of the Control Company of all or substantially all of the stock of the Control Company where the stockholders of the Control Company before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company; (b) a merger in which the stockholders of the Control Company before such merger do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company; or 6 (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), shall either assume the Company's rights and obligations under outstanding stock option agreements or substitute options for the Acquiring Corporation's stock for such outstanding Options. In the event the Acquiring Corporation elects not to assume or substitute for such outstanding Options in connection with a merger described in (B) above or a sale of assets described in (C) above, the Board shall provide that any unexercisable and/or unvested portion of the outstanding Options shall be immediately exercisable and vested as of a date prior to the Transfer of Control, as the Board so determines. The exercise and/or vesting of any Option that was permissible solely by reason of this paragraph 10 shall be conditioned upon the consummation of the Transfer of Control. Any Options which are neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control shall terminate effective as of the date of the Transfer of Control. 11. PROVISION OF INFORMATION. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common stockholders. 12. OPTIONS NON-TRANSFERABLE. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 13. TRANSFER OF COMPANY'S RIGHTS. In the event any Participating Company assigns, other than by operation of law, to a third person, other than another Participating Company, any of the Participating Company's rights to repurchase any shares of Stock acquired on the exercise of an Option, the assignee shall pay to the assigning Participating Company the value of such right as determined by the Company in the Company's sole discretion. Such consideration shall be paid in cash. In the event such repurchase right is exercisable at the time of such assignment, the value of such right shall be not less than the fair market value of the shares of Stock which may be repurchased under such right (as determined by the Company) minus the repurchase price of such shares. The requirements of this paragraph 13 regarding the minimum consideration to be received by the assigning Participating Company shall not inure to the benefit of the Optionee whose shares of Stock are being repurchased. Failure of a Participating Company to comply with the provisions of this paragraph 13 shall not constitute a defense or otherwise prevent the exercise of the repurchase right by the assignee of such right. 14. TERMINATION OR AMENDMENT OF PLAN OR OPTIONS. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan or any Option at any time; 7 provided, however, that without the approval of the Company's stockholders, there shall be (a) no increase in the total number of shares of Stock covered by the Plan (except by operation of the provisions of paragraph 9 above), (b) no change in the class of persons eligible to receive Incentive Stock Options and (c) no expansion in the class of persons eligible to receive nonqualified stock options. In addition to the foregoing, the approval of the Company's stockholders shall be sought for any amendment to the Plan or an Option for which the Board deems stockholder approval necessary in order to comply with Rule 16b-3. In any event, no amendment may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing Network General Corporation 1989 Stock Option Plan was duly amended by the Board of Directors of the Company on the 9th day of August, 1996. ------------------------------- 8 NETWORK GENERAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT (INITIAL OPTION) Network General Corporation (the "Company") granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement. 1. DEFINITIONS: (a) "Optionee" shall mean ____________________________________. (b) "Date of Option Grant" shall mean ________________________. (c) "Number of Option Shares" shall mean _____________________ shares of common stock of the Company as adjusted from time to time pursuant to paragraph 9 below. (d) "Exercise Price" shall mean $______ per share as adjusted from time to time pursuant to paragraph 9 below. (e) "Initial Exercise Date" shall be the date occurring one (1) year after the Date of Option Grant. (f) "Initial Vesting Date" shall be the date occurring one (1) year after the Date of Option Grant. (g) Determination of "Vested Ratio": Vested Ratio Prior to Initial Vesting Date 0 On Initial Vesting Date, 1/4 provided the Optionee is continuously employed by a Participating Company from the Date of Option Grant until the Initial Vesting Date 1 PLUS For each full month 1/48 of the Optionee's continuous employment by a Participating Company from the Initial Vesting Date In no event shall the Vested Ratio exceed 1/1. (h) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Company" shall mean Network General Corporation, a Delaware corporation, and any successor corporation thereto. (k) "Participating Company" shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Option Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. (l) "Participating Company Group" shall mean at any point in time all corporations collectively which are then a Participating Company. (m) "Plan" shall mean the Network General Corporation 1989 Stock Option Plan. 2. STATUS OF THE OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to 2 the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below, the Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, the Option may not be exercised more frequently than twice in any continuous twelve (12) month period; provided, however, that the foregoing restriction shall not apply so as to prevent an exercise (i) following the Optionee's termination of employment as set forth in paragraph 7 below or (ii) during the thirty (30) day periods immediately preceding and following an Ownership Change as defined in paragraph 8 below. In addition to the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company's stockholders in order for the Option to comply with the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior to such stockholder approval if the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board, in its sole discretion, approves the exercise of the Option prior to such stockholder approval. (b) METHOD OF EXERCISE. The Option shall be exercisable by written notice to the Company which shall state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by (i) full payment of the exercise price for the number of shares being purchased and (ii) an executed copy, if required herein, of the then current form of joint escrow instructions referenced below. (c) FORM OF PAYMENT OF EXERCISE PRICE. Such payment shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's common stock owned by the Optionee having a value not less than the exercise price, which either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company, (iii) by cash for a portion of the exercise price and the Optionee's promissory note for the balance of the exercise price, (iv) by Immediate Sales Proceeds, as defined below, or (v) by any combination of the foregoing. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's 3 common stock. Unless otherwise specified by the Board at the time the Option is granted, the promissory note permitted in clause (iii) above shall not exceed the amount permitted by law to be paid by a promissory note and shall be a full recourse note in a form satisfactory to the Company, with principal payable in equal annual installments with the last installment due four (4) years from the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of stock acquired pursuant to the then current form of security agreement as approved by the Company. In the event the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's employment with the Participating Company Group for any reason, with or without cause. "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of some or all of the shares acquired upon the exercise of the Option pursuant to a program and/or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve any such program and/or procedure. (d) WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired on exercise of the Option. (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the 4 Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following termination of employment as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 7. TERMINATION OF EMPLOYMENT. (a) TERMINATION OF THE OPTION. If the Optionee ceases to be an employee of the Participating Company Group for any reason except death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee within three (3) months after the date on which the Optionee's employment terminates, but in any event no later than the Option Term Date. If the Optionee's employment with the Company is terminated because of the death of the Optionee or disability of the Optionee within the meaning of section 422(c) of the Code, the Option may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of twelve (12) months from the date the Optionee's employment terminated, but in any event no later than the Option Term Date. The Optionee's employment shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of employment. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to this paragraph 7(a) may not be made by delivery of a promissory note as provided in paragraph 4(c)(iii) above. (b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this paragraph 7, the Optionee's employment shall be deemed to have terminated either upon an actual termination of employment or upon the Optionee's employer ceasing to be a Participating Company. (c) EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's employment with the Participating Company Group terminates unless the exercise of the Option in accordance with 5 this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. (d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth above would subject the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of employment, or (iii) the Option Term Date. (e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment with the Participating Company Group shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Optionee's employment shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Optionee's right to reemployment with the Participating Company Group remains guaranteed by statute or contract. Notwithstanding the foregoing, however, a leave of absence shall be treated as employment for purposes of determining the Optionee's Vested Ratio if and only if the leave of absence is designated by the Company as (or required by law to be) a leave for which vesting credit is given. (f) APPLICATION TO CONSULTANTS. For purposes of this Option Agreement, in the event the Optionee is a consultant or other independent contractor but not an employee of a Participating Company at the time the Option is granted, termination of the Optionee's status as a consultant or other independent contractor of the Participating Company shall be deemed to be termination of the Optionee's employment. 8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company: (a) the direct or indirect sale or exchange by the stockholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority 6 of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the stockholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), shall assume the Company's rights and obligations under this Option Agreement or substitute an option for the Acquiring Corporation's stock for the Option. In the event the Acquiring Corporation elects not to assume the Company's rights and obligations under this Option Agreement or substitute for the Option in connection with a Transfer of Control involving an Ownership Change described in (b) or (c) above, the Board shall provide that any unexercised portion of the Option shall be fully exercisable as of a date prior to the Transfer of Control, as the Board so determines. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reclassification, or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change) shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A STOCKHOLDER OR EMPLOYEE. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. Nothing in the Option shall confer upon the Optionee any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's employment at any time. 11. ESCROW. (a) ESTABLISHMENT OF ESCROW. To insure shares which are security for any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate or certificates evidencing the shares which the Optionee purchases upon exercise of the Option with an agent designated by the Company under the terms and conditions of a security agreement approved by the Company. If the Company does not require such 7 deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. (b) DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after full repayment on any promissory note secured by the shares in escrow, but not more frequently than twice each year, the agent shall deliver to the Optionee the shares no longer security for any promissory note. 12. STOCK DIVIDENDS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split, or other change in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to any security interest held by the Company with the same force and effect as the shares subject to such security interest immediately before such event. 13. LEGENDS. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 14. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 15. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 16. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. 8 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all the terms and provisions tereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions this Option Agreement. By: ------------------------- Title: ------------------------- Date: ------------------------- 9 NETWORK GENERAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT (SPECIAL VESTING) Network General Corporation (the "Company") granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement. 1. DEFINITIONS: (a) "Optionee" shall mean ____________________________________. (b) "Date of Option Grant" shall mean ________________________. (c) "Number of Option Shares" shall mean _____________________ shares of common stock of the Company as adjusted from time to time pursuant to paragraph 9 below. (d) "Exercise Price" shall mean $______ per share as adjusted from time to time pursuant to paragraph 9 below. (e) "Initial Exercise Date" shall mean____________________. (f) Determination of "Cumulative Vested Shares": On each Vesting Date set forth in the table below, provided that the Optionee is continuously employed by a Participating Company from the Date of Option Grant until the respective Vesting Date, the Optionee shall become vested in the number of Cumulative Vested Shares set forth opposite such Vesting Date. Cumulative Vesting Date Shares Vesting Vested Shares ------------ -------------- -------------- _______ , 199____ ______________ ______________ _______ , 199____ ______________ ______________ _______ , 199____ ______________ ______________ _______ , 199____ ______________ ______________ (g) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. 1 (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Company" shall mean Network General Corporation, a Delaware corporation, and any successor corporation thereto. (j) "Participating Company" shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Option Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. (k) "Participating Company Group" shall mean at any point in time all corporations collectively which are then a Participating Company. (l) "Plan" shall mean the Network General Corporation 1989 Stock Option Plan. 2. STATUS OF THE OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in section 422(b) of the Code. 2 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below, the Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the number of Cumulative Vested Shares set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, the Option may not be exercised more frequently than twice in any continuous twelve (12) month period; provided, however, that the foregoing restriction shall not apply so as to prevent an exercise (i) following the Optionee's termination of employment as set forth in paragraph 7 below or (ii) during the thirty (30) day periods immediately preceding and following an Ownership Change as defined in paragraph 8 below. In addition to the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company's stockholders in order for the Option to comply with the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior to such stockholder approval if the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board, in its sole discretion, approves the exercise of the Option prior to such stockholder approval. (b) METHOD OF EXERCISE. The Option shall be exercisable by written notice to the Company which shall state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by (i) full payment of the exercise price for the number of shares being purchased and (ii) an executed copy, if required herein, of the then current form of joint escrow instructions referenced below. 3 (c) FORM OF PAYMENT OF EXERCISE PRICE. Such payment shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's common stock owned by the Optionee having a value not less than the exercise price, which either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company, (iii) by cash for a portion of the exercise price and the Optionee's promissory note for the balance of the exercise price, (iv) by Immediate Sales Proceeds, as defined below, or (v) by any combination of the foregoing. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's common stock. Unless otherwise specified by the Board at the time the Option is granted, the promissory note permitted in clause (iii) above shall not exceed the amount permitted by law to be paid by a promissory note and shall be a full recourse note in a form satisfactory to the Company, with principal payable in equal annual installments with the last installment due four (4) years from the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of stock acquired pursuant to the then current form of security agreement as approved by the Company. In the event the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's employment with the Participating Company Group for any reason, with or without cause. "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of some or all of the shares acquired upon the exercise of the Option pursuant to a program and/or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve any such program and/or procedure. (d) WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired on exercise of the Option. 4 (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. 5 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following termination of employment as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 7. TERMINATION OF EMPLOYMENT. (a) TERMINATION OF THE OPTION. If the Optionee ceases to be an employee of the Participating Company Group for any reason except death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee within three (3) months after the date on which the Optionee's employment terminates, but in any event no later than the Option Term Date. If the Optionee's employment with the Company is terminated because of the death of the Optionee or disability of the Optionee within the meaning of section 422(c) of the Code, the Option may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of twelve (12) months from the date the Optionee's employment terminated, but in any event no later than the Option Term Date. The Optionee's employment shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of employment. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to this paragraph 7(a) may not be made by delivery of a promissory note as provided in paragraph 4(c)(iii) above. (b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this paragraph 7, the Optionee's employment shall be deemed to have terminated either upon an actual termination of employment or upon the Optionee's employer ceasing to be a Participating Company. (c) EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's employment with the Participating Company Group terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. (d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth above would subject the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option shall remain exercisable until the earliest to occur of (I) the tenth (10th) day following the date on which the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of employment, or (iii) the Option Term Date. (e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment with the Participating Company Group shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of 6 ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Optionee's employment shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Optionee's right to reemployment with the Participating Company Group remains guaranteed by statute or contract. Notwithstanding the foregoing, however, a leave of absence shall be treated as employment for purposes of determining the Optionee's Cumulative Vested Shares if and only if the leave of absence is designated by the Company as (or required by law to be) a leave for which vesting credit is given. (f) APPLICATION TO CONSULTANTS. For purposes of this Option Agreement, in the event the Optionee is a consultant or other independent contractor but not an employee of a Participating Company at the time the Option is granted, termination of the Optionee's status as a consultant or other independent contractor of the Participating Company shall be deemed to be termination of the Optionee's employment. 