-----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, FUoTBQbWOj+u9fWQ7FaXrRqUiVSwfMFnaz8oWHU6FLfMjMJF8MkwFO4IJLVb6Kxo j8jK3PVP8Wc80Ha0dHviuQ== 0000912057-96-025639.txt : 19961113 0000912057-96-025639.hdr.sgml : 19961113 ACCESSION NUMBER: 0000912057-96-025639 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 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: 96659066 BUSINESS ADDRESS: STREET 1: 4200 BOHANNON DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4154732000 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...September 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 September 30, 1996, there were outstanding 43,316,647 shares of the Registrant's Common Stock (par value $0.01 per share). This report, including exhibits, consists of 91 pages. The exhibit index begins on page 14-16. FORM 10-Q INDEX PAGE ---- Cover Page 1 Index 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 1996 and March 31, 1996 3 Condensed Consolidated Statements of Income - three and six months ended September 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows - six months ended September 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements - September 30, 1996 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 - 16 Signatures 17 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) September 30, 1996 March 31, 1996 ------------------ -------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $36,548 $34,180 Marketable Securities 67,061 81,417 Accounts receivable, net 44,028 34,043 Inventories 5,191 4,863 Prepaid expenses and deferred tax assets 16,229 11,303 -------- -------- Total current assets 169,057 165,806 Property and Equipment, at cost: Demonstration and rental equipment 11,257 9,968 Office and development equipment 30,816 27,443 Leasehold improvements 2,954 2,771 -------- -------- 45,027 40,182 Less accumulated depreciation and amortization (27,901) (23,006) -------- -------- Net property and equipment 17,126 17,176 Long-term Investments 43,257 37,139 Other Assets 7,772 3,209 -------- -------- $237,212 $223,330 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $6,053 $4,300 Accrued liabilities 16,381 14,749 Deferred revenue 24,235 20,916 -------- -------- Total current liabilities 46,669 39,965 Long-term Deferred Revenue and Taxes 3,524 3,248 Stockholders' Equity: Common Stock Issued -- 46,806,647 shares at September 30, 1996 and 46,068,302 shares at March 31, 1996 468 461 Additional paid-in-capital 137,119 127,482 Retained earnings 110,310 91,799 Less treasury stock, at cost -- 3,490,000 shares at September 30, 1996 2,490,000 shares at March 31, 1996 (60,878) (39,625) -------- -------- Total stockholders' equity 187,019 180,117 -------- -------- $237,212 $223,330 -------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended (in thousands, except per share data) September 30, September 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) Revenues: Product $43,626 $35,436 $84,265 $67,266 Services 11,919 8,293 22,960 16,203 ---------- ---------- ---------- ---------- Total Revenues 55,545 43,729 107,225 83,469 ---------- ---------- ---------- ---------- Cost of Revenues: Product 11,108 7,744 20,769 14,648 Services 2,999 2,330 6,311 4,547 ---------- ---------- ---------- ---------- Total Cost of Revenues 14,107 10,074 27,080 19,195 ---------- ---------- ---------- ---------- Gross profit 41,438 33,655 80,145 64,274 Operating Expenses: Sales and marketing 17,857 15,082 34,879 28,678 Research and development 7,418 6,824 14,594 12,615 General and administrative 3,630 2,946 7,334 5,577 Acquired in-process research and development --- 7,153 --- 7,153 ---------- ---------- ---------- ---------- Total Operating Expenses 28,905 32,005 56,807 54,023 ---------- ---------- ---------- ---------- Income from operations 12,533 1,650 23,338 10,251 Interest Income, net 1,605 1,860 3,296 3,606 ---------- ---------- ---------- ---------- Income before provision for income taxes 14,138 3,510 26,634 13,857 Provision for Income Taxes 4,312 3,200 8,123 6,356 ---------- ---------- ---------- ---------- Net income $9,826 $310 $18,511 $7,501 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings Per Share $0.22 $0.01 $0.41 $0.17 ---------- ---------- ---------- ---------- Weighted Average Common and Common Equivalent Shares Outstanding 45,325 45,978 45,735 45,800 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended (in thousands) September 30, 1996 1995 ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $18,511 $7,501 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,093 3,668 Acquired in-process research & development - 7,153 Deferred taxes, net (802) 567 Net change in certain assets and liabilities (12,021) (1,181) ---------- ---------- Net cash provided by operating activities 11,781 17,708 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of held-to-maturity investments (79,858) (76,658) Purchases of available-for-sale investments (24,461) - Proceeds from maturities of held-to-maturity investments 87,917 81,615 Proceeds from sales/maturities of available-for-sale investments 24,816 - Cash used to purchase AIM Technology - (6,501) Net additions to property and equipment (6,218) (8,739) ---------- ---------- Net cash provided by (used in) investing activities 2,196 (10,283) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net of issuance costs 9,644 9,088 Repurchase of common stock (21,253) (14,424) ---------- ---------- Net cash used in financing activities (11,609) (5,336) Net increase in cash and cash equivalents 2,368 2,089 Cash and cash equivalents at beginning of period 34,180 18,950 ---------- ---------- Cash and cash equivalents at end of period $36,548 $21,039 ---------- ---------- ---------- ---------- Supplemental Disclosures Cash paid during the period for : Income taxes $8,371 $5,060
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Network General Corporation ("Network General" or the "Company") have been prepared in accordance with generally accepted accounting principles for 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 and six months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. CASH AND CASH EQUIVALENTS, MARKETABLE 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 September 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 $2,782 $2,783 $1 Debt securities issued by states of the United States and political subdivisions of the state 76,000 76,190 190 ------- ------- ---- $78,782 $78,973 $191 ------- ------- ---- ------- ------- ----
AVAILABLE-FOR-SALE SECURITIES
(In thousands) Amortized Aggregate Unrealized Cost Fair Value Gains --------- ----------- --------------- Debt securities issued by states of the United States and political subdivisions of the state $31,439 $31,536 $97 ------- ------- ---- ------- ------- ----