8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company: (a) the direct or indirect sale or exchange by the stockholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the stockholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), shall assume the Company's rights and obligations under this Option Agreement or substitute an option for the Acquiring Corporation's stock for the Option. In the event the Acquiring Corporation elects not to assume the Company's rights and obligations under this Option Agreement or substitute for the Option in connection with a Transfer of Control involving an Ownership Change described in (b) or (c) above, the Board shall provide that any unexercised portion of the Option shall be fully exercisable as of a date prior to the Transfer of Control, as the Board so determines. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control. 7 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reclassification, or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change) shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A STOCKHOLDER OR EMPLOYEE. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. Nothing in the Option shall confer upon the Optionee any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's employment at any time. 11. ESCROW. (a) ESTABLISHMENT OF ESCROW. To insure shares which are security for any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate or certificates evidencing the shares which the Optionee purchases upon exercise of the Option with an agent designated by the Company under the terms and conditions of a security agreement approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. (b) DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after full repayment on any promissory note secured by the shares in escrow, but not more frequently than twice each year, the agent shall deliver to the Optionee the shares no longer security for any promissory note. 12. STOCK DIVIDENDS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split, or other change in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to any security interest held by the Company with the same force and effect as the shares subject to such security interest immediately before such event. 13. LEGENDS. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of 8 the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 14. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 15. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 16. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. NETWORK GENERAL CORPORATION By:______________________________ Title:_____________________________ The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Date:________________________ 9 NETWORK GENERAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT (FOCAL GRANT) Network General Corporation (the "Company") granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement. 1. DEFINITIONS: (a) "Optionee" shall mean __________________________________. (b) "Date of Option Grant" shall mean _______________________. (c) "Number of Option Shares" shall mean ____________________ shares of common stock of the Company as adjusted from time to time pursuant to paragraph 9 below. (d) "Exercise Price" shall mean $___________ per share as adjusted from time to time pursuant to paragraph 9 below. (e) "Initial Exercise Date" shall be the date occurring one (1) month after the Date of Option Grant. (f) "Initial Vesting Date" shall be the date occurring one (1) month after the Date of Option Grant. (g) Determination of "Vested Ratio": Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, 1/12 provided the Optionee is continuously employed by a Participating Company from the Date of Option Grant until the Initial Vesting Date 1 PLUS For each full month 1/12 of the Optionee's continuous employment by a Participating Company from the Initial Vesting Date In no event shall the Vested Ratio exceed 1/1. (h) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Company" shall mean Network General Corporation, a Delaware corporation, and any successor corporation thereto. (k) "Participating Company" shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Option Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. (l) "Participating Company Group" shall mean at any point in time all corporations collectively which are then a Participating Company. (m) "Plan" shall mean the Network General Corporation 1989 Stock Option Plan. 2. STATUS OF THE OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 2 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below, the Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, the Option may not be exercised more frequently than twice in any continuous twelve (12) month period; provided, however, that the foregoing restriction shall not apply so as to prevent an exercise (i) following the Optionee's termination of employment as set forth in paragraph 7 below or (ii) during the thirty (30) day periods immediately preceding and following an Ownership Change as defined in paragraph 8 below. In addition to the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company's stockholders in order for the Option to comply with the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior to such stockholder approval if the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board, in its sole discretion, approves the exercise of the Option prior to such stockholder approval. (b) METHOD OF EXERCISE. The Option shall be exercisable by written notice to the Company which shall state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by (i) full payment of the exercise price for the number of shares being purchased and (ii) an executed copy, if required herein, of the then current form of joint escrow instructions referenced below. (c) FORM OF PAYMENT OF EXERCISE PRICE. Such payment shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's common stock owned by the Optionee having a value not less than the exercise price, which either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company, (iii) by cash for a portion of the exercise price and the Optionee's promissory note for the balance of the exercise price, (iv) by Immediate Sales Proceeds, as defined below, or (v) by any combination of the foregoing. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's common stock. Unless otherwise specified by the Board at the time the Option is granted, the promissory note permitted in clause (iii) above shall not exceed the amount permitted by law to be paid by a promissory note and shall be a full recourse note in a form satisfactory to the 3 Company, with principal payable in equal annual installments with the last installment due four (4) years from the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of stock acquired pursuant to the then current form of security agreement as approved by the Company. In the event the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's employment with the Participating Company Group for any reason, with or without cause. "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of some or all of the shares acquired upon the exercise of the Option pursuant to a program and/or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve any such program and/or procedure. (d) WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired on exercise of the Option. (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. As a condition to the exercise of the Option, the Company 4 may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following termination of employment as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 7. TERMINATION OF EMPLOYMENT. (a) TERMINATION OF THE OPTION. If the Optionee ceases to be an employee of the Participating Company Group for any reason except death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee within three (3) months after the date on which the Optionee's employment terminates, but in any event no later than the Option Term Date. If the Optionee's employment with the Company is terminated because of the death of the Optionee or disability of the Optionee within the meaning of section 422(c) of the Code, the Option may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of twelve (12) months from the date the Optionee's employment terminated, but in any event no later than the Option Term Date. The Optionee's employment shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of employment. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to this paragraph 7(a) may not be made by delivery of a promissory note as provided in paragraph 4(c)(iii) above. (b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this paragraph 7, the Optionee's employment shall be deemed to have terminated either upon an actual termination of employment or upon the Optionee's employer ceasing to be a Participating Company. (c) EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's employment with the Participating Company Group terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. 5 (d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth above would subject the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of employment, or (iii) the Option Term Date. (e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment with the Participating Company Group shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Optionee's employment shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Optionee's right to reemployment with the Participating Company Group remains guaranteed by statute or contract. (f) APPLICATION TO CONSULTANTS. For purposes of this Option Agreement, in the event the Optionee is a consultant or other independent contractor but not an employee of a Participating Company at the time the Option is granted, termination of the Optionee's status as a consultant or other independent contractor of the Participating Company shall be deemed to be termination of the Optionee's employment. 8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company: (a) the direct or indirect sale or exchange by the stockholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the stockholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), shall assume the Company's rights and obligations under this Option Agreement or substitute an option for the Acquiring 6 Corporation's stock for the Option. In the event the Acquiring Corporation elects not to assume the Company's rights and obligations under this Option Agreement or substitute for the Option in connection with a Transfer of Control involving an Ownership Change described in (b) or (c) above, the Board shall provide that any unexercised portion of the Option shall be fully exercisable as of a date prior to the Transfer of Control, as the Board so determines. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reclassification, or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change) shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A STOCKHOLDER OR EMPLOYEE. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. Nothing in the Option shall confer upon the Optionee any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's employment at any time. 11. ESCROW. (a) ESTABLISHMENT OF ESCROW. To insure shares which are security for any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate or certificates evidencing the shares which the Optionee purchases upon exercise of the Option with an agent designated by the Company under the terms and conditions of a security agreement approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. (b) DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after full repayment on any promissory note secured by the shares in escrow, but not more frequently than twice each year, the agent shall deliver to the Optionee the shares no longer security for any promissory note. 12. STOCK DIVIDENDS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split, or other change in the character or amount of any of the outstanding 7 stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to any security interest held by the Company with the same force and effect as the shares subject to such security interest immediately before such event. 13. LEGENDS. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 14. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 15. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 16. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. NETWORK GENERAL CORPORATION By: _________________________________ Title: _______________________________ The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Date:__________________________ 8 NETWORK GENERAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT (EVERGREEN OPTION) Network General Corporation (the "Company") granted to the individual named below an option to purchase certain shares of common stock of the Company, in the manner and subject to the provisions of this Option Agreement. 1. DEFINITIONS: (a) "Optionee" shall mean __________________________________. (b) "Date of Option Grant" shall mean _______________________. (c) "Number of Option Shares" shall mean ____________________ shares of common stock of the Company as adjusted from time to time pursuant to paragraph 9 below. (d) "Exercise Price" shall mean $___________ per share as adjusted from time to time pursuant to paragraph 9 below. (e) "Initial Exercise Date" shall be the date occurring thirty-seven (37) months after the Date of Option Grant. (f) "Initial Vesting Date" shall be the date occurring thirty-seven (37) months after the Date of Option Grant. (g) Determination of "Vested Ratio": Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, 1/12 provided the Optionee is continuously employed by a Participating Company from the Date of Option Grant until the Initial Vesting Date 1 PLUS For each full month 1/12 of the Optionee's continuous employment by a Participating Company from the Initial Vesting Date In no event shall the Vested Ratio exceed 1/1. (h) "Option Term Date" shall mean the date ten (10) years after the Date of Option Grant. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Company" shall mean Network General Corporation, a Delaware corporation, and any successor corporation thereto. (k) "Participating Company" shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Option Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Code. (l) "Participating Company Group" shall mean at any point in time all corporations collectively which are then a Participating Company. (m) "Plan" shall mean the Network General Corporation 1989 Stock Option Plan. 2. STATUS OF THE OPTION. This Option is intended to be a nonqualified stock option and shall not be treated as an incentive stock option as described in section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board of Directors of the Company (the "Board") and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references herein to the Board shall also mean the committee if such committee has been appointed and, unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 2 4. EXERCISE OF THE OPTION. (a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below, the Option shall first become exercisable on the Initial Exercise Date. The Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option in the amount equal to the Number of Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. Notwithstanding the foregoing, the Option may not be exercised more frequently than twice in any continuous twelve (12) month period; provided, however, that the foregoing restriction shall not apply so as to prevent an exercise (i) following the Optionee's termination of employment as set forth in paragraph 7 below or (ii) during the thirty (30) day periods immediately preceding and following an Ownership Change as defined in paragraph 8 below. In addition to the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company's stockholders in order for the Option to comply with the requirements of Rule 16b-3, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall not be exercisable prior to such stockholder approval if the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board, in its sole discretion, approves the exercise of the Option prior to such stockholder approval. (b) METHOD OF EXERCISE. The Option shall be exercisable by written notice to the Company which shall state the election to exercise the Option, the number of shares for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified or registered mail, return receipt requested, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in paragraph 6 below, accompanied by (i) full payment of the exercise price for the number of shares being purchased and (ii) an executed copy, if required herein, of the then current form of joint escrow instructions referenced below. (c) FORM OF PAYMENT OF EXERCISE PRICE. Such payment shall be made (I) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of the Company's common stock owned by the Optionee having a value not less than the exercise price, which either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company, (iii) by cash for a portion of the exercise price and the Optionee's promissory note for the balance of the exercise price, (iv) by Immediate Sales Proceeds, as defined below, or (v) by any combination of the foregoing. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of the Company's common stock to the extent such tender of stock would constitute a violation of the provisions of any law, regulation and/or agreement restricting the redemption of the Company's common stock. Unless otherwise specified by the Board at the time the Option is granted, the promissory note permitted in clause (iii) above shall not exceed the amount permitted by law to be paid by a promissory note and shall be a full recourse note in a form satisfactory to the 3 Company, with principal payable in equal annual installments with the last installment due four (4) years from the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of stock acquired pursuant to the then current form of security agreement as approved by the Company. In the event the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's employment with the Participating Company Group for any reason, with or without cause. "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of some or all of the shares acquired upon the exercise of the Option pursuant to a program and/or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve any such program and/or procedure. (d) WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired on exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired on exercise of the Option. (e) CERTIFICATE REGISTRATION. The certificate or certificates for the shares as to which the Option shall be exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee. (f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of the shares upon exercise of the Option shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Option may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Option may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. As a condition to the exercise of the Option, the Company 4 may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. (g) FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Term Date as defined above, (b) the last date for exercising the Option following termination of employment as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 7. TERMINATION OF EMPLOYMENT. (a) TERMINATION OF THE OPTION. If the Optionee ceases to be an employee of the Participating Company Group for any reason except death or disability within the meaning of section 422(c) of the Code, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee ceased to be an employee, may be exercised by the Optionee within three (3) months after the date on which the Optionee's employment terminates, but in any event no later than the Option Term Date. If the Optionee's employment with the Company is terminated because of the death of the Optionee or disability of the Optionee within the meaning of section 422(c) of the Code, the Option may be exercised by the Optionee (or the Optionee's legal representative) at any time prior to the expiration of twelve (12) months from the date the Optionee's employment terminated, but in any event no later than the Option Term Date. The Optionee's employment shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of employment. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to this paragraph 7(a) may not be made by delivery of a promissory note as provided in paragraph 4(c)(iii) above. (b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this paragraph 7, the Optionee's employment shall be deemed to have terminated either upon an actual termination of employment or upon the Optionee's employer ceasing to be a Participating Company. (c) EXERCISE PREVENTED BY LAW. Except as provided in this paragraph 7, the Option shall terminate and may not be exercised after the Optionee's employment with the Participating Company Group terminates unless the exercise of the Option in accordance with this paragraph 7 is prevented by the provisions of paragraph 4(f) above. If the exercise of the Option is so prevented, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Term Date. 5 (d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth above would subject the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of employment, or (iii) the Option Term Date. (e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment with the Participating Company Group shall not be deemed to terminate if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Optionee's employment shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Optionee's right to reemployment with the Participating Company Group remains guaranteed by statute or contract. (f) APPLICATION TO CONSULTANTS. For purposes of this Option Agreement, in the event the Optionee is a consultant or other independent contractor but not an employee of a Participating Company at the time the Option is granted, termination of the Optionee's status as a consultant or other independent contractor of the Participating Company shall be deemed to be termination of the Optionee's employment. 8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the "Control Company" shall mean the Participating Company whose stock is subject to the Option. An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company: (a) the direct or indirect sale or exchange by the stockholders of the Control Company of all or substantially all of the stock of the Control Company; (b) a merger in which the Control Company is a party; or (c) the sale, exchange, or transfer (including, without limitation, pursuant to a liquidation or dissolution) of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). A "Transfer of Control" shall mean an Ownership Change in which the stockholders of the Control Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), shall assume the Company's rights and obligations under this Option Agreement or substitute an option for the Acquiring 6 Corporation's stock for the Option. In the event the Acquiring Corporation elects not to assume the Company's rights and obligations under this Option Agreement or substitute for the Option in connection with a Transfer of Control involving an Ownership Change described in (b) or (c) above, the Board shall provide that any unexercised portion of the Option shall be fully exercisable as of a date prior to the Transfer of Control, as the Board so determines. The Option shall terminate effective as of the date of the Transfer of Control to the extent that the Option is neither assumed by the Acquiring Corporation nor exercised as of the date of the Transfer of Control. 9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate adjustments shall be made in the number, exercise price and class of shares of stock subject to the Option in the event of a stock dividend, stock split, reverse stock split, combination, reclassification, or like change in the capital structure of the Company. In the event a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change) shares of another corporation (the "New Shares"), the Company may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the number of shares and the exercise price shall be adjusted in a fair and equitable manner. 10. RIGHTS AS A STOCKHOLDER OR EMPLOYEE. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate or certificates for the shares for which the Option has been exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such certificate or certificates are issued, except as provided in paragraph 9 above. Nothing in the Option shall confer upon the Optionee any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's employment at any time. 11. ESCROW. (a) ESTABLISHMENT OF ESCROW. To insure shares which are security for any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate or certificates evidencing the shares which the Optionee purchases upon exercise of the Option with an agent designated by the Company under the terms and conditions of a security agreement approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. (b) DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after full repayment on any promissory note secured by the shares in escrow, but not more frequently than twice each year, the agent shall deliver to the Optionee the shares no longer security for any promissory note. 12. STOCK DIVIDENDS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split, or other change in the character or amount of any of the outstanding 7 stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to any security interest held by the Company with the same force and effect as the shares subject to such security interest immediately before such event. 13. LEGENDS. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to effectuate the provisions of this paragraph. 14. BINDING EFFECT. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 15. TERMINATION OR AMENDMENT. The Board, including any duly appointed committee of the Board, may terminate or amend the Plan and/or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee. 16. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Company other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. 8 NETWORK GENERAL CORPORATION By: _________________________________ Title: ______________________________ The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Date: _______________________ 9 EX-10.19 4 EXHIBIT 10.19 EXHIBIT 10.19 NETWORK GENERAL CORPORATION 1989 EMPLOYEE STOCK PURCHASE PLAN (As Amended August 9, 1996) 1. PURPOSE. The Network General Corporation 1989 Employee Stock Purchase Plan (the "Plan") is established to provide eligible employees of Network General Corporation, a Delaware corporation ("Network General"), and any current or future parent or subsidiary corporations of Network General which the Board of Directors of Network General (the "Board") determines should be included in the Plan (collectively referred to as the "Company"), with an opportunity to acquire a proprietary interest in the Company by the purchase of the common stock of Network General. (Network General and any parent or subsidiary corporation designated by the Board as a participating corporation shall be individually referred to herein as a "Participating Company." For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended. (the "Code").) It is intended that the Plan shall qualify as an "employee stock purchase plan" under section 423 of the Code (including any future amendments or replacements of such section), and the Plan shall be so construed. Any term not expressly defined in the Plan but defined for purposes of section 423 of the Code shall have the same definition herein. An employee participating in the Plan (a "Participant") may withdraw such Participant's accumulated payroll deductions (if any) therein at any time during an Offering Period (as defined below). Accordingly, each Participant is, in effect, granted an option pursuant to the Plan (a "Purchase Right") which may or may not be exercised at the end of an Offering Period and which is intended to qualify as an option described in section 423 of the Code. 2. ADMINISTRATION. The Plan shall be administered by the Board and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent references to the Board shall also mean the committee if a committee has been appointed. The Board shall have the sole and absolute discretion to determine from time to time what parent corporations and/or subsidiary corporations shall be Participating Companies. All questions of interpretation of the Plan or of any Purchase Right shall be determined by the Board and shall be final and binding upon all persons having an interest in the Plan and/or any Purchase Right. Subject to the provisions of the Plan, the Board shall determine all of the relevant terms and conditions of Purchase Rights granted pursuant to the Plan; provided, however, that all Participants granted Purchase Rights pursuant to the Plan shall have the same rights and privileges within the meaning of section 423(b)(5) of the Code. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. 3. SHARE RESERVE. The maximum number of shares which may be issued under the Plan shall be 1,500,000 shares of Network General's authorized but unissued common stock or 1 treasury shares of common stock (the "Shares"). In the event that any Purchase Right for any reason expires or is cancelled or terminated, the Shares allocable to the unexercised portion of such Purchase Right may again be subjected to a Purchase Right. 4. ELIGIBILITY. Any employee of a Participating Company is eligible to participate in the Plan except the following: (a) employees who have not completed one (1) month of continuous employment with the Company as of the commencement of an Offering Period; (b) employees who are customarily employed by the Company for less than twenty (20) hours a week; (c) employees whose customary employment is for not more than five (5) months in any calendar year; and (d) employees who own or hold options to purchase or who, as a result of participation in this Plan, would own or hold options to purchase, stock of the Company possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company within the meaning of section 423(b)(3) of the Code. 5. OFFERING DATES. (a) OFFERING PERIODS. Except as otherwise set forth below, the Plan shall be implemented by sequential offerings (individually an "Offering") of six (6) months duration (an "Offering Period"). Prior to August 1, 1992, an Offering Period shall commence on the first day of January and end on the last day of June of the same year. An Offering Period shall also commence on the first day of July of each year and end on the last day of December of the same year. The first Offering Period shall commence on the effective date of a registration statement on Form S-1 under the Securities Act of 1933, as amended, which covers the common stock of Network General, whether or not such registration statement covers some or all of the Shares issuable under the Plan. Effective as of August 1, 1992 and in lieu of the foregoing, an Offering Period shall commence on the first day of February of each year and end on the last day of July of the same year. An Offering Period shall also commence on the first day of August of each year and end on the last day of January of the succeeding year. Notwithstanding the foregoing, the Board may establish a different term for one or more Offerings and/or different commencing and/or ending dates for such Offerings. An employee who becomes eligible to participate in the Plan after an Offering Period has commenced shall not be eligible to participate in such Offering but may participate in any subsequent Offering provided such employee is still eligible to participate in the Plan as of the commencement of any such subsequent Offering. The first day of an Offering Period shall be the "Offering Date" for such Offering Period. In the event the first and/or last day of an Offering Period is not a business day, the Company shall specify the business day that will be deemed the first or last day, as the case may be, of the Offering Period. (b) GOVERNMENTAL APPROVAL; STOCKHOLDER APPROVAL. Notwithstanding any other provision of the Plan to the contrary, any Purchase Right granted pursuant to the Plan shall 2 be subject to (i) obtaining all necessary governmental approvals and/or qualifications of the sale and/or issuance of the Purchase Rights and/or the Shares, and (ii) obtaining stockholder approval of the Plan. Notwithstanding the foregoing, stockholder approval shall not be necessary in order to grant any Purchase Right granted on the Offering Date of either of the Plan's first Offering Period; provided, however, that the exercise of any such Purchase Right shall be subject to obtaining stockholder approval of the Plan. 6. PARTICIPATION IN THE PLAN. (a) INITIAL PARTICIPATION. An eligible employee shall become a participant in the Plan (a "Participant") on the first Offering Date after satisfying the eligibility requirements and delivering to the Company not later than the close of business on the last business day before such Offering Date (the "Subscription Date") a subscription agreement indicating the employee's election to participate in the Plan and authorizing payroll deductions. An eligible employee who does not deliver a subscription agreement to the Company on or before the Subscription Date shall not participate in the Plan for that Offering Period or for any subsequent Offering Period unless such eligible employee subsequently enrolls in the Plan by complying with the provisions of paragraph 4 and by filing a subscription agreement with the Company on or before the Subscription Date for such subsequent Offering Period. The Company may, from time to time, change the Subscription Date as deemed advisable by the Company in its sole discretion for proper administration of the Plan. (b) CONTINUED PARTICIPATION. Participation in the Plan shall continue until (i) the Participant ceases to be eligible as provided in paragraph 4, (ii) the Participant withdraws from the Plan pursuant to paragraph 11, or (iii) the Participant terminates employment as provided in paragraph 12. At the end of an Offering Period, each Participant in such terminating Offering Period shall automatically participate in the first subsequent Offering Period according to the same elections contained in the Participant's subscription agreement effective for the Offering Period which has just ended, provided such Participant is still eligible to participate in the Plan as provided in paragraph 4. However, a Participant may file a subscription agreement with respect to such subsequent Offering Period if the Participant desires to change any of the Participant's elections contained in the Participant's then effective subscription agreement. 7. RIGHT TO PURCHASE SHARES. During an Offering Period each Participant in such Offering Period shall have a Purchase Right consisting of the right to purchase five thousand (5,000) Shares. 8. PURCHASE PRICE. The purchase price at which Shares may be acquired at the end of an Offering pursuant to the exercise of all or any portion of a Purchase Right granted under the Plan (the "Offering Exercise Price") shall be set by the Board; provided, however, that the purchase price shall not be less than eighty-five percent (85%) of the lesser of (a) the fair market value of the Shares on the Offering Date of such Offering Period, or (b) the fair market value of the Shares at the time of exercise of all or any portion of the Purchase Right. Unless otherwise provided by the Board prior to the commencement of an Offering Period, the Offering Exercise Price shall be eighty-five percent (85%) of the lesser of (a) the fair market value of the Shares on the Offering Date of such Offering Period or (b) the fair market value of the Shares at the time 3 of exercise of all or any portion of the Purchase Right. The fair market value of the Shares on the Offering Date or on the date of exercise will be the closing price quoted on the National Association of Securities Dealers Automated Quotation System on such date; however the fair market value of the Shares on the first Offering Date will be the offering price for the common stock of Network General as registered on the Form S-1 filed with the Securities and Exchange Commission. 9. PAYMENT OF PURCHASE PRICE. Shares which are acquired pursuant to the exercise of all or any portion of a Purchase Right for a given Offering Period may be paid for only by means of payroll deductions from the Participant's Compensation accumulated during the Offering Period. For purposes of the Plan, a Participant's "Compensation" with respect to an Offering shall include all amounts paid in cash and includable as "wages" subject to tax under section 3101(a) of the Code without applying the dollar limitation of section 3121(a) of the Code. Accordingly, Compensation shall include, without limitation, salaries, commissions, bonuses, overtime, and salary deferrals under section 401(k) of the Code. Notwithstanding the foregoing, Compensation shall not include reimbursements of expenses, allowances, or any amount deemed received without the actual transfer of cash or any amounts directly or indirectly paid pursuant to the Plan or any other stock purchase or stock option plan. Except as set forth below. the amount of Compensation to be withheld from a Participant's Compensation during each pay period shall be determined by the Participant's subscription agreement. (a) ELECTION TO DECREASE WITHHOLDING. During an Offering Period, a Participant may elect to decrease the amount withheld from his or her Compensation by filing an amended subscription agreement with the Company on or before the Change Notice Date. The "Change Notice Date" shall initially be the seventh (7th) day prior to the end of the first pay period for which such election is to be effective; however, the Company may change such Change Notice Date from time to time. A Participant may not elect to increase the amount withheld from the Participant's Compensation during an Offering Period. (b) LIMITATIONS ON PAYROLL WITHHOLDING. The amount of payroll withholding with respect to the Plan for any Participant during any pay period shall not exceed ten percent (10%) of the Participant's Compensation for such pay period. Amounts shall be withheld in whole percentages only and shall be reduced by any amounts contributed by the Participant and applied to the purchase of Company stock pursuant to any other employee stock purchase plan qualifying under section 423 of the Code. (c) PAYROLL WITHHOLDING. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in the Plan. (d) PARTICIPANT ACCOUNTS. Individual accounts shall be maintained for each Participant. All payroll deductions from a Participant's Compensation shall be credited to such account and shall be deposited with the general funds of the Company. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose. 4 (e) NO INTEREST PAID. Interest shall not be paid on sums withheld from a Participant's Compensation. (f) EXERCISE OF PURCHASE RIGHT. On the last day of an Offering Period, each Participant who has not withdrawn from the Offering or whose participation in the Offering has not terminated on or before such last day shall automatically acquire pursuant to the exercise of the Participant's Purchase Right the number of whole Shares arrived at by dividing the total amount of the Participant's accumulated payroll deductions for the Offering Period by the Offering Exercise Price; provided, however, in no event shall the number of Shares purchased by the Participant exceed the number of Shares subject to the Participant's Purchase Right. No Shares shall be purchased on behalf of a Participant whose participation in the Offering or the Plan has terminated on or before the date of such exercise. (g) RETURN OF CASH BALANCE. Any cash balance remaining in the Participant's account shall be refunded to the Participant as soon as practical after the last day of the Offering Period. In the event the cash to be returned to a Participant pursuant to the preceding sentence is an amount less than the amount necessary to purchase a whole Share, the Company may establish procedures whereby such cash is maintained in the Participant's account and applied toward the purchase of Shares in the subsequent Offering Period. (h) WITHHOLDING. At the time the Purchase Right is exercised, in whole or in part, or at the time some or all of the Shares are disposed of, the Participant shall make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any, which arise upon exercise of the Purchase Right and/or upon disposition of Shares. The Company may, but shall not be obligated to, withhold from the Participant's Compensation the amount necessary to meet such withholding obligations. (i) COMPANY ESTABLISHED PROCEDURES. The Company may, from time to time, establish (i) a minimum required withholding amount for participation in any Offering, (ii) limitations on the frequency and/or number of changes in the amount withheld during an Offering, (iii) an exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, (iv) payroll withholding in excess of or less than the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of subscription agreements, and/or (v) such other limitations or procedures as deemed advisable by the Company in the Company's sole discretion which are consistent with the Plan and section 423 of the Code. (j) EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's Purchase Right remaining unexercised after the end of the Offering Period to which such Purchase Right relates shall expire immediately upon the end of such Offering Period. 