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) September 30, 1996 March 31, 1996 ------------------ -------------- Purchased parts $2,970 $2,650 Finished goods 2,221 2,213 ------ ------ $5,191 $4,863 ------ ------ ------ ------ D. 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 12 and 13 and in the Company's reports on Forms 10-K and 10-Q which are on file with the Securities and Exchange Commission. RESULTS OF OPERATIONS Revenues for the quarter ended September 30, 1996 were $55,545,000, an increase of 27% over revenues totaling $43,729,000 for the quarter ended September 30, 1995. For the six months ended September 30, 1996, revenues were $107,225,000, an increase of 28% over revenues of $83,469,000 for the six months ended September 30, 1995. Domestic revenues increased 20% to $42,377,000 for the quarter ended September 30, 1996 compared to $35,332,000 for quarter ended September 30, 1995. For the six months ended September 30, 1996, domestic revenues were $81,277,000, an increase of 21% over the same period ended September 30, 1995. International revenues increased 57% for the second quarter of fiscal year 1997 compared to the second quarter of fiscal year 1996, growing from $8,397,000 to $13,168,000 and increased 58% to $25,948,000 for the six months ended September 30, 1996. Pacific Rim and Latin America revenues increased 54% quarter over quarter and increased 59% for the six months ended September 30, 1996 compared to the same period ended September 30, 1995 while European revenues grew 61% and 57% for the quarter and six months ended September 30, 1996, respectively. International revenues increased to 24% of total revenues for both the three and six months ended September 30, 1996, compared to 19% and 20%, respectively, for the three and six months ended September 30, 1995. These increases in international revenues resulted from increased sales volumes by the Company's exclusive Japan distributor as well as the Company's focus on a new, revised European sales strategy which has led to increased sales volumes in Europe. 8 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 Six Months Ended September 30, September 30, ------------ ------------- (dollars in thousands) (dollars in thousands) SOURCES OF REVENUES 1996 1995 1996 1995 ---- ---- ---- ---- Tool Products (1) $28,092 $21,068 $55,128 $41,492 System Products (2) 15,534 14,368 29,137 25,774 ------- ------- ------- ------- Subtotal Product Revenues 43,626 35,436 84,265 67,266 Services (3) 11,919 8,293 22,960 16,203 ------- ------- ------- ------- Total Revenues $55,545 $43,729 $107,225 $83,469 ------- ------- ------- ------- ------- ------- ------- ------- PERCENTAGES OF REVENUES 1996 1995 1996 1995 ---- ---- ---- ---- Tool Products 51% 48% 52% 50% System Products 28% 33% 27% 31% --- --- --- --- Subtotal Product Revenues 79% 81% 79% 81% Services 21% 19% 21% 19% --- --- --- --- Total Revenues 100% 100% 100% 100% ---- ---- ---- ---- ---- ---- ---- ----
(1) Tool products in each of the three and six months ended September 30, 1996 and 1995 include revenues from the Sniffer-Registered Trademark- Network Analyzer local area network (LAN) analysis products, wide area network (WAN) analysis products, product rentals and royalties from license agreements. In both the three and six months ended September 30, 1995, tool products also include product rentals. (2) System products consist of revenues from the Distributed Sniffer System-Registered Trademark- analysis products, performance measurement analysis products, the Foundation probe and agent remote monitoring products, the Sharpshooter monitoring products, the DATACOM Systems, Inc. line of network switching devices, the Netsys Technologies, Inc. line of connectivity and performance tools and Frontier Software Development, Inc.'s line of "Netscout" remote monitoring products. (3) Services revenues in each of the three and six months ended September 30, 1996 and 1995 include first-year warranty revenues as defined by Statement of Position ("SOP") 91-1 and revenues from software support and maintenance contracts and training and consulting services. In both the three and six months ended September 30, 1996, services revenues also include product rentals. The Company's tool products revenues increased 33% to $28,092,000 for the second quarter of fiscal year 1997 compared to $21,068,000 for the second quarter of fiscal year 1996. For the six months ended September 30, 1996, tool products revenues totaled $55,128,000, an increase of 33% over tool products revenues totaling $41,492,000 for the six months ended September 30, 1995. Sniffer-Registered Trademark- Network Analyzer products accounted for substantially all of the Company's tool products revenues in both the three and six month periods ended September 30, 1996 and 1995. Tool products revenues represented approximately 51% of Network General's revenues for the second fiscal quarter ended September 30, 1996, compared to 48% for the same period ended September 30, 1995. For the six months ended September 30, 1996, tool products represented 52% of the Company's total revenues, compared to 50% for the same period ended September 30, 1995. Revenues for the quarter ended September 30, 1996 included $15,534,000 in system products revenues, an 8 % increase compared to $14,368,000 in system products revenues for the same period in fiscal year 1996. System products revenues increased 13 % to $29,137,000 for the six months ended September 30, 1996 compared to $25,774,000 for the same period ended September 30, 1995. The Distributed Sniffer System-Registered Trademark- (DSS) analysis products accounted for the majority of the Company's system products revenues in both the three and six month periods ended September 30, 1996 and 1995. System products revenues decreased to approximately 28% and 27% of Network General's revenues for the three and six months ended September 30, 1996, respectively, compared to 33% and 31% for the three and six months ended September 30, 1995, respectively, due to faster growth in tools and services revenues as well as broadening competition for system products. 9 Services revenues include revenues from software support and maintenance contracts and 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 quarter ended September 30, 1996, services revenues increased 44% to $11,919,000, from $8,293,000 for the same quarter in fiscal year 1996. The increase in services revenues resulted from increases in all categories of services revenues. Services revenues grew 42% from $16,203,000 for the six months ended September 30, 1995 to $22,960,000 for the six months ended September 30, 1996. As a percentage of total revenues, services revenues represented approximately 21% of Network General's revenues for the three and six months ended September 30, 1996, an increase from 19% for the same periods ended September 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 and six months ended September 30, 1996 from 77% for the quarter and six months ended September 30, 1995, primarily resulting from increased pricing pressure on the company's products, increased cost of servers for the Company's system products, promotional pricing on one of the Company's older product platforms, and increased sales of third party products. 