10. LIMITATIONS ON PURCHASE OF SHARES; RIGHTS AS A STOCKHOLDER. (a) FAIR MARKET VALUE LIMITATION. Notwithstanding any other provision of the Plan, no Participant shall be entitled to purchase Shares under the Plan (and any other employee stock purchase plan sponsored by Network General or a parent or subsidiary corporation of Network General) at a rate which exceeds $25,000 in fair market value, determined as of the 5 Offering Date for each Offering Period (or such other limit as may be imposed by the Code), for each calendar year in which the Participant participates in the Plan (and any other employee stock purchase plan sponsored by Network General or a parent or subsidiary corporation of Network General). (b) ALLOCATION OF SHARES. In the event the number of Shares which might be purchased by all Participants in the Plan exceeds the number of Shares available in the Plan, the Company shall make a pro rata allocation of the remaining Shares in as uniform a manner as shall be practicable and as the Company shall determine to be equitable. (c) RIGHTS AS A STOCKHOLDER AND EMPLOYEE. A Participant shall have no rights as a stockholder by virtue of the Participant's participation in the Plan until the date of the issuance of a stock certificate(s) for the Shares being purchased pursuant to the exercise of the Participant's Purchase Right. No adjustment shall be made for cash dividends or distributions or other rights for which the record date is prior to the date such stock certificate(s) are issued. Nothing herein shall confer upon a Participant any right to continue in the employ of the Company or interfere in any way with any right of the Company to terminate the Participant's employment at any time. 11. WITHDRAWAL. (a) WITHDRAWAL FROM AN OFFERING. A Participant may withdraw from an Offering by signing a written notice of withdrawal on a form provided by the Company for such purpose and delivering such notice to the Company at any time prior to the end of an Offering Period. Unless otherwise indicated by the Participant, withdrawal from an Offering shall not result in a withdrawal from the Plan or any succeeding Offering therein. A Participant is prohibited from again participating in an Offering upon withdrawal from such Offering. The Company may, from time to time, impose a requirement that the notice of withdrawal be on file with the Company for a reasonable period prior to the effectiveness of the Participant's withdrawal from an Offering. (b) WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the Plan by signing a written notice of withdrawal on a form provided by the Company for such purpose and delivering such notice to the Company. In the event a Participant voluntarily elects to withdraw from the Plan, the Participant may not resume participation in the Plan during the same Offering Period, but may participate in any subsequent Offering under the Plan by again satisfying the requirements of paragraph 6. The Company may impose, from time to time, a requirement that the notice of withdrawal be on file with the Company for a reasonable period prior to the effectiveness of the Participant's withdrawal from the Plan. (c) LIMITATION FOLLOWING CESSATION OF PARTICIPATION BY CERTAIN EMPLOYEES. Notwithstanding any provision herein to the contrary, an employee shall be prohibited from again participating in the Plan for at least six months after the date on which such employee is deemed to "cease participation" in the Plan (as defined below) if such employee is: 6 (1) an officer or director of Network General subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (2) deemed to have "ceased participation" in the Plan within the meaning of Rule 16b-3, promulgated under the Exchange Act, as amended from time to time or any successor rule or regulation ("Rule 16b-3") as a consequence of such employee's election to (i) withdraw from an Offering pursuant to paragraph 11(a) above, (ii) withdraw from the Plan pursuant to paragraph 11(b) above, or (iii) stop or decrease to a nominal level the amount withheld from such employee's Compensation pursuant to paragraph 9(a) above. (d) WAIVER OF WITHDRAWAL RIGHT. The Company may, from time to time, establish a procedure pursuant to which a Participant may elect (an "Irrevocable Election"), at least six (6) months prior to the last day of an Offering Period, to have all payroll deductions accumulated in such Participant's Plan account as of such date applied to purchase shares under the Plan, and (1) to waive such Participant's right to withdraw from the Offering or the Plan and (2) to waive such Participant's right to increase, decrease, or cease payroll deductions under the Plan from such Participant's Compensation during the Offering Period ending on such date. An Irrevocable Election shall be made in writing on a form provided by the Company for such purpose and must be delivered to the Company not later than the close of business on the day preceding the date which is six (6) months before the last day of the Offering Period for which such election is to be first effective. 12. TERMINATION OF EMPLOYMENT. Termination of a Participant's employment with the Company on account of either death or disability shall terminate the Participant's participation in the Plan at the end of the Offering Period in which the Participant's death or disability occurs. Termination of a Participant's employment with the Company for any reason other than death or disability, including the failure of a Participant to remain an employee eligible to participate in the Plan, shall terminate the Participant's participation in the Plan at the end of thirty (30) days after such termination of employment. A Participant whose participation has been so terminated may again become eligible to participate in the Plan by again satisfying the requirements of paragraphs 4 and 6. In the event of termination of a Participant's employment on account of the Participant's death, the Participant's legal representative shall have the right to withdraw from the Plan according to the terms of paragraph 11 prior to the time the deceased Participant's participation in the Plan terminates. 13. REPAYMENT OF PAYROLL DEDUCTIONS. In the event a Participant's interest in the Plan or any Offering therein is terminated for any reason, the balance held in the Participant's account shall be returned as soon as practicable after such termination to the Participant (or, in the case of the Participant's death, to the Participant's legal representative) and all of the Participant's rights under the Plan shall terminate. Such account balance may not be applied to any other Offering under the Plan. No interest shall be paid on sums returned to a Participant pursuant to this paragraph 13. 7 14. TRANSFER OF CONTROL. A "Transfer of Control" shall be deemed to have occurred in the event any of the following occurs with respect to the Control Company. For purposes of applying this paragraph 14, the "Control Company" shall mean Network General. (a) the direct or indirect sale or exchange by the stockholders of the Control Company of all or substantially all of the stock of the Control Company where the stockholders of the Control Company before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company; (b) a merger in which the stockholders of the Control Company before such merger do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Control Company; or (b) the sale, exchange, or transfer of all or substantially all of the Control Company's assets (other than a sale, exchange, or transfer to one (1) or more corporations where the stockholders of the Control Company before such sale, exchange, or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporation(s) to which the assets were transferred). In the event of a Transfer of Control, the Board, in its sole discretion, shall either (i) provide that Purchase Rights granted under the Plan shall be fully exercisable to the extent of each Participant's account balance for the Offering Period as of a date prior to the Transfer of Control, as the Board so determines, or (ii) arrange with the surviving, continuing, successor, or purchasing corporation, as the case may be, that such corporation assume the Company's rights and obligations under the Plan. All Purchase Rights shall terminate effective as of the date of the Transfer of Control to the extent that the Purchase Right is neither exercised as of the date of the Transfer of Control nor assumed by the surviving, continuing, successor, or purchasing corporation, as the case may be. 15. CAPITAL CHANGES. In the event of changes in the common stock of the Company due to a stock split, reverse stock split, stock dividend, combination, reclassification, or like change in the Company's capitalization, or in the event of any merger, sale or other reorganization, appropriate adjustments shall be made by the Company in the Plan's share reserve, the number of Shares subject to a Purchase Right and in the purchase price per share. 16. NON-TRANSFERABILITY. A Purchase Right may not be transferred in any manner otherwise than by will or the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. 17. REPORTS. Each Participant who exercised all or part of the Participant's Purchase Right for an Offering Period shall receive as soon as practicable after the last day of such Offering Period a report of such Participant's account setting forth the total payroll deductions accumulated, the number of Shares purchased and the remaining cash balance to be refunded or retained in the Participant's account pursuant to paragraph 9(g), if any. 8 18. PLAN TERM. This Plan shall continue until terminated by the Board or until all of the Shares reserved for issuance under the Plan have been issued, whichever shall first occur. 19. RESTRICTION ON ISSUANCE OF SHARES. The issuance of shares pursuant to the Purchase Right shall be subject to compliance with all applicable requirements of federal or state law with respect to such securities. The Purchase Right may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations. In addition, no Purchase Right may be exercised unless (i) a registration statement under the Securities Act of 1933, as amended, shall at the time of exercise of the Purchase Right be in effect with respect to the shares issuable upon exercise of the Purchase Right, or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Purchase Right may be issued in accordance with the terms of an applicable exemption from the registration requirements of said Act. As a condition to the exercise of the Purchase Right, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation, and to make any representation or warranty with respect thereto as may be requested by the Company. 20. LEGENDS. The Company may at any time place legends or other identifying symbols referencing any applicable federal and/or state securities restrictions and any provision convenient in the administration of the Plan on some or all of the certificates representing shares of stock issued under the Plan. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to a Purchase Right in the possession of the Participant in order to carry out the provisions of this paragraph. Unless otherwise specified by the Company, legends placed on such certificates may include but shall not be limited to the following: (a) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." (b) Any legend required to be placed thereon by the California Commissioner of Corporations. 21. NOTIFICATION OF SALE OF SHARES. The Company may require the participant to give the Company prompt notice of any disposition of Shares acquired by exercise of a Purchase Right within two years from the date of granting such Purchase Right or one year from the date of exercise of such Purchase Right. The Company may direct that the certificates evidencing 9 shares acquired by exercise of a Purchase Right refer to such requirement to give prompt notice of disposition. 22. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend or terminate the Plan, except that such termination shall not affect Purchase Rights previously granted under the Plan, nor may any amendment make any change in a Purchase Right previously granted under the Plan which would adversely affect the right of any Participant (except as may be necessary to qualify the Plan as an employee stock purchase plan pursuant to section 423 of the Code). In addition, an amendment to the Plan must be approved by the stockholders of the Company, within the meaning of section 423 of the Code, within twelve (12) months of the adoption of such amendment if such amendment would authorize the sale of more shares than are authorized for issuance under the Plan or would change the definition of the corporations that may be designated by the Board as a corporation the employees of which are eligible to participate in the Plan. Furthermore, the approval of the Company's stockholders shall be sought for any amendment to the Plan for which the Board deems stockholder approval necessary in order to comply with Rule 16b-3. IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing Network General Corporation 1989 Employee Stock Purchase Plan was duly amended by the Board of Directors on the 9th day of August, 1996. 10 NETWORK GENERAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT - -- Original Application - -- Change in Percentage of Payroll Deductions I hereby elect to participate in the 1989 Employee Stock Purchase Plan (the "Stock Purchase Plan") of Network General Corporation (the "Company") and subscribe to purchase shares of the Company's common stock as determined in accordance with the terms of the Stock Purchase Plan. I hereby authorize payroll deductions in the amount of $__________ or ___________ percent of my compensation (fill in one only) from each paycheck throughout the "Offering Period" (as defined in the Stock Purchase Plan) in accordance with the terms of the Stock Purchase Plan. (I understand that the amount deducted each pay period cannot be more than 10% of my compensation.) I understand that these payroll deductions will be accumulated for the purchase of shares of common stock of the Company at the applicable purchase price determined in accordance with the Stock Purchase Plan. I further understand that, except as otherwise set forth in the Stock Purchase Plan, shares will be purchased for me automatically on the last day of the Offering Period unless I withdraw from the Stock Purchase Plan or from the Offering by giving written notice to the Company or unless I terminate employment. I further understand that I will automatically participate in each subsequent Offering under the Plan and have the same percentage of my compensation withheld as I have designated in this agreement until such time as I file with the Company a notice of withdrawal from the Stock Purchase Plan on such form as may be established from time to time by the Company or I terminate employment. Shares purchased for me under the Stock Purchase Plan should be issued in the name set forth below. I understand that Shares may be issued either in my name alone or together with my spouse as community property or in joint tenancy.) NAME: ------------------------------------------ ADDRESS: ------------------------------------------ ------------------------------------------ ------------------------------------------ MY SOCIAL SECURITY NUMBER:---------------------- 11 I am familiar with the terms and provisions of the Stock Purchase Plan and hereby agree to participate in the Stock Purchase Plan subject to all of the terms and provisions thereof. I understand that the Board reserves the right to amend the Stock Purchase Plan and my right to purchase stock under the Stock Purchase Plan as may be necessary to qualify the Plan as an employee stock purchase plan as defined in section 423 of the Internal Revenue Code of 1986, as amended. I understand that the effectiveness of this subscription agreement is dependent upon my eligibility to participate in the Stock Purchase Plan. Date: ___________________________ Signature: ________________________ 12 NETWORK GENERAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I hereby elect to withdraw from the current offering (the "Offering") of the common stock of Network General Corporation (the "Company") under the Network General Corporation 1989 Employee Stock Purchase Plan (the "Stock Purchase Plan"), and hereby request that all payroll deductions credited to my account under the Stock Purchase Plan with respect to the Offering (if any), and not previously used to purchase shares of common stock of the Company under the Stock Purchase Plan, be paid to me as soon as is practical. I understand that this Notice of Withdrawal automatically terminates my interest in the Offering. As to participation in future offerings of stock under the Stock Purchase Plan, I elect as follows: ___ I elect to participate in future offerings under the Stock Purchase Plan. ___ I understand that by making the election set forth above I shall participate in all sequential offerings under the Stock Purchase Plan commencing subsequent to the Offering until such time as I elect to withdraw from the Stock Purchase Plan or any such subsequent offering. (However, if I am subject to Section 16 of the Securities Exchange Act of 1934, I understand that I may be prohibited from again participating in future Offerings for at least six months from the date of my withdrawal. See applicable provisions of the Plan.) ___ I elect NOT to participate in future offerings under the Stock Purchase Plan. I understand that by making the election set forth above I terminate my interest in the Stock Purchase Plan and that no further payroll deductions will be made unless I elect in accordance with the Stock Purchase Plan to become a participant in another offering under the Stock Purchase Plan. I understand that if no election is made as to participation in future offerings under the Stock Purchase Plan, I will be deemed to have elected to participate in such future offerings. Date: __________________________ Signature:_________________________ 1 NETWORK GENERAL CORPORATION 1989 EMPLOYEE STOCK PURCHASE PLAN IRREVOCABLE ELECTION BY OFFICER I, _______________________________, am a participant in the Network General Corporation 1989 Employee Stock Purchase Plan (the "Plan"). In order to exempt my future purchase(s) of common stock under the Plan from the "short-swing" profit recovery provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), I declare as follows: 1. TERM. (a) The Term of this Election (the "Term") will commence either immediately or on the first day of the offering period under the Plan beginning on or after the date of this Election and ending at least six (6) months after the date of this Election, as indicated below. The Term will end six (6) months after the date on which I deliver to the Company a written revocation of this Election on a form approved by the Company. Check one: _____ The Term will commence on the first day of the offering period beginning: __________________________ (Enter Date) _____ The Term will commence immediately. (b) I understand that any purchase I make under the Plan less than six (6) months after the date of this Election or at any other time that this Election is not in force may not be exempt from Section 16(b) of the Exchange Act. I understand that any such purchase will be exempt from Section 16(b) only if I hold the shares I acquire in such purchase for at least six months after the date of purchase. 2. ELECTION. I IRREVOCABLY ELECT, for the duration of the Term, to have all payroll deductions accumulated in my account under the Plan as of each purchase date applied to purchase whole shares of common stock in accordance with the terms of the Plan and my current subscription agreement. Furthermore, I waive any and all rights I may have under the Plan or my subscription agreement to increase or decrease the rate of payroll deductions set forth in my current subscription agreement, to voluntarily cease such payroll deductions, or to withdraw from the Plan or any offering period under the Plan. 3. INDEMNIFICATION. The Company will not be required to carry out any instruction I may give to the Company, purporting to be effective at any time during the Term, which is 1 contrary to this Election. Notwithstanding the foregoing, the Company shall have no liability to me, and I hereby agree to indemnify and hold the Company harmless with respect to, any consequence arising from the Company's compliance with any instruction that I may give, including, without limitation, any cost, liability or penalty I may incur pursuant to any federal or state income tax or securities law or regulation. Date: ________________________________ (Signature) 2 NETWORK GENERAL CORPORATION 1989 EMPLOYEE STOCK PURCHASE PLAN REVOCATION OF ELECTION BY OFFICER I, ________________________________hereby revoke my Election, dated ________________________199 _______, with respect to my participation in the Network General Corporation 1989 Employee Stock Purchase Plan. I understand that this Revocation will become effective six (6) months after the date on which this Revocation is delivered to the authorized representative of the Company. Date: _________________________ _______________________________ (Signature) RECEIVED BY: NETWORK GENERAL CORPORATION AUTHORIZED REPRESENTATIVE Date:_________________________ __________________________________ (Signature) ___________________________________ (Name Printed) 1 EX-10.21 5 EXHIBIT 10.21 EXHIBIT 10.21 Tenant: Network General LEASE TABLE OF CONTENTS ARTICLE TITLE PAGE 1 - Premises and Term 1 2 - Rent 2 3 - Landlord's Work - Tenant's Work 4 4 - Streets 4 5 - Utility Services 4 6 - Assignment - Change of Ownership 4 7 - Tenant's Additional Agreements 7 8 - Use of Premises 9 9 - Indemnity and Public Liability Insurance 9 10 - Fire Insurance and Casualty 10 11 - Repair 13 12 - Fixtures & Alterations 15 13 - Remedies 16 14 - Bankruptcy 18 15 - Surrender of Premises 18 16 - Eminent Domain 19 17 - Real Property Taxes 20 18 - Parking and Accommodation Areas 21 19 - Miscellaneous 22 BUSINESS PARK LEASE THIS LEASE is made this 3rd day of July, 1996, between CAMPBELL AVENUE ASSOCIATES, a California partnership, herein referred to as "Landlord," and NETWORK GENERAL, a Delaware corporation, herein referred to as "Tenant". WITNESSETH: ARTICLE 1 - Premises and Term SECTION 1.1. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the demised premises, including the building and other improvements thereon consisting of approximately 65,839 square feet and located at 4045-4055 Campbell Avenue, Menlo Park, California (as shown cross-hatched on EXHIBIT "A"), upon and subject to the terms and provisions of this Lease for a demised term of five (5) years (plus any partial period prior to the commencement of the first full calendar month), commencing ninety (90) days after Landlord delivers the demised premises to Tenant (scheduled to be on or before October 1, 1996, and potentially as early as July 1, 1996, subject to the vacation of the demised premises by the existing tenant as described in SECTION 1.2 below) for the purposes of performing construction of improvements pursuant to Article 3, and ending on the last day of the fifth (5th) year (exclusive of such partial period, if any) after such commencement. Following commencement of the demised term, the parties agree to execute a "Commencement Date Memorandum" or like document specifying the following with respect to this Lease: (i) the commencement date, (ii) dates on which the base rent shall increase pursuant to Section 2.1., and (iii) the expiration date. SECTION 1.2. The demised premises are currently occupied by an existing tenant pursuant to a lease which is currently in full force and effect. This Lease and the obligations of Tenant and Landlord hereunder are expressly conditioned upon the vacation of the demised premises by the existing tenant. The existing lease is scheduled to expire on September 30, 1996. Landlord agrees to the following: (i) Landlord has not heretofore, and agrees that it shall not, extend the existing lease or amend any term therein that will create rights of the existing tenant to remain in the demised premises after the expiration date thereof; (ii) Landlord shall use diligent efforts to cause the existing tenant to vacate the demised premises on or before September 30, 1996, and (iii) the demised premises shall not be deemed delivered to Tenant until the existing tenant has completed site closure in accordance with a closure work plan prepared for Tenant by a licensed environmental consultant and submitted for approval to all applicable governmental agencies and the existing tenant's concrete hazardous materials containment area and facilities have been removed. Tenant acknowledges that the closure plan may not be reviewed by applicable governmental authorities until after possession of the demised premises has been delivered to Tenant and that such review shall not delay commencement of the demised term unless such governmental authorities require additional closure work which actually delays construction of the Tenant's improvements or interferes with Tenant's occupancy of the demised premises in which case the required commencement date shall be extended by the actual number of days of such delay or interference. Tenant acknowledges that -1- Landlord cannot require the existing tenant to vacate the demised premises prior to the scheduled expiration date of the existing lease. SECTION 1.3. Provided that an Event of Default (as defined in Section 13.1. below) does not exist either at the time of exercise of either of the following options, or at the expiration of the initial five-year term or at the expiration of the first one-year option term, Tenant is hereby given options to extend the term of this Lease as follows: the first option period shall be for one (1) year and the second option period shall be for three (3) years, commencing respectively (i) at the expiration of the initial five year term as to the first option period and (ii) at the expiration of the first one year option period, if any, as to the second option period, upon the following terms and conditions: A. Tenant shall exercise each of the options by giving Landlord written notice at least two hundred fifteen (215) days prior to (i) the expiration of the initial five year term as to the first option period and (ii) the expiration of the first one year option period, if any, as to the second option period. The exercise of the first option is an express condition precedent to the exercise of the second option. B. Base rent during each of the extended terms, if any, shall be established as set out in SECTION 2.2 below. C. Landlord shall not be obligated to provide any improvements in the demised premises. D. There shall be no further option to extend than that as set forth hereinabove. E. All other terms and conditions shall be as set forth in the Lease. ARTICLE 2 - Rent SECTION 2.1. Tenant covenants and agrees to pay to Landlord without set- off, recoupment, deduction or demand of any nature whatsoever (other than the potential abatement of base rent contemplated by Sections 10.2. and 16.1. hereof), base rent as follows: for the first (1st) and second (2nd) years during the demised term (plus any partial period prior to the commencement of the first full calendar month) the amount of Six Hundred Seventy One Thousand Five Hundred Fifty Seven and 80/100 Dollars ($671,557.80) per annum, payable in twelve (12) equal monthly installments of Fifty Five Thousand Nine Hundred Sixty Three and 15/100 Dollars ($55,963.15); for the third (3rd) and fourth (4th) years during the demised term the amount of Seven Hundred Eleven Thousand Sixty One and 20/100 Dollars ($711,061.20) per annum, payable in twelve (12) equal monthly installments of Fifty Nine Thousand Two Hundred Fifty Five and 10/100 Dollars ($59,255.10); and for the fifth (5th) year during the demised term the amount of Seven Hundred Fifty Thousand Five Hundred Sixty Four and 60/100 Dollars ($750,564.60) per annum, payable in twelve (12) equal monthly installments of Sixty Two Thousand Five Hundred Forty Seven and 05/100 Dollars ($62,547.05). Base rent shall be paid monthly in advance on the first (1st) day of each calendar month. -2- SECTION 2.2. Base rent during each of the extended terms, if any, will be the fair market rental value of the demised premises (including any appropriate interim adjustments) on the date of the commencement of the applicable extended term based upon current rental rates for spaces of comparable size, age, construction, location and condition as the building, taking into account the age and condition of any improvements installed in the building and any lease incentives such as improvement allowances and free rent then prevailing in the market (the "fair market rental value") as determined by negotiation of Landlord and Tenant. If Landlord and Tenant shall be unable to arrive at a mutualy acceptable base rent for either of the extended terms at least five (5) months prior to (i) the expiration of the initial five year term as to the first option period and (ii) the expiration of the first one year option period, if any, as to the second option period, then the matter shall be submitted to arbitration in accordance with the provisions of SECTION 19.20. In no event shall the base rent for the first extended term be reduced below the base rent in effect during the fifth (5th) year of the demised term, and in no event shall the base rent for the second extended term be reduced below the base rent in effect during the last year of the first extended term. SECTION 2.3. For the purpose of this Lease, a year shall be twelve (12) calendar months, commencing with the first day of the first full calendar month of the demised term and the succeeding anniversaries thereof. For any period prior to the commencement of the first year or subsequent to the end of the last year of the demised term, rent shall be prorated on the basis of the rental rate then payable. SECTION 2.4. All sums payable and all statements deliverable to Landlord by Tenant under this Lease shall be paid and delivered at 60 Hillsdale Mall, San Mateo, California 94403-3497, or at such other place as Landlord may from time to time direct by notice to Tenant and all such sums shall be paid in lawful money of the United States. SECTION 2.5. Upon execution of this Lease, Tenant shall pay to the Landlord the following: Fifty Five Thousand Nine Hundred Sixty Three and 15/100 Dollars ($55,963.15) which shall be applied by Landlord to the first base rent to become due and payable under this Lease. SECTION 2.6. In addition to base rent under SECTION 2.1., all other payments to be made under this Lease by Tenant to Landlord shall be deemed to be and shall become additional rent hereunder, whether or not the same to be designated as such, and shall be included in the term "rent" wherever used in this Lease; and, unless another time shall be expressly provided for the payment thereof, all rent and additional rent shall be due and payable together with the next succeeding installment of base rent; and Landlord shall have the same remedies for failure to pay the same as for a nonpayment of base rent. SECTION 2.7. Any amount due from Tenant to Landlord that is not paid within three (3) business days after receipt of written notice that payment is due shall bear interest at the lesser of (i) ten percent (10%) per annum, or (ii) the highest rate then permitted to be charged on late payments under leases under California law; provided, -3- however, the payment of any such interest shall not excuse or cure the default upon which such interest accrued. Tenant acknowledges and agrees that payment of such interest on late payments is reasonable compensation to Landlord for the additional costs incurred by Landlord caused by such late payment, including, but not limited to, collection and administration expenses and the loss of the use of the money that was late in payment. ARTICLE 3 - Landlord's Work - Tenant's Work SECTION 3.1. Landlord shall not be required to perform any work in the demised premises; and, subject to Section 11.6, Tenant accepts the demised premises in an "as is" condition. SECTION 3.2. Tenant shall provide certain interior improvements as described in EXHIBIT "C" to be made a part hereof and upon terms and conditions as set forth in Exhibit "D" attached hereto. Such improvements shall be made at the sole cost of Tenant (subject to Landlord's contribution set forth in EXHIBIT "D") in accordance with detailed plans and specifications therefor which must be approved, in writing, by Landlord or Landlord's architect before work is commenced. Tenant shall furnish Landlord with a set of "as built" plans on diskettes that are compatible with Landlord's "AutoCAD" system after any such work is completed. ARTICLE 4 - Streets SECTION 4.1. Tenant agrees to use diligent efforts to require employees, and to direct customers and other persons visiting Tenant, to park in the parking area provided in the Parking and Accommodation Areas. ARTICLE 5 - Utility Services SECTION 5.1. Landlord has at its own cost and expense secured the installation of water, gas, sanitary sewers and electrical services to the demised premises and made all necessary connections thereof to the building. Tenant shall pay all meter or service charges made by public utilities companies and shall pay for the water, gas and/or electricity used on the demised premises and sewer use fees and charges whether ad valorum or not and any so called "sewer connection charges" based on increased wastewater discharge from the demised premises exclusively. Tenant shall maintain such connections of utilities to the building. SECTION 5.2. Landlord shall not be liable to Tenant for the failure of any utility services. ARTICLE 6 - Assignment - Change of Ownership SECTION 6.1. A. Except as otherwise provided herein, Tenant shall not, by operation of law or otherwise, transfer, assign, sublet, enter into license or concession agreements, -4- change ownership, mortgage or hypothecate this Lease or the Tenant's interest in and to the demised premises without first procuring the written consent of Landlord which consent shall not be unreasonably withheld, conditioned or delayed. Any attempted transfer, assignment, subletting, license or concession agreement, change of ownership, mortgage or hypothecation without Landlord's written consent shall be void and confer no rights upon any third person. Landlord's consent to a proposed assignment or sublease shall not be unreasonably withheld provided that the proposed assignee or sublessee shall have: (i) a net worth, at the time of the assignment or sublease, determined in accordance with good accounting principles, equal to or in excess of the net worth of Tenant at the date of the Lease; (ii) been active in its current business for a minimum of three (3) years immediately prior to the assignment or sublease; and (iii) a good reputation in the business community; provided further that Tenant shall give Landlord not less than fifteen (15) days' notice prior to the effective date of any such assignment or sublease, and Landlord shall have the option, in the case of an assignment or sublease (except as provided below) for substantially all of the remaining demised term of the Lease, to terminate this Lease with respect to the space to be assigned or subleased by notice to Tenant given within seven (7) days of Landlord's receipt of Tenant's notice. Notwithstanding the above, Landlord shall not have the right to terminate the Lease in connection with any proposed assignment or sublet to any entity which controls or is controlled by or is under common control with Tenant or to any entity with or into with Tenant is merged, or any entity that acquires all or substantially all of Tenant's stock or assets, or any other entity with which Tenant is combined or consolidated (herein, an "Affiliate"). Nothing herein contained shall relieve Tenant and any Guarantor from its covenants and obligations for the demised term. Tenant agrees to reimburse Landlord for Landlord's reasonable outside attorneys' fees (not to exceed Five Hundred Dollars ($500.00) incurred in conjunction with the processing and documentation of any such requested transfer, assignment, subletting, licensing or concession agreement, change of ownership, mortgage or hypothecation of this Lease or Tenant's interest in and to the demised premises. If Landlord consents to any assignment or sublease pursuant to this Article, Tenant shall pay Landlord, as additional rent: (a) in the case of each and every assignment, except the assignment to an Affiliate, an amount equal to ALL monies, property, and other consideration of every kind whatsoever paid or payable to Tenant by the assignee for such assignment and for all property of Tenant transferred to the assignee as part of the transaction (including, but not limited to, fixtures, other leasehold improvements, furniture, equipment, and furnishings); and (b) in the case of each and every sublease, fifty percent (50%) of any Sublease Premium (determined below), LESS all base rent and additional rent under this Lease accruing during the term of the sublease in respect of the subleased space (as reasonably determined by Landlord, taking into account the useable area of the premises demised under the sublease). "Sublease Premium" shall mean all rent, additional rent, and/or other monies, property, and other consideration of every kind whatsoever received by Tenant from the subtenant for or by reason of the sublease (including all amounts received by Tenant for, or attributable to, any Included Property), LESS: -5- (i) commissions actually paid by Tenant to procure the sublease to an independent third party licensed real estate broker and outside attorneys' fees actually paid by Tenant, amortized over the term of the sublease, commencing with the date on which the sublease term commences: (ii) the actual cost of leasehold improvements undertaken by Tenant (subject to Landlord's prior written consent) solely to prepare the sublease space for the subtenant amortized over the period of the term of the sublease commencing with the date on which the sublease commences; and (iii) the unamortized cost of Included Property, if any, determined on a straight-line basis over the period of the term of the sublease as certified to Landlord by Tenant's independent certified public accountant (at Tenant's expense). The term "Included Property" means all property of Tenant transferred to the subtenant as part of the transaction (including, but not limited to, fixtures, other leasehold improvements, furniture, equipment, and furnishings). Tenant shall pay fifty percent (50%) of the Sublease Premium to Landlord as and when Tenant receives payment from such subtenant. B. Each transfer, assignment, subletting, license, concession agreement, mortgage and hypothecation to which there has been consent shall be by an instrument in writing in form satisfactory to Landlord, and shall be executed by the transferor, assignor, sublessor, licensor, concessionaire, hypothecator or mortgagor and the transferee, assignee, sublessee, licensee, concessionaire or mortgagee in each instance, as the case may be; and each transferee, assignee, sublessee, licensee, concessionaire or mortgagee shall agree in writing for the benefit of Landlord herein to assume, to be bound by, and to perform the terms, covenants and conditions of this Lease to be done, kept and performed by Tenant (except such terms, covenants and conditions which by the express terms of the sublease Tenant agrees to perform), including the payment of all amounts due or to become due under this Lease directly to Landlord. One (1) executed copy of such written instrument shall be delivered to Landlord. Failure to first obtain in writing Landlord's consent or failure to comply with the provisions of this Article shall operate to prevent any such transfer, assignment, subletting, license, concession agreement, mortgage, or hypothecation from becoming effective. C. If Tenant hereunder is a corporation which, under the then current laws of the State of California, is not deemed a public corporation, or is an unincorporated association or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of twenty-five percent (25%) shall be deemed an assignment within the meaning and provisions of this SECTION 6.1. D. Landlord's rights to assign this Lease are and shall remain unqualified. Upon any sale of the demised premises and provided the purchaser assumes all obligations under this Lease, Landlord shall thereupon be entirely released of all -6- obligations of Landlord hereunder and shall not be subject to any liability resulting from any act or omission or event occurring after such sale. E. The consent of Landlord to any transfer, assignment, sublease, license or concession agreement, change in ownership, mortgage or hypothecation of this Lease is not and shall not operate as a consent to any future or further transfer, assignment, sublease, license or concession agreement, change in ownership, mortgage or hypothecation, and Landlord specifically reserves the right to refuse to grant any such consents except as otherwise provided in this SECTION 6.1. ARTICLE 7 - Tenant's Additional Agreements SECTION 7.1. Tenant agrees at all times during the demised term to: (A) Keep the demised premises in a neat and clean condition. (B) Promptly remove all waste, garbage or refuse from the demised premises. (C) Promptly comply with all laws and ordinances and all rules and regulations of duly constituted governmental authorities affecting the demised premises, and the cleanliness, safety, use and occupation thereof, but this clause (C) shall not be construed to require Tenant to comply with any such laws, ordinances, rules or regulations which require structural changes in the demised premises unless the same are made necessary by act or work performed by Tenant or the nature of the particular activities being carried on by Tenant in the demised premises; and this clause (C) does not apply to hazardous materials and other environmental matters, which laws shall be complied with pursuant to Section 7.4; provided, however, that Tenant has no obligation to remedy any instance of violation of laws existing as of the date this Lease is executed. (D) Prevent the escape from the demised premises of all fumes, odors and other substances which are offensive or may constitute a nuisance or interfere with other tenants. SECTION 7.2. Tenant agrees that it will not at any time during the demised term without first obtaining the Landlord's written consent: (A) Conduct or permit any fire, bankruptcy or auction sale in the demised premises. (B) Place on the exterior walls (including both interior and exterior surfaces of windows and doors), the roof of any buildings or any other part of the demised premises, any sign, symbol, advertisement, neon light, other light or other object or thing visible to public view outside of the demised premises. (C) Change the exterior color of the building on the demised premises, or any part thereof, or the color, size, location or composition of any sign, symbol or advertisement that may have been approved by Landlord. (D) Park, operate, load or unload, any truck or other delivery vehicle on any place other than the loading area designated for Tenant's use. (E) Use the plumbing facilities for any purpose other than that for which they were constructed or dispose of any foreign substance therein. (F) Install any exterior lighting or plumbing facilities, shades or awnings, amplifiers or similar devices, or use any advertising medium which may be heard or experienced outside the demised premises, such as loudspeakers, phonographs, or radio broadcasts. (G) Deface any portion of the building or improvements on the demised premises, normal usage excepted. In the event any portion of the building is defaced or damaged, Tenant agrees to repair such damage. (H) Permit any rubbish or garbage to accumulate on the demised premises, or any part thereof, unless confined in metal containers so located as not to be visible to members of the public. (I) Install, maintain or operate any sign except as approved in writing by Landlord. (J) Store materials, -7- supplies, equipment, finished products, raw materials or articles of any nature outside of the demised premises. (K) Use the demised premises for retail, or residential purposes. SECTION 7.3. Tenant agrees that it will not at any time during the demised term: (A) Perform any act or carry on any practice which may injure the demised premises. (B) Burn anything in or about the demised premises. (C) Keep or display any merchandise or other object on or otherwise obstruct any sidewalks, walkways driveways. (D) Use or permit the use of any portion of the demised premises as living quarters, sleeping apartments, lodging rooms, or for any unlawful purpose. (E) Use or permit the demised premises to be used for any purpose which is or shall not then be allowed under the Zoning Ordinance of the City of Menlo Park, California, in that area. SECTION 7.4. Tenant shall, at its expense, comply with all applicable laws, regulations, rules and orders, regardless of when they become or became effective, relating to health, safety, noise, environmental protection, waste disposal, and water and air quality, and furnish copies of permits, manifests and other applicable evidence of such compliance, if any, upon request of Landlord. Should any discharge, leakage, spillage, emission or pollution of any type occur upon or from the demised premises due to Tenant's use and occupancy thereof, Tenant, at its expense, shall be obligated to remedy the same to the satisfaction of Landlord and any governmental body having jurisdiction thereover; provided, however, that Tenant shall not be obligated to perform remediation to a level in excess of that which is required by law so long as such limitation of Tenant to perform remediation does not interfere with Landlord's use and enjoyment, or the value, of the demised premises. Tenant agrees to indemnify, hold harmless, and defend Landlord against all liability, cost, and expense (including without limitation any fines, penalties, judgments, litigation costs, and attorneys' fees) incurred by Landlord as a result of Tenant's breach of this section, or as a result of any such discharge, leakage, spillage, emission, or pollution, due to Tenant's use and occupancy of