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 and sales of third party product lines, which have lower margins than the Company's own products), system products (which include sales of third party product lines, which have lower margins than the Company's own products) and services (which have historically lower gross margins than the Company's products margins) and the use of indirect distribution channels to sell the Company's products, both domestically and internationally. Sales and marketing expenses were $17,857,000 in the second quarter of fiscal year 1997, an increase of 18% compared to $15,082,000 in the second quarter of fiscal year 1996. For the six months ended September 30, 1996, sales and marketing expenses totaled $34,879,000, an increase of 22% over $28,678,000 incurred for the same period ended September 30, 1995. These increases were 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 32% from 34% for the quarters ended September 30, 1996 and 1995, respectively, and decreased from 34% to 33% for the six months ended September 30, 1995 and 1996, respectively, due to increased use of indirect distribution channels to sell the Company's products and services, thereby reducing the amount of direct selling costs related to such sales of the Company's products and services. Research and development expenses were $7,418,000 in the second quarter of fiscal year 1997, compared to $6,824,000 in the second quarter of fiscal year 1996 and $14,594,000 for the six months ended September 30, 1996 compared to $12,615,000 for the same period ended September 30, 1995. As a percentage of revenues, research and development expenses decreased to 13% for the quarter ended September 30, 1996 compared to 16% for the quarter ended September 30, 1995 and 14% for the six months ended September 30, 1996 compared to 15% for the six months ended September 30, 1995 due to the fact the three and six months ended September 30, 1995 included significant expenses incurred to support accelerated development efforts of high speed network technology products. The increase in absolute dollar spending was a result of increased staffing and equipment expense to support growth in the Company's breadth of product and services offerings. 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, therefore, the Company has charged all software development costs to research and development expenses in the consolidated statements of income. 10 General and administrative expenses were $3,630,000 for the quarter ended September 30, 1996 and $2,946,000 for the quarter ended September 30, 1995. For the six months ended September 30, 1996, general and administrative expenses totaled $7,334,000 compared to $5,577,000 incurred for the six months ended September 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 and six months ended September 30, 1996 and 1995. Earnings per share for the quarter ended September 30, 1996 increased to $0.22 compared to $0.01 per share earned in the quarter ended September 30, 1995. For the six months ended September 30, 1996, earnings per share increased to $0.41 from $0.17 for the same period in fiscal year 1996. Excluding the one-time charge to write-off acquired in-process research and development related to the acquisition of AIM Technology ("AIM") earnings per share in the three and six months ended September 30, 1995 would have been $0.16 and $0.33, respectively. These increases were 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 and common equivalent shares outstanding decreased from 45,978,000 in the second quarter of fiscal year 1996 to 45,325,000 in the second quarter of fiscal year 1997 due to increased repurchases of common stock. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $11,781,000 for the six months ended September 30, 1996 and $17,708,000 the six months ended September 30, 1995. The primary source of these funds was net income, offset by net changes in certain assets and liabilities in fiscal years 1997 and 1996. Net cash provided by investing activities was $2,196,000 for the six months ended September 30, 1996, compared to net cash used in investing activities of $10,283,000 for the six months ended September 30, 1995. Net cash from investing activities in the first six months of fiscal year 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. Net cash used in financing activities was $11,609,000 for the six months ended September 30, 1996 and $5,336,000 for the same period ended September 30, 1995. The primary use of these funds was repurchases of common stock totaling $21,253,000 and $14,424,000 for the six months ended September 30, 1996 and 1995, respectively. Offsetting these uses were proceeds from the issuance of common stock totaling $9,644,000 for the six months ended September 30, 1996 and $9,088,000 for the same period ending September 30, 1995. As of September 30, 1996, the Company's principal sources of liquidity included cash, cash equivalents, marketable debt securities and long-term investments totaling $146,866,000, including $43,257,000 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. 11 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's products, particularly the Company's system products. Increased competition may also lead to downward pricing pressure on the Company's products. 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 quarters were received by the Company later in their respective fiscal quarters than they have been in prior quarters. It is anticipated this trend will continue into the near future. Further, the Company has entered the most recent fiscal quarters with a lower level of backlog as a percentage of revenue shipped within such quarters compared to prior periods. If the trends of orders received later in the quarter and lower levels of backlog entering the quarter continue, there is more risk the Company may not attain quarterly revenue objectives. Since the Company's expense levels are based on expectations of future revenues, failure of the Company to achieve quarterly revenue objectives would, therefore, have an adverse effect on the Company's operating results. In addition, the Company's expansion of its indirect channels of distribution may lead to channel conflict and downward pricing pressure and changes to the Company's gross margins and operating margins. The Company remains in the process of implementing 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. 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. 12 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 System are registered trademarks of Network General Corporation and/or its wholly owned subsidiaries. 13 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: The Company's annual meeting of stockholders was held on August 9, 1996. At the meeting, Leslie G. Denend and Laurence R. Hootnick were elected as Class III members of the Company's Board of Directors, with terms expiring at the Company's annual meeting of stockholders in 1999 and until their successors are elected and qualified. Mr. Denend was elected with 40,049,777 votes FOR and 38,326 votes WITHHELD. Mr. Hootnick was elected with 40,057,549 votes FOR and 30,554 votes WITHHELD. Also at the same meeting, the stockholders approved five other proposals. The first proposal was to amend the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 100,000,000. Approval was obtained with 35,941,451 votes FOR, 4,066,390 votes AGAINST, 30,562 votes ABSTAINING and 49,700 Broker Non-Votes on this proposal. The second proposal was to amend the Company's 1989 Stock Option Plan to increase the number of shares reserved for issuance thereunder from 14,000,000 to 16,000,000. Approval was obtained with 22,107,789 votes FOR, 17,886,132 votes AGAINST, 44,482 votes ABSTAINING and 49,700 Broker Non-Votes on this proposal. The third proposal was to amend the Company's 1989 Employee Stock Purchase Plan to increase the number of shares of the Company's Common Stock reserve for issuance thereunder from 1,400,000 to 1,500,000. Approval was obtained with 39,062,692 votes FOR, 933,317 votes AGAINST, 42,394 votes ABSTAINING and 49,700 Broker Non-Votes on this proposal. The fourth proposal was to amend the Company's 1989 Outside Directors Stock Option Plan and increase the number of shares reserved for the issuance thereunder from 920,000 to 1,020,000. Approval was obtained with 25,395,975 votes FOR, 14,588,656 votes AGAINST, 53,772 votes ABSTAINING and 49,700 Broker Non-Votes on this proposal. The fifth and final proposal was to ratify the appointment of Arthur Andersen LLP as the independent accountants of the Company for the fiscal year ending March 31, 1997. Approval was obtained with 40,018,597 votes FOR, 42,320 votes AGAINST and 27,186 votes ABSTAINING on this proposal. 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"). 14 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 Amended and Restated 1989 Outside Directors Stock Option Plan and related documentation, as amended August 9, 1996. 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 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"). 10.11 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. 15 10.12 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. 10.13 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"). 10.14 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. 10.15 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"). 10.16 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. 10.17 Network General Corporation 1989 Employee Stock Option Plan and related documentation, as amended August 9, 1996. 10.18 Network General Corporation 1989 Employee Stock Purchase Plan and related documentation, as amended August 9, 1996. 10.19 Employment Agreement dated August 19, 1995 between the Company and Michael Kremer, which is incorporated by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the year ended March 31, 1996 ("1996 Form 10-K"). 10.20 Lease dated July 3, 1996, between the Company and Campbell Avenue Associates, which is incorporated by reference to Exhibit 10-22 of the 1996 Form 10-K. 10.21 Secured Loan Agreement dated October 29, 1996 between the Company and John Richard Stringer. 27.0 Financial Data Schedule 2) Form 8-K The Company did not file any reports on Form 8-K during the three months ended September 30, 1996. 16 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: November 12, 1996 by S/JAMES T. RICHARDSON ----------------- ------------------------ James T. Richardson Senior Vice President, Corporate Operations, Chief Financial Officer and Assistant Secretary (authorized officer) Date: November 12, 1996 by S/BERNARD J. WHITNEY ----------------- --------------------------- Bernard J. Whitney Vice President, Controller and Chief Accounting Officer (authorized officer) 17 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 1 any outstanding Option for any reason expires or is terminated 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 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 sixty thousand (60,000) 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 sixty thousand (60,000) shares of Stock upon such election; provided, however, that on and after November 1, 1993, such number shall be twenty thousand (20,000). (ii) Each Outside Director shall be granted an Option to purchase ten thousand (10,000) 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 five thousand (5,000). (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 continuous 1/12 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 2 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 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 3 Company as described in paragraph 7 below, or (c) upon a Transfer of Control as described in paragraph 8 below. 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 4 (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). 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. 5 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 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-10.17 3 EXHIBIT 10.17 EXHIBIT 10.17 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 (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, 1/48 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 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: ------------------------------- 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 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-10.18 4 EXHIBIT 10.18 EXHIBIT 10.18 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 3 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 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 (c) 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 SECURED LOAN AGREEMENT October 29, 1996 A. PARTIES 1. John Richard Stringer 19915 Bella Vista Saratoga, CA 95070 ("DEBTOR") 2. Network General Corporation 4200 Bohannon Drive Menlo Park, CA 94025 ("CREDITOR") B. RECITALS 1. Whereas, as of the date of this Secured Loan Agreement first set forth above, Debtor is an executive officer of Creditor. 2. Whereas, Creditor desires to lend Debtor and Debtor desires to borrow from Creditor funds to assist Debtor's purchase of certain land located in California and construction of a primary residence thereon. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: C. AGREEMENT 1. PRINCIPAL. Creditor is lending to Debtor, and Debtor is borrowing from Creditor a total principal amount of Five Hundred Thousand Dollars ($500,000) to be paid to Debtor as follows: (i) Two Hundred Thousand Dollars ($200,000) to be paid into Debtor's escrow account number 761881 with Chicago Title Company (the "LAND ESCROW") for Debtor's purchase of certain real property located at Parcel Number 1 Garrod Road, Saratoga, California 95070 which is more fully identified in the preliminary title report attached hereto as EXHIBIT A (the "LAND"), upon GMAC Mortgage Corporation's depositing into the Land Escrow Three Hundred Thousand Dollars ($300,000); and (ii) Three Hundred Thousand Dollars ($300,000) to be paid into Debtor's escrow for the permanent (mortgage) financing of the Land and the improvements to have been built on the Land (the "FINAL ESCROW"), which 1 improvements (hereafter known as the "RESIDENCE") are more fully described in "A Custom Residence for Serena Development Corp., Lot 1, Garrod Road, Saratoga, CA" dated as of May 2, 1990 and the balance of which permanent (mortgage) financing for the Land and the Residence is to be providedby GMAC Mortgage Corporation, upon GMAC Mortgage Corporation's approval of the Final Escrow closing. The amounts loaned to Debtor hereunder are evidenced by the Promissory Notes in the forms attached hereto as EXHIBITS B and C, respectively (the "NOTES"). The Note represented by EXHIBIT C for Five Hundred Thousand Dollars ($500,000) shall be executed by Debtor upon Creditor's advance of the Three Hundred Thousand Dollars ($300,000) described in Section 1 (ii) herein and in substitution and cancellation for the Note represented by EXHIBIT B for Two Hundred Thousand Dollars ($200,000). Under no circumstances will funds described in Section C.1(ii) above be advanced prior to the close of the Land Escrow, nor prior to the close of the Final Escrow. In the event the Land Escrow does not close by October 31, 1996, Creditor is under no obligation to advance any funds pursuant to this Secured Loan Agreement. In the event the Final Escrow does not close by October 31, 1997, Creditor is under no obligation to advance the Three Hundred Thousand Dollars ($300,000) described in Section C.1(ii) herein. In the event Debtor is no longer an employee of Creditor prior to Creditor's advance of either the funds described in Section C.1(i) above or Section C.1(ii) above, Creditor is under no obligation to advance any funds which have not already been advanced pursuant to such Sections. 2. SECURITY. Subject to the applicable terms of this Secured Loan Agreement, Debtor grants to Creditor a security interest in the Collateral to secure the payment of the Obligations, as defined in Section D below. 