the demised premises, regardless of whether such liability, cost, or expense arises during or after the demised term. Tenant shall pay all amounts due Landlord under this section, as additional rent, within ten (10) days after any such amounts become due. Tenant shall, prior to the expiration or earlier termination of the Lease, submit such closure plan(s) regarding hazardous materials and/or hazardous substances as are then required under applicable law (including any applicable local ordinances), with a copy to Landlord; and Tenant shall, at Tenant's expense, prior to the expiration or earlier termination of the demised term, comply with such closure plan(s). Landlord's and Tenant's obligations under this SECTION 7.4. shall survive the expiration or earlier termination of this Lease, including without limitation any termination resulting from any default by Tenant under the Lease. Landlord has initiated and received a Phase I Environmental Study ("Study") dated April 1996 prepared by Green Environmental, Inc. of the demised premises and has shall provided Tenant with a copy thereof. Landlord shall reimburse Tenant for the -8- cost of removal of any asbestos containing materials associated with the floor tile in the manufacturing area of the demised premises currently occupied by the existing tenant. Subject to Section 1.2. herein, Tenant agrees to comply with all applicable laws in the removal of any such asbestos or other hazardous materials currently located in the demised premises which Tenant removes in the course of its construction; and Tenant shall be liable for any failure to comply with any such laws in the course of such removal. Landlord agrees to indemnify and hold harmless Tenant against all liability, cost and expense incurred by Tenant as a result of any pollution or other environmental problem caused by Landlord or Landlord's employees, agents or contractors. With respect to any contamination of the demised premises caused by the existing tenant, Landlord agrees to assign to Tenant, subject to reservation by Landlord for Landlord's losses directly or indirectly caused by any such contamination by the existing tenant, the benefit of any indemnity or contract rights against the existing tenant for losses sustained by Tenant resulting from any such contamination. ARTICLE 8 - Use of Premises SECTION 8.1. Tenant shall use the demised premises solely for general office, research and development, light assembly, and storage of Tenant's products and any related lawful purpose as approved by Landlord and in conformity with municipal zoning requirements and any CC&Rs applicable to the demised premises, and for no other purposes without Landlord's written consent. ARTICLE 9 - Indemnity and Public Liability Insurance SECTION 9.1. Tenant agrees to indemnify and save harmless Landlord from and against all claims arising from any act, omission or negligence of Tenant, or its contractors, licensees, agents, servants, invitees or employees, or arising from any accident, injury or damage whatsoever caused to any person, or to the property of any person occurring during the demised term in the demised premises, from and against all costs, expenses and liabilities incurred in or in connection with any such claim or proceeding brought thereon, including, but not limited to, reasonable attorneys' fees and court costs; provided, however, that in no event shall Tenant have any indemnification obligation or other responsibility under this Section for any costs, expenses and liabilities attributable to the negligence or willful misconduct of Landlord or its agents, contractors or employees. SECTION 9.2. Tenant agrees to maintain in full force during the demised term a policy of public liability and property damage insurance under which Landlord (and such other persons, firms or corporations as are designated by Landlord and are properly includible as additional insureds under the terms of any such policies of insurance) and Tenant are named as insureds, and the insurer agrees to indemnify and hold Landlord and Landlord's said designees harmless from and against all cost, expense and/or liability arising out of or based upon any and all claims, accidents, injuries and damage mentioned in SECTION 9.1. Each such policy shall be placed with an insurer having a Best rating of at least A-X and shall be noncancelable with respect to the Landlord and -9- Landlord's said designees without twenty (20) days' written notice to the Landlord and Landlord's said designees, shall be renewed at least thirty (30) days before the expiration of each policy, and a duplicate original or certificate thereof shall be delivered to Landlord prior to commencement of the demised term and thereafter within thirty (30) days of the renewal of the term of each policy. The limits of liability of such comprehensive general liability insurance shall be Two Million Dollars ($2,000,000.00) for injury or death to one or more persons and damage to property, combined single limit. All public liability, property damage and other casualty policies shall be written as primary policies, not contributing with and not in excess of coverage which Landlord may carry. If Tenant shall not comply with its covenants to maintain insurance made above, or if Tenant fails to provide duplicate originals or certificates thereof to Landlord as is provided above, Landlord may, but shall not be required to, obtain any such insurance; and if Landlord does obtain any such insurance, Tenant shall, on demand, reimburse Landlord for the premium for any such insurance. SECTION 9.3. Tenant agrees to use and occupy the demised premises, the Parking and Accommodation Areas and to use all other portions of the Business Park (which it is herein given the right to use) at its own risk and hereby releases to the full extent permitted by law the Landlord, and its agents, servants, contractors, and employees, from all claims and demands of every kind resulting from any accident, damage or injury occurring therein unless caused by the negligence or willful misconduct of Landlord, its employees, agents or contractors. Landlord shall have no responsibility or liability for any loss of or damage to fixtures or other personal property of Tenant. The provisions of this Section shall apply during the whole of the demised term. ARTICLE 10 - Fire Insurance and Casualty SECTION 10.1. If the building on the demised premises should be damaged or destroyed during the demised term by any casualty insurable under Landlord's standard fire and extended coverage insurance policies, Landlord shall (except as hereinafter provided) repair and/or rebuild the same to substantially the condition in which the same existed immediately prior to such damage or destruction. Landlord's obligation under this Section shall in no event exceed either (A) the scope of the work done by Landlord in the original construction of such building, or (B) the proceeds of any such insurance policy if Landlord keeps the building and the demised premises insured against loss or damage by such fire and extended coverage insurance to the extent of at least eighty percent (80%) of the insurable value of the building with a replacement cost endorsement (or otherwise for the full replacement value) to the extent reasonably obtainable from responsible insurance companies licensed to do business in California, unless Landlord nevertheless elects to repair and/or rebuild the building and the demised premises. Landlord covenants and agrees to carry the insurance described in the preceding sentence if available at commercially reasonable prices. Tenant shall in the event of any such damage or destruction, unless this Lease shall be terminated as hereinafter provided, be responsible for replacing or repairing all exterior signs, trade fixtures, equipment, display cases, and other installations originally installed by the Tenant. Except for the immediately preceding sentence and the -10- deductible under Landlord's casualty insurance, Tenant shall have no obligation to pay for any costs of reconstruction. Tenant shall have no interest in the proceeds of any insurance carried by Landlord. Subject to the provisions of Article 12, Landlord shall have no interest in Tenant's personal property. Tenant shall not have any further contractual obligation to Landlord to maintain its personal property other than to perform all of the terms and provisions of this Lease on Tenant's part to be performed with respect thereto, and the parties agree that maintenance, repair and replacement of Tenant's personal property shall be and remain Tenant's sole responsibility. Tenant shall reimburse Landlord for the deductible amount under Landlord's casualty insurance (if the Lease is not terminated); provided that, the amount of any deductible exceeding $20,000.00 shall be amortized on a straight line basis and paid monthly (together with interest at the rate of 10% per annum) over the remaining portion of the demised term. SECTION 10.2. Tenant's base rent shall be abated proportionately during any period in which, by reason of any such damage or destruction, the building is rendered partially or totally untenantable. Such abatement shall continue for the period commencing with such destruction or damage and ending with the substantial completion by the Landlord of such work or repair and/or reconstruction as Landlord is obligated to do. SECTION 10.3. If the building on the demised premises should be damaged or destroyed to the extent of 33-1/3% or more of the then monetary value thereof by an event described in SECTION 10.1., then Landlord may terminate this Lease by written notice to Tenant. Within forty-five (45) days of the date of casualty Landlord shall notify Tenant, in writing, of Landlord's reasonable estimate of the time period required for repair of the demised premises. If Landlord's estimate indicates that the necessary time for repair will exceed two hundred seventy (270) days from the date of casualty for the demised premises then, in that event, Tenant may by written notice to Landlord given within ten (10) days of Landlord's notice terminate this Lease. If Tenant does not terminate the Lease then Landlord shall (subject to Landlord's termination rights) thereafter diligently pursue such repairs and use its diligent efforts to complete the repairs within the above-referenced time period. If Landlord fails to complete the repairs within such time periods and is not diligently pursuing completion of the same then Tenant may terminate the Lease. If such damage or destruciton occurs and this Lease is not so terminated, this Lease shall remain in full force and effect and the parties waive the provisons of any laws to the contrary. If neither party elects to terminate this Lease then Landlord shall repair and/or rebuild the same as provided in SECTION 10.1. If such damage or destruction occurs and this Lease is not so terminated, this Lease shall remain in full force and effect and the parties waive the provisions of any law to the contrary. The Landlord's obligation under this Section shall in no event exceed the scope of the work to be done by the Landlord in the original construction of said building and the demised premises. SECTION 10.4. -11- SECTION 10.5. Tenant agrees, in addition to any rent provided for herein, to pay to the Landlord the cost of the fire and extended coverage insurance policy carried by Landlord on the demised premises during the entire demised term or any renewal or extension thereof. This Section expressly permits the Landlord to carry standard fire and extended coverage policies to the extent of one hundred percent (100%) of the insurable value. SECTION 10.6. During the demised term, Tenant shall carry, at its expense, insurance, or shall self-insure, against loss and damage by fire with an "All Risk" endorsement for the full insurable value of Tenant's merchandise, trade fixtures, furnishings, operating equipment and personal property, including wall coverings, carpeting and drapes, if installed by Tenant.. A certificate evidencing such coverage shall be delivered to Landlord prior to commencement of the demised term and thereafter thirty (30) days prior to the expiration of the term of such policy. Such insurance shall be written as a primary policy, not contributing with and not in excess of coverage Landlord may carry. SECTION 10.7. In the event the building on the demised premises shall be damaged as a result of any flood, earthquake, act of war, nuclear reaction, nuclear radiation or radioactive contamination, or from any other casualty not covered by Landlord's fire and extended coverage insurance, to any extent whatsoever, Landlord may within ninety (90) days following the date of such damage, commence repair, reconstruction or restoration of the building and prosecute the same diligently to completion, in which event this Lease shall continue in full force and effect, or within said ninety (90) day period elect not to so repair, reconstruct or restore the building, in which event this Lease shall cease and terminate. In either such event Landlord shall give Tenant written notice of its intention within said ninety-day period. Tenant's base rent shall be abated proportionately during any period in which, by reason of any such damage or destruction, the building is rendered partially or totally untenantable. Such abatement shall continue for the period commencing with such destruction or damage and ending with the substantial completion by the Landlord of such work or repair and/or reconstruction as Landlord is obligated to do. SECTION 10.8. Upon any termination of this Lease under the provisions of this ARTICLE 10, the rent shall be adjusted as of the date of such termination and the parties shall be released without further obligation to the other party upon the surrender of possession of the demised premises to Landlord, except for items that have been theretofore accrued and are then unpaid, and except for obligations that are designated as surviving such termination. SECTION 10.9. Notwithstanding anything in this ARTICLE 10 or elsewhere in this Lease to the contrary, Landlord may maintain any insurance on the demised premises that Landlord deems necessary or advisable, including, but not limited to, any rental insurance (not to exceed twelve (12) months), owner's protective liability insurance or any insurance required by any mortgagee of Landlord; and earthquake insurance provided that any such earthquake insurance is available at commercially reasonable rates, and Landlord may include the amount of the premiums for such insurance in the total of the insurance premiums which Tenant is required to pay under the terms hereof. -12- ARTICLE 11 - Repair SECTION 11.1. Landlord agrees, at Landlord's sole expense, to repair and maintain building foundations, exterior wall structure, roof structure and structural support systems for the demised premises throughout the life of the Lease. Structural defects and maintenance shall not be deemed to include non- structural cracks or fissures in walls or floors, (i.e., cracks or fissures which do not materially adversely affect the structural initegrity of the building), so long as such cracks or fissures do not substantially interfere with Tenant's use and occupancy of the demised premises, nor the requirement of painting or caulking. Additionally, Landlord shall, at Landlord's sole expense, restripe and reseal the parking lot as needed prior to the commencement of the Lease. The foregoing sentence shall be a one time obligation of Landlord as of the commencement of the Lease. Thereafter, additional changes shall be made and paid for pursuant to Article 18 below. SECTION 11.2. Subject to Section 11.1., Tenant agrees during the demised term or any extension thereof to maintain the interior of the building on the demised premises, and every part thereof, except as to work to be performed by Landlord under SECTIONS 11.1. AND 11.3. Tenant further agrees to clean, inside and out, all of the glass on the exterior of the building. If Tenant should fail to faithfully perform its maintenance obligations hereunder then Landlord shall, upon having given notice to Tenant of the need for said maintenance, have the right to perform, or cause to be performed, said maintenance and Tenant shall on demand reimburse Landlord for Landlord's costs of providing such maintenance. SECTION 11.3. Subject to Section 11.5., Landlord shall provide the following services and Tenant shall, in addition to all other payments required to be made under other provisions of this Lease, on demand reimburse Landlord for Landlord's gross costs of: (i) maintaining, repairing and replacing the roof; (ii) painting, maintaining and repairing the exterior of the building; (iii) maintaining, repairing and replacing the elevator and elevator equipment room (if any); (iv) maintenance and repair associated with the mechanical and electrical rooms; (v) maintenance and repair of the trash enclosure utilized in connection with the building; (vi) maintenance, repair and replacement of the glass on the exterior of the building and (vii) any other maintenance and repair other than that which Landlord is required to perform at Landlord's expense per SECTION 11.1. Tenant shall also, on demand, reimburse Landlord for Landlord's costs of maintaining, repairing and replacing the heating and air conditioning equipment serving the demised premises, whether furnished by Landlord or Tenant. Landlord's said costs as used in this SECTION 11.3. shall include all costs and expenses of every kind or nature reasonably incurred by Landlord in the performance of such maintenance, repair or replacements. SECTION 11.4. If during the term of this Lease Landlord or Landlord's insurance carrier requires the installation of an Ansul Fire Control System or its equivalent, or any fire detection device, because of the nature of the particular activities being carried on by Tenant in the demised premises, then said system or device shall be installed by Landlord at its cost, within the time specified, and Tenant shall be entitled to amortize the cost thereof, determined by multiplying the cost by a fraction, the numerator of which is the number of days in the demised term (both elapsed and not elapsed) and -13- the denominator of which is the number of days in the estimated useful life of the fire control system. Tenant shall pay any such cost, as additional rent, monthly on a straight-line basis amortized over the remaining demised term of the Lease using an interest rate equal to ten 10% per annum. Section 11.5. Notwithstanding the provisions of Sections 11.3 and 18.3 hereof, Tenant's obligation to reimburse Landlord for the cost of any capital improvement (as used in this Section 11.5., "capital improvement" shall be repairs or replacements which cost in excess of Ten Thousand Dollars ($10,000.00) individually, or in excess of Thirty Thousand Dollars ($30,000.00) in the aggregate in any one calendar year) required to be made by Landlord pursuant to Article 11 and/or Article 18 of this Lease during the demised term and required under good accounting practice to be amortized, shall be limited to a proportionate share of such replacement or repair costs (the "Reimbursement Amounts") calculated as follows: (a) if such costs are incurred during the initial demised term of this Lease but before Tenant has exercised its right to extend the term of this Lease, by multiplying such replacement costs by a fraction, the numerator of which is the number of days in the original demised term and the denominator of which is the number of days in the estimated useful life of the replacement; and (b) if such costs are incurred during (i) the initial demised term of this Lease but after Tenant has exercised either of its rights to extend the term of this Lease, or (ii) either of the extended terms of this Lease, by multiplying such replacement costs by a fraction, the numerator of which is the number of days in the demised term of this Lease (including the original demised term and the extended term(s)) and the denominator of which is the number of days in the estimated useful life of the replacement. If a Reimbursement Amount has been determined under subsection (a) or (b) above with respect to any replacement costs, and Tenant subsequently extends the term of this Lease, Tenant shall also be responsible for an additional Reimbursement Amount with respect to the remaining unamortized amount of such replacement costs determined by multiplying the remaining unamortized amount of such replacement costs by a fraction, the numerator of which is the number of days in the extended term(s) of this Lease and the denominator of which is the remaining number of days in the estimated useful life of the replacement. In no event shall Tenant be obligated to pay Landlord more than 100% of such replacement costs, together with interest as hereinbelow set forth. The foregoing limitation shall not apply to equipment furnished by Tenant and maintained by Landlord and shall in no event apply to any costs for repairs or replacements occasioned by (x) Tenant's negligent acts or omissions or those of its employees, contractors, agents, invitees or servants, or (y) the particular nature of Tenant's business, all of which costs shall be borne soley by Tenant. Tenant shall pay any Reimbursement Amounts, as additional rent, monthly on a straight-line basis amortized over the remaining demised term of the Lease using an interest rate equal to ten percent (10%) per annum. -14- SECTION 11.6 Landlord agrees that it will deliver the demised premises to Tenant with the existing sidewalks, driveways and parking areas, and the truck doors, mechanical, electrical, plumbing, roof and roofing systems of the building on the demised premises, in good operating condition and the glazing watertight. If any of the items mentioned in this Section 11.6 fail to perform within six (6) months following Tenant's occupancy of the demised premises for any reason, other than (i) Tenant's failure to perform routine maintenance, (ii) Tenant's particular use of any such system, or (iii) any negligent act or omission of Tenant, its employees, agents, contractors, invitees or servants, and provided an Event of Default (as defined in Section 13.1 below) does not exist, then, and in such event, Landlord shall, at its cost, repair the deficiency; otherwise, and after the expiration of the above six (6) month period, Tenant shall be responsible for the cost of the maintenance, repair or replacement pursuant to the provisions of Sections 11.3, 11.5 and 18.3. hereof. ARTICLE 12 - FIXTURES & ALTERATIONS SECTION 12.1. All trade fixtures owned by Tenant and installed in the demised premises shall remain the property of Tenant and may be removed from time to time and shall be removed at the expiration of the demised term. Tenant shall repair any damage to the demised premises caused by the removal of said fixtures. If Tenant fails to remove such fixtures on or before the last day of the demised term, all such fixtures shall become the property of Landlord, unless Landlord elects to require their removal, in which case Tenant shall promptly remove them and restore the demised premises to its condition prior to such removal. Landlord may also, at Landlord's sole discretion, store such fixtures at Tenant's expense. SECTION 12.2. Except for non-structural interior alterations (with a cost not exceeding Ten Thousand Dollars ($10,000.00) in any one calendar year) which do not materially affect the sprinkler system and/or mechanical/electrical systems or require removal or modification of improvements installed by Landlord, and provided that Tenant shall notify Landlord of any such alterations and provide Landlord with plans on diskettes that are compatible with Landlord's "AutoCAD" system, Tenant shall not make any alterations, additions or improvements in or to the demised premises or the building without submitting plans and specifications therefor for the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed but, if granted, may be subject to such reasonable conditions as Landlord may deem appropriate. Any such alterations, additions or improvements consented to by Landlord shall be made at Tenant's sole cost and expense in accordance with the plans and specifications therefor and Tenant agrees to provide Landlord with an "as built" set of plans and specifications after any such work is completed. Tenant shall secure any and all governmental permits, approvals or authorizations required in connection with any such work, and shall hold Landlord harmless from any and all liability, costs, damages, expenses (including attorneys' fees) and any and all liens resulting therefrom. All alterations, additions and improvements (and expressly including the light fixtures and floor coverings installed by Tenant), shall be deemed to belong to Tenant, but shall be deemed to have been attached to the demised premises or the building and to have become the property of Landlord upon the termination of the demised term except that -15- the foregoing shall not apply to furniture, removable paneling, decorations, wall fixtures, trade fixtures, appliances, equipment and other personal property of Tenant which do not become a part of the demised premises. Upon the expiration or sooner termination of the demised term hereof, Tenant shall, upon written demand by Landlord, at Tenant's sole cost and expense, forthwith remove any alterations, decorations, additions or improvements made by Tenant, designated by Landlord to be removed, and Tenant shall forthwith at its sole cost and expense repair any damage to the demised premises or the building caused by such removal. Upon request, Landlord shall advise Tenant in writing whether it reserves the right to require Tenant to remove any alterations from the demised premises upon termination of the Lease. If Landlord elects not to reserve such right, then Tenant shall not be required to remove the alterations in question from the demised premises at such time. ARTICLE 13 - Remedies SECTION 13.1. An "Event of Default" by Tenant shall have occurred under this Lease if (1) Tenant defaults in the payment of base rent or any item of additional rent when due and such default continues for more than five (5) days following Tenant's receipt of written notice of delinquency, or (2) Tenant defaults in the performance of any other obligation under the Lease and Tenant fails to remedy same within thirty (30) days following Tenant's receipt of written notce of default, provided that if the nature of the default is such that it can be cured, but cannot reasonably be remedied within thirty (30) days, then no Event of Default shall be deemed to have occurred so long as Tenant commences the cure of such default within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. Should an Event of Default occur, then, in addition to all other rights and remedies Landlord may have under this Lease or under applicable law, Landlord shall have the following rights and remedies: (1) The Landlord has the remedy described in California Civil Code Section 1951.4 (Landlord may continue the lease in effect after Tenant's breach and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations). If Tenant breaches any covenants of this Lease or if an Event of Default occurs, whether or not Tenant abandons the demised premises, this Lease shall continue in effect until Landlord terminates Tenant's right to possession, and Tenant shall remain liable to perform all of its obligations under this Lease and Landlord may enforce all of Landlord's rights and remedies, including the right to recover rent as it falls due. If Tenant abandons the demised premises or fails to maintain and protect the same as herein provided, Landlord shall have the right to do all things necessary or appropriate to maintain, preserve and protect the demised premises, including the installation of guards, and may do all things appropriate to a re-letting of the demised premises, and none of said acts shall be deemed to terminate Tenant's right of possession, unless Landlord elects to terminate the same by written notice to Tenant. Tenant agrees to reimburse Landlord on demand for all amounts reasonably expended by Landlord in maintaining, preserving and protecting the demised premises, together with interest on the amounts expended from time to time at the lesser of (i) ten percent (10%) per annum, or (ii) the maximum legal rate (as used in -16- this Section 13.1, the "Maximum Legal Rate"). Landlord shall also have the right to repair, remodel and renovate the demised premises at the expense of Tenant and as deemed necessary by Landlord. (2) Landlord shall have the right to terminate Tenant's possession of the demised premises, and if Tenant's right to possession of the demised premises is terminated by Landlord by reason of an Event of Default by Tenant, or by reason of the happening of an Event of Default, or by reason of abandonment of the demised premises by Tenant, Tenant agrees to pay to Landlord on demand (i) all unpaid rent earned at the time of termination, together with interest on all unpaid installments from the times they were due to the date of termination at the Maximum Legal Rate; (ii) the amounts by which the unpaid rent which would have been due and payable by Tenant since the date of termination exceeds the amount of any rental loss that Tenant proves could have been avoided, together with interest on said amounts from the dates they were due at the Maximum Legal Rate; (iii) the worth at the time of demand of the amount by which the unpaid rent for the balance of the term of this Lease exceeds the amount of rental loss that Tenant proves may reasonably be avoided, together with interest on such amount at the Maximum Legal Rate from the date of demand until paid; (iv) all other amounts due Landlord from Tenant under the terms of this Lease, or necessary to compensate Landlord for all detriment caused by Tenant's failure to perform its obligations under this Lease. The right to possession of the demised premises by Tenant should not be deemed terminated until Landlord gives Tenant written notice of such termination or until Landlord re-lets all or a portion of the demised premises. In the event that Landlord seeks to recover the amount due, Landlord shall be entitled to recover the amounts specified in paragraphs (a) (1), (a) (2) and (a) (4) of Section 1951.2 of the Civil Code of California as such section reads at the date of this Lease, together with interest on said amounts at the Maximum Legal Rate from the dates they were due, computed as of the date of the award, together with the worth at the time of the award of the amount by which the unpaid rent for the balance of the term exceeds the amount of such rental loss that Tenant proves could reasonably have been avoided. Landlord shall be required to mitigate damages by making a good faith effort to re-let the demised premises. (3) No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy herein or by law, provided that each shall be cumulative and in addition to every other right or remedy given herein or now hereafter existing at law or in equity or by statute. SECTION 13.2. Landlord shall in no event be in default in the performance of any of its obligations hereunder unless and until Landlord shall have failed to perform such obligations within thirty (30) days or such additional times as is reasonably required to correct any such default after notice by Tenant to the Landlord properly specifying wherein the Landlord has failed to perform any such obligation or after Landlord otherwise becomes aware of the default. ARTICLE 14 - Bankruptcy -17- SECTION 14.1. Tenant shall give written notice to Landlord of its intention to commence proceedings under any state or federal insolvency or bankruptcy law, or any comparable law that is now or hereafter may be in effect, whereby Tenant seeks to be, or would be, discharged of its debts or the payment of its debts is sought to be delayed, at least thirty (30) days prior to the commencement of such proceedings. SECTION 14.2. If any of the following events occur: (1) The entry of an order for relief under Title 11 of the United States Code as to Tenant or its executors, administrators or assigns, if any, or the adjudication of Tenant or its executors, administrators or assigns, if any, as insolvent or bankrupt pursuant to the provisions of any state insolvency or bankruptcy act; (2) The appointment of a receiver, trustee or other custodian of the property of Tenant by reason of the insolvency or inability of Tenant to pay its debts; (3) The assignment of the property of Tenant for the benefit of creditors; (4) The commencement of any proceedings under any state or federal insolvency or bankruptcy law, or any comparable law that is now or hereafter may be in effect, whereby Tenant seeks to be, or would be, discharged of its debts or the payment of its debts is sought to be delayed (unless, in the case of an involuntary proceeding, if any such proceeding has not been vacated within sixty (60) days following the commencement of that action); (5) The failure of Tenant to give written notice to Landlord provided for in SECTION 14.1. above; then Landlord may, at any time thereafter, in addition to any and all other rights or remedies of Landlord under this Lease or under applicable law, upon written notice to Tenant, terminate this Lease, and upon such notice this Lease shall cease and terminate with the same force and effect as though the date set forth in said notice were the date originally set forth herein and fixed for the expiration of the demised term. Tenant shall thereupon vacate and surrender the demised premises, but shall remain liable as herein provided. ARTICLE 15 - Surrender of Premises SECTION 15.1. Tenant shall, upon termination of the demised term, or any earlier termination of this Lease, surrender to Landlord the demised premises, including, without limitation, all building equipment and apparatus, and fixtures (except as provided in SECTIONS 12.1. AND 12.2.) then upon the demised premises without any damage, injury, or disturbance thereto, or payment therefor, except damages due to ordinary wear and tear, acts of God, fire and other perils to the extent the demised premises are not required to be repaired or restored as hereinbefore provided, and Tenant shall dispose of any hazardous materials stored, dispensed, handled or used by Tenant or Tenant's agents, employees, contractors, invitees or servants in, at or upon the demised premises in accordance with the provisions of SECTION 7.4. Tenant shall -18- not be required to repair worn carpets, nail holes and other incidental damage that results from Tenant's lawful use and occupancy of the demised premises. ARTICLE 16 - Eminent Domain SECTION 16.1. If (i) more than thirty-three percent (33%) of the floor area of the building on the demised premises shall be taken under the power of eminent domain and the portion not so taken will not be reasonably adequate for the operation of Tenant's business after the Landlord completes such repairs or alterations as the Landlord is obligated or elects to make, or (ii) if a portion of the demised premises, including the parking areas, shall be taken under the power of eminent domain and the portion not so taken will not be reasonably adequate for Tenant to effectively and efficiently, in the use of good business judgment, use Tenant's shipping and distribution facilities on the demised premises after the Landlord completes such repairs or alterations as the Landlord is obligated or elects to make, Tenant shall have the right to elect either to terminate this Lease, or, subject to Landlord's right to terminate the Lease pursuant to SECTION 16.4., to continue in possession of the remainder of the demised premises and shall notify Landlord in writing within thirty (30) days after such taking of Tenant's election. In the event less than thirty- three percent (33%) of the floor area of the building on the demised premises shall be taken or Tenant elects to remain in possession, as provided in the first sentence hereof, all of the terms herein provided shall continue in effect, except that the base rent shall be reduced in the same proportion that the floor area of the building on the demised premises taken bears to the original floor area of the building on the demised premises, and Landlord shall at its own cost and expense make all necessary repairs or alterations to the building so as to constitute the portion of the building not taken a complete architectural unit and the demised premises a complete unit for the purposes allowed by this Lease, but such work shall not exceed the scope of the work to be done by Landlord in originally constructing said building. SECTION 16.2. Each party waives the provisions of Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking. SECTION 16.3. All damages or awards for any taking under the power of eminent domain whether for the whole or a part of the demised premises shall belong to and be the property of Landlord whether such damages or awards shall be awarded as compensation for diminution in value to the leasehold or to the fee of the demised premises; provided however, that Landlord shall not be entitled to the award made to Tenant or Landlord for loss of business, depreciation to, and cost or removal of stock and fixtures and for leasehold improvements which have been installed by Tenant at its sole cost and expense less depreciation which is to be computed on the basis of completely depreciating such leasehold improvements during the initial term of this Lease, and any award made to Tenant in excess of the then depreciated value of leasehold improvements shall be payable to the Landlord. SECTION 16.4. If more than thirty-three percent (33%) of the floor areas of the building on the demised premises shall be taken under power of eminent domain, or if more than fifty percent (50%) of the Parking and Accommodation Areas shall be so -19- taken, Landlord may, by written notice to Tenant delivered on or before the date of surrendering possession to the public authority pursuant to such taking, terminate this Lease as of such date. SECTION 16.5. If this Lease is terminated as provided in this Article, the rent shall be paid up to the day that possession is so taken by public authority and Landlord shall make a prorata refund of any rent and all deposits paid by Tenant in advance and not yet earned. ARTICLE 17 - Real Property Taxes SECTION 17.1. Tenant shall reimburse Landlord for all real property taxes, assessments and ongoing sewer fees applicable to the demised premises. Taxes shall be prorated to lease years for purpose of making this computation. Such payment shall be made by Tenant within thirty (30) days after receipt of Landlord's written statement setting forth the amount of such computation thereof. If the demised term of this Lease shall not expire concurrently with the expiration date of the fiscal tax year, Tenant's liability for taxes for the last partial lease year shall be prorated on an annual basis. SECTION 17.2. If the demised premises are not separately assessed, Tenant's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Landlord from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Landlord's reasonable determination thereof, in good faith, shall be conclusive. SECTION 17.3. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the demised premises or elsewhere. Tenant shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant's said personal property shall be assessed with Landlord's real property, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement setting forth the taxes applicable to Tenant's property. SECTION 17.4. In addition to all other payments provided for herein, the Tenant shall on demand reimburse Landlord for any surcharges, fees, and any similar charges required to be paid by any instrumentality of local, state or federal government in connection with parking in the parking area, including policing; supervising with attendants; other costs in connection with providing charged parking; repairs, replacements and maintenance not properly chargeable to capital account under good accounting principles; interest and depreciation of the actual cost of modification or improvements to the areas, facilities and improvements maintained in this Article either (i) required by any instrumentality of local, state or federal government, or (ii) installed by Landlord to facilitate payment of a parking charge by the general public for parking in the parking area, or both, and other similar costs; and there shall be excluded (a) cost of construction of such improvements which is properly chargeable to capital -20- account and (b) depreciation of the original cost of construction of all items not previously mentioned in this sentence. If Landlord shall require the payment of a parking charge by the general public for parking in the parking area, then during any period in which such a charge is made the total revenue (after deducting excise and similar taxes thereon and taxes, fees or surcharges imposed by any agency or instrumentality of local, state or federal government) actually received in cash or its equivalent by Landlord for such parking charge shall be credited against said gross costs. SECTION 17.5. Notwithstanding the provisions of ARTICLE 17 hereinabove, Tenant shall pay any increase in "real property taxes" resulting from any and all improvements of any kind whatsoever placed on or in the demised premises for the benefit of or at the request of Tenant regardless of whether said improvements were installed or constructed either by Landlord or Tenant. SECTION 17.6. In addition to all other payments provided for herein, the Tenant shall on demand reimburse Landlord for any tax (excluding income tax) and/or business license fee or other levy that may be levied, assessed or imposed upon the rent or other payments provided for herein or on the square footage of the demised premises, on the act of entering into this Lease, or on the occupancy of the Tenant however described, as a direct substitution in whole or in part for, or in addition to, any real property taxes, whether pursuant to laws presently existing or enacted in the future. ARTICLE 18 - Parking and Accommodation Areas SECTION 18.1. Landlord grants to Tenant during the demised term the non- exclusive right to use the parking facilities and other areas provided and designated as "Parking and Accommodation Areas" on EXHIBIT "B" hereto for the accommodation and parking of such automobiles of the Tenant, its officers, agents, employees and its customers while working or visiting Tenant; provided that Landlord shall have no obligation to enforce such exclusive use of the parking facilities on Tenant's behalf. Except as provided in SECTION 17.4., Landlord shall not charge parking fees for such right to use parking facilities. SECTION 18.2. All parking areas and facilities furnished by Landlord including, but not limited to, pedestrian sidewalks, landscaped areas and parking areas shall at all times be subject to the control and management of Landlord so that Landlord will be in a position to make available efficient and convenient use thereof, and Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all facilities and areas mentioned in this Article, and Tenant agrees to abide by and conform therewith. Landlord shall have the right to construct, maintain and operate lighting facilities on all of said areas and improvements, to police the same, from time to time to change the area, location and arrangement of parking areas and facilities, to restrict employee parking to employee parking areas, to construct surface, subterranean and/or elevated parking areas and facilities, to establish and from time to time change the level of parking surfaces, to close (if necessary) all or any portion of said areas or facilities to such extent as may in the opinion of Landlord's counsel be legally sufficient to prevent a dedication thereof or the -21- accrual of any rights of any person or of the public therein, and to do and perform such other acts in and to said areas and