3. REPAYMENT. In accordance with the terms and conditions of the Notes: A. INTEREST. Debtor shall make interest payments on the principal outstanding to Creditor at the simple rate of the lesser of: (a) six and six tenths percent (6.6%) per annum or (b) the statutorily prescribed applicable Federal rate (AFR) appropriate to the loan principal. Debtor shall make such interest payments semi-annually. Throughout the term of this Agreement, Debtor shall make semi-annual interest payments to Creditor within five (5) business days of Creditor's payment to Debtor of Debtor's semi-annual management bonus payments, which payments generally occur each October and April. In the event that Creditor does not: (i) make any management bonus available to any employee of Creditor; (ii) make any management bonus available to Debtor; or (iii) make a management bonus available to Debtor until after October or April, respectively, then in any of such cases, Debtor shall make his semi-annual interest payment to Creditor no later than the next successive November 15 or May 15, respectively. B. PRINCIPAL. In the event the Creditor advances to Debtor the entire Five Hundred Thousand Dollars ($500,000) as set forth in Section C.1 above, Debtor shall repay the full Five Hundred Thousand Dollar ($500,000) principal amount and any accrued interest thereon (from the last most recent interest payment date) on the date which is exactly five (5) years from the date the Final Escrow closes ("FINAL REPAYMENT DATE"). In the event that Creditor has advanced to Debtor only Two Hundred Thousand Dollars ($200,000) by October 2 31, 1997, Debtor shall repay the full Two Hundred Thousand Dollar ($200,000) principal amount and any accrued interest thereon (from the last most recent interest payment date) on October 31, 1997. Debtor is hereby permitted to prepay the principal and interest in whole or in part at any time prior to dates described in these Sections C.3A and C.3B without penalty. 4. ACCELERATION OF PAYMENT. In the event that Debtor is no longer an employee of Creditor for any reason (except as set forth below in Section C.5), and Creditor has only advanced Debtor Two Hundred Thousand Dollars ($200,000), the payment of principal described in Section C.3.B above will no longer apply (although the payment of interest pursuant to Section C.3.A. shall remain in full force and effect) and the total principal and all accrued interest (from the last most recent interest payment date) will be due upon THE EARLIER OF: (i) the date which is nine (9) months from the date Debtor is no longer an employee of Creditor; or (ii) October 31, 1997. In the event that Debtor is no longer an employee of Creditor for any reason (except as set forth below in Section C.5), and Creditor has advanced Debtor Five Hundred Thousand Dollars ($500,000), the payment of principal and interest described in Section C.3B above will no longer apply (although the payment of interest pursuant to Section C.3.A. shall remain in full force and effect) and the total principal and all accrued interest (from the last most recent interest payment date) will be due on the date which is THE EARLIER OF: (i) nine (9) months from the date Debtor is no longer an employee of Creditor; or (ii) the Final Repayment Date. 5. CHANGE IN CONTROL. A. "CHANGE OF CONTROL EVENT" means an Ownership Change, as defined below, in which the shareholders of the Creditor before such Ownership Change do not retain, directly or indirectly, at a least a majority of the beneficial interest in the voting stock of the Creditor after such transaction or in which the Creditor is not the surviving corporation. "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Creditor: (i) the direct or indirect sale or exchange by the shareholders of the Creditor of all or substantially all of the stock of the Creditor; (ii) a merger or consolidation in which the Creditor is a party and in which the shareholders of the Creditor before such Ownership Change do not retain, directly or indirectly, at a least a majority of the beneficial interest in the voting stock of the Creditor after such transaction or in which the Creditor is not the surviving corporation; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Creditor; or (iv) a liquidation or dissolution of the Creditor. B. "CONSTRUCTIVE TERMINATION" means one or more of the following that occurs within two (2) years after the occurrence of any Change of Control Event: (i) any 3 failure by the Creditor to pay, or any reduction by the Creditor of (a) the Debtor's base salary in effect immediately prior to the date of the Change of Control Event (unless reductions comparable in amount and duration are concurrently made for all other employees of the Creditor with responsibilities, organizational level and title comparable to the Debtor), or (b) the Debtor's bonus compensation in effect immediately prior to the date of the Change of Control Event (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Debtor and all other participants in the bonus program); or (ii) any failure by the Creditor to: (a) continue to provide the Debtor with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Creditor then held by the Debtor, any benefit or compensation plans and programs, including, but not limited to, the Creditor's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans in which the Debtor was participating immediately prior to the date of the Change of Control Event, or their equivalent, or (b) provide the Debtor with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position or a comparable position with the Creditor then held by the Debtor. C. "PERMANENT DISABILITY" means that: (i) the Debtor has been incapacitated by bodily injury or disease so as to be prevented thereby from engaging in the performance of the Debtor's duties; (ii) such total incapacity shall have continued for a period of six consecutive months; and (iii) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Debtor's life. D. "CAUSE" means: (i) theft, a material act of dishonesty, fraud, the falsification of any employment or Creditor records or the commission of any criminal act which impairs Debtor's ability to perform his/her duties; (ii) improper disclosure of the Creditor's confidential, business or proprietary information by the Debtor; (iii) any action by Debtor which the Creditor's Board of Directors (the "BOARD") reasonably believes has had or will have a material detrimental effect on the Creditor's reputation or business; or 4 (iv) persistent failure of the Debtor to perform the lawful duties and responsibilities assigned by the Creditor which is not cured within a reasonable time following the Debtor's receipt of written notice of such failure from the Creditor. E. "TERMINATION UPON CHANGE OF CONTROL" means any one of the following: (i) any termination of the employment of the Debtor by the Creditor without Cause within two (2) years after the occurrence of any Change of Control Event; (ii) any termination of the employment of the Debtor by the Creditor without Cause during the period commencing thirty (30) days prior to the date of the Creditor's first public announcement that the Creditor has entered into a definitive agreement to effect an Ownership Change (even though still subject to approval by the Creditor's stockholders and other conditions and contingencies) and ending on the date of the Change of Control Event; or (iii) any resignation by the Debtor immediately following any Constructive Termination that occurs within two (2) years after the occurrence of any Change of Control Event. "Termination Upon Change of Control" shall not include any termination of the employment of the Debtor: (a) by the Creditor for Cause; (b) by the Creditor as a result of the Permanent Disability of the Debtor; (c) as a result of the death of the Debtor; or (d) as a result of the voluntary termination of employment by the Debtor that is not deemed to be a Constructive Termination pursuant to Subsection 5.B. above. NOTHING SET FORTH IN THIS AGREEMENT SHALL CONSTITUTE AN AGREEMENT OF EMPLOYMENT NOR SHALL THIS AGREEMENT ALTER DEBTOR'S STATUS AS AN AT-WILL EMPLOYEE OF CREDITOR. F. REPAYMENT UPON DEBTOR'S TERMINATION UPON CHANGE OF CONTROL. In the event of the Debtor's Termination Upon Change of Control, the repayment of interest for a period of one (1) year from the date of such Termination shall be borne by the Creditor or its successor, and the repayment of principal set forth in Subsection C.3.B shall remain in full force and effect. G. DUE ON SALE. In the event Debtor sells, transfers, assigns or conveys any interest (including but not limited to change of title, grants of leases, or grants of security interests) in the Land or Residence, or any portion thereof, other than the grant to GMAC Mortgage Corporation of a first deed of trust in the Land and Residence, all outstanding principal and accrued interest shall be fully due and payable immediately prior to the closing of any such upon the closing any such sale, transfer, assignment or conveyance. D. OBLIGATION 5 The following are the "OBLIGATIONS" secured by this Agreement: 1. All amounts due under the Notes. 2. All costs incurred by Creditor to obtain, preserve, and enforce this Agreement, collect the Obligation, and maintain and preserve the Collateral, and including (but not limited to) taxes, assessments, insurance premiums, repairs, reasonable attorneys' fees and legal expenses, rent, storage costs, and expenses of sale. E. COLLATERAL Debtor hereby grants and agrees to grant to Creditor a security interest in the following, hereinafter called the "COLLATERAL": 1. To secure the Two Hundred Thousand Dollars ($200,000) loaned to Debtor and interest thereon pursuant to the Note, evidenced by EXHIBIT B: all stock options, whether vested or unvested, which Debtor has any rights to pursuant to the Network General Corporation 1989 Employee Stock Option Plan, as amended, now owned and hereafter acquired by Debtor and wherever located, and all cash or non-cash proceeds of any of the foregoing, including insurance proceeds (Debtor's "STOCK OPTIONS"). 2. Upon Creditor's advancing to Debtor the final Three Hundred Thousand Dollars ($300,000), Debtor's executing the Note evidenced by EXHIBIT C, Debtor's executing and assisting in the filing of appropriate documentation to secure the Land/Residence Collateral described below and Creditor's extinguishing the Note represented by EXHIBIT B, Creditor will release all rights to the Collateral described in Section E.1. above and will instead secure the entire principal amount loaned hereunder and interest thereon with a deed of trust on the Land and the Residence, including all substitutes and replacements therefor, accessions, attachments, and other additions thereto, and all cash or non-cash proceeds of any of the foregoing, including insurance proceeds. At no time will Creditor have both Debtor's Stock Options and the Land/Residence as Collateral. F. AGREEMENTS OF DEBTOR 1. Debtor will: take adequate care of the Collateral; insure the Collateral for such hazards and in such amounts as Creditor directs, with policies and coverages satisfactory to Creditor; pay all costs necessary to obtain, preserve, and enforce this security interest, collect the Obligation and preserve the Collateral, including (but not limited to) taxes, assessments, insurance premiums, repairs, reasonable attorneys' fees and legal expenses, rent, storage costs, and expenses of sale; furnish Creditor with any information on the Collateral requested by Creditor; allow Creditor to inspect the Collateral, and inspect and copy all records relating to the Collateral and the Obligation; sign any papers furnished by Creditor which are necessary to obtain and maintain this security interest, including but not limited to executing Joint Escrow Instructions appointing Gray Cary Ware & Freidenrich as agent with respect to Debtor's Stock Options as security, executing and filing a form UCC-1 Financing Statement with the 6 California Secretary of State, appropriate deeds of trust with the county of Santa Clara or elsewhere as Creditor may deem appropriate to perfect its security interest; perfect a security interest (using a method satisfactory to Creditor) in goods covered by chattel paper which is part of the Collateral; notify Creditor of any change occurring in or to the Collateral, or in any fact or circumstance warranted or represented by Debtor in this Agreement or furnished to Creditor, or if any Event of Default occurs. 2. For so long as Creditor has as Collateral Debtor's Stock Options Debtor will not, without Creditor's prior written consent exercise in any period more than fifty percent (50%) of the number of Stock Options which vested in such period. 3. Debtor warrants: except for the first deed of trust which will be perfected on the Land and Residence by GMAC Mortgage Corporation, no financing statement, deed of trust or notice of security interest has been filed with respect to the Collateral, other than relating to this security interest; Debtor is absolute owner of the Collateral, and it is not encumbered other than by this security interest (and the same will be true of Collateral acquired hereafter when acquired); all account debtors and obligors, whose obligations are part of the Collateral, are to the extent permitted by law prevented from asserting against Creditor any claims or defenses they have against sellers. G. RIGHTS OF CREDITOR Creditor may, in its discretion, before or after default: terminate, on notice to Debtor, Debtor's authority to sell, lease, otherwise transfer Collateral, or any other Collateral as to which such permission has been given; require Debtor to give possession or control of the Collateral to Creditor; indorse as Debtor's agent any instruments or chattel paper in the Collateral; notify account debtors and obligors on instruments to make payment directly to Creditor; contact account debtors directly to verify information furnished by Debtor; take control of proceeds and use cash proceeds to reduce any part of the Obligation; take any action Debtor is required to take or otherwise necessary to obtain, preserve, and enforce this security interest, and maintain and preserve the Collateral, without notice to Debtor, and add costs of same to the Obligation (but Creditor is under no duty to take any such action); release Collateral in its possession to Debtor, temporarily or otherwise; take control of funds generated by the Collateral, such as dividends, interest, proceeds or refunds from insurance, and use same to reduce any part of the Obligation; waive any of its right hereunder without such waiver prohibiting the later exercise of the same or similar rights; revoke any permission or waiver previously granted to Debtor. H. DEFAULT 1. Any of the following is an "Event of Default": failure of Debtor to pay the Notes in accordance with its terms, or any other liability in the Obligation on demand, or to perform any act or duty required by this Agreement; Debtor's material breach of any other agreement between Creditor and Debtor; falsity of any warranty or representation in this Agreement when made; material adverse change in any fact warranted or represented in this 7 Agreement; involvement of Debtor in bankruptcy or insolvency proceedings; death or other termination of Debtor's existence; a sale of all or substantially all of Debtor's assets; substantial loss, theft, destruction, sale, reduction in value, encumbrance of, damage to, or change in the Collateral; material adverse modification of any contract, the rights to which are part of the Collateral; levy on, seizure, or attachment of the Collateral; judgment against Debtor; filing any financing statement with regard to the Collateral, other than relating to this security interest; Creditor's belief that the prospect of payment of any part of the Obligation or the performance of any part of this Agreement, is materially impaired. 