improvements respectively as in the use of good business judgment the Landlord shall determine to be advisable with a view to the improvement of the convenience and use thereof by Tenant, other lessees, and their respective employees and visitors. Landlord agrees that in the exercise of its rights herein Landlord shall use its reasonable efforts to minimize the disruption of Tenant's business in the demised premises. In no event shall Landlord reduce the number of parking spaces in the parking area, unless required to do so by law. SECTION 18.3. Subject to Section 11.5,. Tenant agrees during the demised term to pay to Landlord an annual charge which shall be Landlord's actual gross costs of operating, maintaining and/or replacing all of the areas and facilities mentioned in this Article. The annual charge shall be an estimate computed on the basis of periods of twelve (12) consecutive calendar months, commencing and ending on such dates as may be designated by Landlord, and shall be paid in monthly installments on the first day of each calendar month in the amount estimated by Landlord. Within ninety (90) days after the end of each such annual period, Landlord will determine (and furnish to Tenant a statement showing in reasonable detail) the actual annual charge for such period and the amounts so estimated and paid during such period shall be adjusted within such ninety (90) days (including adjustments on a prorata basis of any partial such period at either end of the demised term) and one party shall pay to the other on demand whatever amount is necessary to effectuate such adjustment. Landlord's said gross costs shall consist of and include all costs and expenses of every kind or nature incurred by Landlord in the operation, maintenance and/or replacement of all of the areas, facilities and improvements mentioned in this Article determined in accordance with good accounting practice by an accountant employed by Landlord. The determination of such accountant shall be conclusive. Without otherwise limiting the generality of the foregoing, there shall be included in such gross costs public liability and property damage insurance, landscape maintenance, maintenance of utilities, water, cleaning of areas, facilities and improvements, operation of lighting, common area taxes and assessments determined in the same manner as taxes and assessments on the demised premises, policing and sweeping of parking areas, supervising with attendants, repairs, replacements and maintenance, and an amount equal to ten percent (10%) of the total of all of the above (excluding real property taxes levied pursuant to Article 17 and property damage insurance) for administration of the Parking and Accommodation Areas. SECTION 18.4. The Parking and Accommodation Areas included for the purpose of this Article are those shown cross-hatched on EXHIBIT "B" outside of the building area. ARTICLE 19 - Miscellaneous SECTION 19.1. Landlord and its designee shall have the right, upon 24 hours' advance notice to Tenant (except in emergencies),during reasonable business hours to enter the demised premises except restricted areas as established by or on behalf of the Federal Government for security purposes (and in emergencies at all times), subject to Tenant's reasonable security precautions (i) to inspect the same, (ii) for any purpose connected with Landlord's rights or obligations under this Lease and, (iii) for all -22- other lawful purposes, and Landlord shall use its reasonable efforts to minimize the disruption of Tenant's business in the demised premises. SECTION 19.2. Tenant shall not be entitled to make repairs at Landlord's expense, and Tenant waives the provisions of Civil Code Sections 1941 and 1942 with respect to Landlord's obligations for tenantability of the demised premises and Tenant's right to make repairs and deduct the expenses of such repairs from rent. SECTION 19.3. This Lease shall be governed exclusively by the provisions hereof and by the laws of the State of California as the same from time to time exist. This Lease expresses the entire understanding and all agreements of the parties hereto with each other and neither party hereto has made or shall be bound by any agreement or any representation to the other party which is not expressly set forth in this Lease. SECTION 19.4. If Tenant should hold over after the demised term and any extension thereof as herein provided for, then such holding over with Landlord's consent shall be construed as a tenancy from month to month at a rent 110% of that provided for under the monthly rental of the principal term of this Lease. If Tenant should hold over after the demised term and any extension thereof as herein provided for without Landlord's consent, rent shall be 150% of that provided for under the monthly rental as of the last month of the original (or extended) term of this Lease; provided said increased rent shall not prejudice Landlord from pursuing any other remedies for such unlawful holdover to which Landlord is legally entitled. SECTION 19.5. Tenant agrees to maintain all toilet and washroom facilities within the demised premises in a neat, clean and sanitary condition. SECTION 19.6. Landlord covenants and agrees that Tenant, subject to the terms and provisions of this Lease, on paying the rent and observing, keeping and performing all of the terms and provisions of this Lease on its part to be observed, kept and performed, shall lawfully, peaceably and quietly have, hold, occupy and enjoy the demised premises during the demised term without hindrance or ejection by any person lawfully claiming under or against the Landlord. SECTION 19.7. Subject to ARTICLE 6, the terms and provisions hereof shall be construed as running with the land and shall be binding upon and inure to the benefit of heirs, executors, administrators, successors and assigns of Landlord and Tenant. SECTION 19.8. A. Tenant shall promptly pay all sums of money with respect to any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in, at or about the demised premises, or furnished to Tenant's agents, employees, contractors or subcontractors, that may be secured by any mechanic's, materialmen's, supplier's or other liens against the demised premises or Landlord's interest therein. In the event any such or similar liens shall be filed, Tenant shall, within three (3) days of receipt thereof, give notice to Landlord of such lien, and Tenant shall, within ten (10) days after receiving notice of the filing of the lien, discharge such lien by payment of the amount due to the lien claimant. However, Tenant may in good faith -23- contest such lien provided that within such ten (10) day period Tenant provides Landlord with a surety bond from a company acceptable to Landlord, protecting against said lien in an amount at least 110% of the amount claimed or secured as a lien or such greater amount as may be required by applicable law; and provided further that Tenant, if it should decide to contest such lien, shall agree to indemnify, defend and save harmless Landlord from and against all costs arising from or in connection with any proceeding with respect to such lien. Failure of Tenant to discharge the lien, or, if contested, to provide such bond and indemnification, shall constitute an Event of Default under this Lease and in, addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated, to discharge or secure the release of any lien by paying the amount claimed to be due, and the amount so paid by Landlord, and all costs and expenses incurred by Landlord therewith, including, but not limited to, court costs and reasonable attorneys' fees, shall be due and payable by Tenant to Landlord forthwith on demand. B. Except with respect to Tenant's improvements constructed at the commencement of the demised term of this Lease, at least fifteen (15) days before the commencement by Tenant of any material construction or remodeling work on the demised premises, Tenant shall give written notice thereof to Landlord. Landlord shall have the right to post and maintain on the demised premises such Notices of Non-Responsibility, or similar notices, provided for under applicable laws. SECTION 19.9. SECTION 19.10. All notices, statements, demands, requests, consents, approvals, authorizations, offers, agreements, appointments or designations hereunder by either party to the other shall be in writing and shall be sufficiently given and served upon the other party if sent by overnight carrier or United States certified mail, return receipt requested, postage prepaid, and addressed as follows: If sent to Tenant, the same shall be addressed to the Tenant at 4045-4055 CAMPBELL AVENUE, MENLO PARK, CALIFORNIA 94025, or at such other place as Tenant may from time to time designate by notice to Landlord. If sent to Landlord, the same shall be addressed to Landlord at 60 HILLSDALE MALL, SAN MATEO, CALIFORNIA 94403-3497, or at such other place as Landlord may from time to time designate by notice to Tenant. Any such notice when sent by overnight carrier or certified mail as above provided shall be deemed duly served as follows: (i) when sent by certified mail, return receipt requested, on the date the U. S. Post Office certifies delivery or refusal to accept delivery or returns the notice as undeliverable, if addressed to the other party at the address for notices herein, or (ii) when sent by overnight carrier, the first business day following the date of such mailing. SECTION 19.11. As used in this Lease and when required by the context, each number (singular or plural) shall include all numbers, and each gender shall include all genders; and unless the context otherwise requires, the word "person" shall include corporation, firm or association. -24- SECTION 19.12. In case of litigation with respect to the mutual rights, obligations, or duties of the parties hereunder, the prevailing party shall be entitled to reimbursement from the other party of all costs and reasonable attorneys' fees actually incurred. SECTION 19.13. Each term and each provision of this instrument performable by Tenant shall be construed to be both a covenant and a condition. SECTION 19.14. Except as otherwise expressly stated, each payment provided herein to be made by Tenant to Landlord shall be in addition to and not in substitution for the other payments to be made by Tenant to Landlord. SECTION 19.15. Time is and shall be of the essence of this Lease and all of the terms, provisions, covenants and conditions hereof. SECTION 19.16. The Tenant warrants that it has not had any dealings with any realtor, broker, or agent in connection with the negotiation of this Lease excepting only Cooper/Brady Corporate Real Estate Services, whom Landlord agrees to pay whatever commission may be due. Except for Cooper/Brady Corporate Real Estate Services, each party agrees to hold the other harmless from any cost, expense or liability for any compensation, commissions or charges claimed by any realtor, broker, or agent with respect to this Lease and/or the negotiation thereof with whom the other party has or purportedly has dealt. SECTION 19.17. Tenant agrees that its interest in this Lease shall be subordinate to any mortgage, deed of trust and/or other security indenture hereafter placed upon the demised premises and to any and all advances made or to be made thereunder and to the interest thereon made and all renewals, replacements, and extensions thereof, but nothing herein contained shall be deemed to alter or limit Tenant's rights as set forth in SECTION 19.6. If any mortgagee, trustee or holder of such security instrument elects to have the Tenant's interest in this Lease superior to any such instrument by notice to Tenant, then this Lease should be deemed superior to the lien of any such mortgage, deed of trust or security indenture whether this Lease was executed before or after said mortgage, deed of trust and/or security indenture. Landlord shall use its reasonable efforts to obtain from the existing mortgagee a Subordination, Non-Disturbance and Attornment Agreement wherein such mortgagee recognizes in writing Tenant's interest in the demised premises and provides that Tenant's interest hereunder shall not be disturbed so long as Tenant is not in default under the terms of this Lease. SECTION 19.18. Landlord reserves the right during the last seven months of the demised term of this Lease or the last seven months of any extension hereof to enter the property upon 24 hours' advance notice to Tenant, during normal working hours for the purpose of showing the demised premises (except restricted areas established by, or on behalf of, the Federal Government for security purposes and subject to Tenant's reasonable security precautions) to prospective tenants or purchasers and to place signs (for the last year) on the demised premises advertising the property for lease or sale. Landlord shall use its reasonable efforts to minimize the disruption of Tenant's business in the demised premises. -25- SECTION 19.19. The following terms as used in this Lease shall have the following meaning: (a) "Unavoidable Delay" means any prevention, delay or stoppage due to strike(s), lockout(s), labor dispute(s), act(s) of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, enemy or hostile governmental action, civil commotion, fire or other casualty, and other conditions or causes beyond the reasonable control of the party obligated to perform. SECTION 19.20. If Landlord and Tenant are unable, pursuant to SECTION 2.2., to agree upon a base rent for the option periods referenced in SECTION 1.3. at least one hundred fifty (150) days prior to (i) the expiration of the initial five year term as to the first option period and (ii) the expiration of the first one year option period, if any, as to the second option period, then the amount by which base rent will be increased shall be determined by arbitration. At least one hundred twenty (120) days prior to (i) the expiration of the initial five year term as to the first option period and (ii) the expiration of the first one year option period, if any, as to the second option period, Landlord and Tenant shall each select a qualified, licensed MAI real estate appraiser familiar with the value of office/industrial property in the City of Menlo Park to act as an arbitrator. Within ten (10) days thereafter, unless during such period the two appraisers shall have agreed upon the fair market rental value (as defined in SECTION 2.2. hereof), including interim adjustments, in which case their determination shall be final and binding, the two arbitrators so appointed shall select a third appraiser similarly qualified to act as the third arbitrator (the two arbitrators will use reasonable efforts to select a third arbitrator who has had no prior dealings with Landlord or Tenant). If the two arbitrators are unable to agree on a third arbitrator, the third arbitrator shall be appointed by the Superior Court of San Mateo County having jurisdiction over the property on application of either Landlord or Tenant. Within forty five (45) days after the appointment of the third arbitrator, the three arbitrators shall determine the fair market rental value (as defined in SECTION 2.2. hereof), including interim adjustments, of the demised premises as they then exist. If the three (3) arbitrators are unable to agree, the base rent shall be the average of the base rent proposals made by the two (2) arbitrators whose proposals are closest. Landlord and Tenant shall each pay the fees of their own arbitrator and shall share equally the fee of the third arbitrator (including all costs associated with an appointment by the Superior Court of San Mateo, if applicable, regardless of which party filed the application). Anything herein to the contrary notwithstanding, the fair market rental value of the demised premises for each year of the option periods shall not be determined to be less than the base rent for the preceding year and shall in no event be less than the base rent in effect during the last year of the initial term with respect to the first option period, or first extended term with respect to the second option period, as the case may be. The rental so established by this provision shall be the rental for each of the option periods. SECTION 19.21. So long as no Event of Default (as defined in Section 13.1 above) by Tenant then exists, Landlord shall, if and when such space becomes available, and so long as such space is not otherwise already encumbered by leases, rights or options of the existing tenant, offer to Tenant the option to expand the demised premises by adding space thereto consisting of the entire building located at 4065 -26- Campbell Avenue, Menlo Park, California (the "expansion space") under the following terms and conditions. If Landlord makes such an offer it shall do so by giving written notice to Tenant not more than three (3) months after Landlord has knowledge that the expansion space will become available for lease and otherwise before Landlord markets the expansion space to third parties. If Landlord offers the expansion space, Tenant shall, within ten (10) business days of Landlord's notice to Tenant offering such space, either accept or reject Landlord's offer. If Tenant accepts Landlord's offer, the parties shall enter into a lease for such expansion space. The right of first offer granted hereunder is only the right of the Tenant to accept or reject the total proposal being offered by Landlord. Such proposal may include but not be limited to, lease rate, lease term, tenant improvements, interim adjustments to lease rate and expense payments and options to extend lease term. Nothing herein shall be construed to prevent Landlord from offering the expansion space to lease to third parties (including existing or future tenants of other properties owned by Landlord) provided Landlord has first made an offer to Tenant as provided herein and Tenant has refused to accept such offer. The right granted Tenant in this SECTION 19.21 may only be exercised by Network General for Network General's sole benefit and cannot be transferred nor can it be exercised by Network General for any other party, except that the right granted Tenant herein may be transferred to an Affiliate (as defined in Section 6.1) provided that the Lease has been assigned to an Affiliate pursuant to the provisions of Section 6.1. Neither Landlord or Tenant shall be bound to the terms and conditions of the offer until the execution of a mutually acceptable lease. If such a lease is not executed within thirty (30) days of Tenant's acceptance of Landlord's offer, for any reason, then, in such event, the right granted hereunder shall lapse and Landlord shall have no further obligation to Tenant with respect to the expansion space. Landlord agrees that from the date of execution and delivery of this Lease, with respect to the expansion space, Landlord shall not extend any existing leases or amend any term of existing leases that will create rights of any existing tenants to remain in the expansion space beyond their original demised term or previously granted option period(s); provided that nothing herein shall limit Landlord's ability to make any other amendments to leases with exsiting tenant(s) in the expansion space during the original demised term or previously granted option period(s). Section 19.22. Landlord acknowledges that during the demised term Tenant may wish to obtain a new street number for the demised premises. Tenant shall have the right to change the street number provided that (i) Tenant obtains all applicable governmental approvals to do so, and (ii) at the expiration or earlier termination of this Lease Landlord may, at Landlord's option, require Tenant (at Tenant's expense) to change the street number of the demised premises back to 4045-4055 Campbell Avenue. Section 19.23. Tenant shall have the right, at Tenant's expense, to dig a trench running between the demised premises and Tenant's facilities in the Menlo Oaks -27- Business Park and install utilities and telecommunications conduits and other related equipment therein provided that (i) Tenant shall secure any and all governmental permits, approvals or authorizations required in connection with any such work, with copies to Landlord for Landlord's prior approval, (ii) Tenant agrees to indemnify, hold harmless, and defend Landlord against all liability, cost, and expense (including without limitation any fines, penalties, judgments, liens, litigation costs, and attorneys' fees) incurred by Landlord resulting therefrom, regardless of whether such liability, cost, or expense arises during or after the demised term, (iii) Tenant shall at its sole cost and expense repair any damage to the demised premises or property owned by Landlord or Landlord's subsidiary, affiliate or parent thereof caused by such work and (iv) prior to the expiration or earlier termination of this Lease, Tenant shall, at its sole cost and expense, remove from the building, disconnect and cap off any such utilities, conduits and equipment installed by Tenant, designated by Landlord to be removed, and repair any damage to the demised premises or the property caused by such removal. The rights granted to Tenant by Landlord herein extend only to the property owned by Landlord, or Landlord's subsidiary, affiliate or parent thereof, and shall not be deemed to extend to property owned by a third party. IN WITNESS WHEREOF, the parties have executed this instrument. TENANT: LANDLORD: NETWORK GENERAL CAMPBELL AVENUE ASSOCIATES, a Delaware corporation a California partnership By: /s/LESLIE G. DENEND By: /s/ FRANCIS NELSON --------------------- ---------------------- President Managing Partner By: /s/ JAMES T. RICHARDSON By: _______________________ ----------------------- Assistant Secretary -28- EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1997 APR-01-1996 JUN-30-1996 55,953 72,975 40,364 (2,459) 5,146 184,797 42,439 (25,336) 231,016 45,190 0 466 0 0 182,014 231,016 40,639 51,680 9,661 12,973 27,814 88 (1,691) 12,496 3,811 8,685 0 0 0 8,685 .19 .19
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