2. When an Event of Default occurs, the entire Obligation becomes immediately due and payable at Creditor's option without notice to Debtor, and Creditor may proceed to enforce payment of same and exercise any and all of the rights and remedies available to a secured party under the California Commercial Code as well as all other rights and remedies. When Debtor is in default, Debtor, upon demand by Creditor, shall assemble the Collateral and make it available to Creditor at a place reasonably convenient to both parties. I. WAIVERS 1. WAIVER OF NOTICE AND CONSENT. Debtor and all other parties now or hereafter liable for the payment hereof, whether as endorser, guarantor, surety or otherwise, severally waive demand, presentment, notice of dishonor, notice of intention to accelerate the maturity hereof, notice of acceleration of the maturity hereof, diligence in collecting, grace, notice and protest, and to the acceptance of further security or the release of any security for this Agreement or the Note, and to the release of any party liable hereunder, all without in any way affecting the liability of Debtor and any endorsers or guarantors hereof or sureties therefor whether or not they are a party to any such act or agreement. 2. CUMULATIVE REMEDIES. No failure, delay or discontinuance on the part of Creditor or any other Creditor of rights in this Agreement or the Notes in exercising any right, power or remedy hereunder or pursuant to the Notes shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided in this Agreement and the Notes are cumulative and are not exclusive of any remedies that may be available to Creditor at law, in equity or otherwise. No amendment, modification, supplement, termination, consent, or waiver of this Agreement or the Note, nor consent to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by Creditor. 3. WAIVER. The failure to exercise the option to accelerate the repayment of the Obligations evidenced by this Agreement, upon the happening of one or more of the Events of Default shall not constitute a waiver of the right to exercise the same at any subsequent time in respect of the same Event of Default (unless such Event of Default has been cured or expressly waived in writing) or any other Event of Default. The acceptance by a Creditor of these Notes of any payment which is late or is less than the payment in full of all amounts due and payable at the time of such payment shall not constitute any of the following: (i) a waiver of the right to 8 exercise the foregoing option at that time or at any subsequent time or nullify any prior exercise of such option; (ii) a waiver of the right to receive timely payments in the future; or (iii) a waiver of the right to receive payment in full of all amounts due and payable at the time of such payment. J. INDEMNIFICATION Debtor agrees to indemnify, defend and hold harmless Creditor and Creditors successors, assigns, agents, and directors (the "INDEMNITEES") of any interest in this Agreement or the Notes from and against (i) any and all transfer taxes, documentary taxes, assessments or charges by reason of the execution and delivery of this Agreement and the Note, and (ii) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the fees and disbursements of legal counsel and other professionals) in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against such Indemnitee, in any manner relating to or arising out of or in connection with the providing of the Agreement or Notes by Debtor ("INDEMNIFIED LIABILITIES"); provided, however, that Debtor shall have no obligation hereunder with respect to any of the Indemnified Liabilities arising from or related to the gross negligence or willful misconduct of any Indemnitee. K. MISCELLANEOUS 1. SEVERABLE PROVISIONS. Every provision of this Agreement and the Notes is intended to be severable. If any term or provision hereof is declared by a court of competent jurisdiction to be illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity, or unenforceability shall not affect. the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. 2. APPLICABLE LAW. This Agreement and the Notes are performable in California and shall be governed by and construed in accordance with the laws of the State of California and laws of the United States applicable to the transaction evidenced hereby. 3. SUCCESSORS-AND ASSIGNS. This Agreement and/or the Notes may not be assigned to any third party by Creditor without the written consent of Debtor. This Agreement and the Notes and any amendments hereto and theretoshall be binding upon and inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Debtor may not assign or transfer any interest or obligation hereunder without the prior written consent of Creditor which may not be unreasonably withheld. 4. NOTICE. Debtor waives presentment, demand, notice of dishonor, protest, and extension of time without notice as to any instruments and chattel paper in the Collateral. Any notice to a party shall be given in writing at that party's address set forth in Section A above, or such other address of which notice is given hereunder, and shall be deemed effectively given as of the earliest of (i) when delivered personally, (ii) when sent by confirmed telex or facsimile, 9 (iii) one (1) day after deposit with a commercial overnight carrier with written verification of receipt, or (iv) five (5) days after having been sent by registered or certified mail, return receipt 10 requested, postage prepaid; PROVIDED, that if the California Commercial Code specifies another notice procedure, such notice procedure shall apply. CREDITOR DEBTOR NETWORK GENERAL CORPORATION: By: /s/James T. Richardson By: /s/John Richard Stringer ---------------------- ------------------------ Name: James T. Richardson Name: John Richard Stringer ------------------- --------------------- Title: Senior Vice President and Chief Financial Officer ------------------------------------------------- The undersigned, being the spouse of the above-named Debtor, does hereby acknowledge that the undersigned has read and is familiar with the provisions of the above Secured Loan Agreement, and the undersigned hereby agrees thereto and joins therein to the extent, if any, that the agreement and joinder of the undersigned may be necessary. Name: Pamela Lura Stringer By: /s/Pamela Lura Stringer ----------------------- 11 12 EXHIBIT B FULL RECOURSE SECURED PROMISSORY NOTE Menlo Park, California $ 200,000.00 OCTOBER 29, 1996 1. OBLIGATION. For value received, John Stringer, a married individual, resident at 19915 Bella Vista, Saratoga, CA 95070 ("DEBTOR") hereby promises to pay to the order of NETWORK GENERAL CORPORATION, a Delaware corporation ("CREDITOR"), the principal sum of Two Hundred Thousand Dollars ($200,000.00), together with interest on the unpaid principal balance from the date hereof until paid at the simple rate of the lesser of: (i) six and six tenths percent (6.6%) per annum or (ii) the statutorily prescribed applicable Federal rate (AFR) appropriate to the loan principal. 2. INTEREST PAYMENTS. Debtor shall make interest payments on the unpaid principal balance semi-annually as set forth herein. Debtor shall make such semi-annual interest payments to Creditor within five (5) business days of Creditor's payment to Debtor of Debtor's semi-annual management bonus payments, which payments generally occur each October and April. In the event that Creditor does not: (i) make any management bonus available to any employee of Creditor; (ii) make any management bonus available to Debtor; or (iii) make a management bonus available to Debtor until after October or April, respectively, then in any of such cases, Debtor shall make his semi-annual interest payment to Creditor no later than the next successive November 15 or May 15, respectively. 3. REPAYMENT OF PRINCIPAL. Debtor shall repay to Creditor the entire amount of unpaid principal and any accrued interest thereon no later than October 31, 1997. Debtor may prepay any or all of this Note at any time at no penalty. Any partial payment shall be applied first to accrued interest, then to principal. Delivery of interest payments and principal due under this Note shall be paid in lawful money of the United States of America at Creditor's address set forth in that certain Secured Loan Agreement dated as of October 29, 1996 between Creditor and Debtor (the "LOAN AGREEMENT"). 4. ACCELERATION OF PAYMENT. Except as set forth in the Loan Agreement, in the event that Debtor is no longer an employee of Creditor for any reason, the payment of principal described in Sections 3 above will no longer apply and the total principal and all accrued interest will be due no later than the earlier of: (i) the date which is nine (9) months after Debtor's final date as an employee of Creditor; or (ii) October 31, 1997. Nothing set forth in this Note shall constitute an agreement of employment nor shall this Agreement alter Debtor's status as an at-will employee of Creditor. 5. DEFAULT. Upon the occurrence of an "Event of Default" (as such term is defined in the Loan Agreement) by Debtor: (a) the entire unpaid principal sum and accrued interest 13 under this Note shall become immediately due and payable; and (b) Creditor shall have, in addition to its rights and remedies under the Loan Agreement, any and all rights and remedies available to it at law or in equity, all of which rights and remedies shall be cumulative. 6. WAIVER. Debtor waives presentment, notice of nonpayment, notice of dishonor, protest, demand and diligence. 7. ATTORNEYS' FEES. If suit is brought for collection of this Note, Debtor agrees to pay all reasonable expenses, including attorneys' fees, incurred by Creditor in connection therewith, whether or not such suit is prosecuted to judgment. 8. INTEGRATION. This Note is an integral part of the Loan Agreement and shall be interpreted as part of and with the Loan Agreement. IN WITNESS WHEREOF, Debtor has caused this Note to be executed as of the date and year first written above. DEBTOR By: /s/John Richard Stringer ------------------------ Name: John Richard Stringer By: /s/Pamela Lura Stringer ------------------------ Name: Pamela Lura Stringer 14 EXHIBIT C SECURED PROMISSORY NOTE Menlo Park, California $ 500,000.00 ____________, 1997 1. OBLIGATION. For value received, John Stringer, a married individual, resident at ______________________________________ ("DEBTOR") hereby promises to pay to the order of NETWORK GENERAL CORPORATION, a Delaware corporation ("CREDITOR"), the principal sum of Five Hundred Thousand Dollars ($500,000.00), together with interest on the unpaid principal balance from the date hereof until paid at the simple rate of the lesser of: (i) six and six tenths percent (6.6%) per annum or (ii) the statutorily prescribed applicable Federal rate (AFR) appropriate to the loan principal. 2. INTEREST PAYMENTS. Debtor shall make interest payments on the unpaid principal balance semi-annually as set forth herein. Debtor shall make such semi-annual interest payments to Creditor within five (5) business days of Creditor's payment to Debtor of Debtor's semi-annual management bonus payments, which payments generally occur each October and April. In the event that Creditor does not: (i) make any management bonus available to any employee of Creditor; (ii) make any management bonus available to Debtor; or (iii) make a management bonus available to Debtor until after October or April, respectively, then in any of such cases, Debtor shall make his semi-annual interest payment to Creditor no later than the next successive November 15 or May 15, respectively. 3. REPAYMENT OF PRINCIPAL. Debtor shall repay to Creditor the entire amount of unpaid principal and any accrued interest thereon no later than the date which five (5) years from the date of this Note first set forth above. Debtor may prepay any or all of this Note at any time at no penalty. Any partial payment shall be applied first to accrued interest, then to principal. Delivery of interest payments and principal due under this Note shall be paid in lawful money of the United States of America at Creditor's address set forth in that certain Secured Loan Agreement dated as of October __, 1996 between Creditor and Debtor (the "LOAN AGREEMENT"). 4. ACCELERATION OF PAYMENT. Except as set forth in the Loan Agreement, in the event that Debtor is no longer an employee of Creditor for any reason, the payment of principal described in Sections 3 above will no longer apply and the total principal and all accrued interest will be due no later than the date which is nine (9) months after Debtor's final date as an employee of Creditor. Nothing set forth in this Note shall constitute an agreement of employment nor shall this Agreement alter Debtor's status as an at-will employee of Creditor. 15 5. DEFAULT. Upon the occurrence of an "Event of Default" (as such term is defined in the Loan Agreement) by Debtor: (a) the entire unpaid principal sum and accrued interest under this Note shall become immediately due and payable; and (b) Creditor shall have, in addition to its rights and remedies under the Loan Agreement, any and all rights and remedies available to it at law or in equity, all of which rights and remedies shall be cumulative. 6. WAIVER. Debtor waives presentment, notice of nonpayment, notice of dishonor, protest, demand and diligence. 7. ATTORNEYS' FEES. If suit is brought for collection of this Note, Debtor agrees to pay all reasonable expenses, including attorneys' fees, incurred by Creditor in connection therewith, whether or not such suit is prosecuted to judgment. 8. INTEGRATION. This Note is an integral part of the Loan Agreement and shall be interpreted as part of and with the Loan Agreement. IN WITNESS WHEREOF, Debtor has caused this Note to be executed as of the date and year first written above. DEBTOR By: --------------------------------- Name: John Richard Stringer By: ---------------------------------- Name: Pamela Lura Stringer 16 EX-27 6 EXHIBIT 27 FDS
5 1,000 6-MOS MAR-31-1997 APR-01-1996 SEP-30-1996 36,548 67,061 47,506 (3,478) 5,191 169,057 45,027 (27,901) 237,212 46,669 0 0 0 468 186,551 237,212 84,265 107,225 20,769 27,080 56,665 142 (3,296) 26,634 8,123 18,511 0 0 0 18,511 0.41 0.41
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