-----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, Lbv0GCpHW+HYo+FCrwIkKR4wzBPd6yp+9du5qlZG4RLxvRXcDJZbtvH/XX7GdI4q c45Hx474X4CbVrl59ha7xQ== 0000891618-97-002314.txt : 19970520 0000891618-97-002314.hdr.sgml : 19970520 ACCESSION NUMBER: 0000891618-97-002314 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCAFEE ASSOCIATES INC CENTRAL INDEX KEY: 0000890801 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770316593 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20558 FILM NUMBER: 97606319 BUSINESS ADDRESS: STREET 1: 2710 WALSH AVE STE 200 CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4089883832 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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 0-20558 MCAFEE ASSOCIATES, INC. (Exact name of registrant as specified in its charter) Delaware 77-0316593 (State of incorporation) (IRS Employer Identification Number) 2805 Bowers Avenue Santa Clara, California 95051 (408) 988-3832 (Address and telephone number of principal executive offices) ------------ Indicate by check mark whether 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- 50,315,555 shares of the registrant's common stock, $0.01 par value, were outstanding as of April 30, 1997. THIS DOCUMENT CONTAINS 31 PAGES. THE EXHIBIT INDEX IS ON PAGE 26. 2 MCAFEE ASSOCIATES, INC. FORM 10-Q, March 31, 1997 -------- CONTENTS
Item Number Page - ----------- ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets: March 31, 1997 and December 31, 1996............................3 Condensed Consolidated Statements of Income: Three months ended March 31, 1997 and 1996......................4 Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 1997 and 1996 .....................5 Notes to Consolidated Financial Statements.........................6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................8 PART II: OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K.....................................24 SIGNATURES ...................................................................25 EXHIBIT INDEX ................................................................26
2 3 MCAFEE ASSOCIATES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) ---------- ASSETS
March 31 December 31 1997 1996 -------- -------- (Unaudited) Current assets: Cash and cash equivalents $ 95,338 $ 76,363 Marketable securities 49,457 50,368 Accounts receivable, net of allowances for doubtful accounts and returns of $3,055 and $3,027 at March 31, 1997 and December 31, 1996 36,344 25,930 Prepaids and other current assets 6,644 5,097 Prepaid taxes 2,274 1,869 Deferred taxes 4,550 4,321 -------- -------- Total current assets 194,607 163,948 Long term investments 27,211 14,021 Fixed assets, net 10,653 7,486 Intangibles, net 907 1,001 Deferred taxes 8,122 7,719 Other assets 563 310 -------- -------- Total assets $242,063 $194,485 ======== ======== LIABILITIES Current liabilities: Accounts payable $ 9,837 $ 5,379 Accrued liabilities 15,396 15,734 Deferred revenue 24,171 20,182 -------- -------- Total current liabilities 49,404 41,295 Deferred revenue, less current portion 4,169 3,663 -------- -------- Total liabilities 53,573 44,958 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized: 5,000,000 shares Common stock, $.01 par value; authorized: 100,000,000 shares; issued and outstanding: 49,845,897 shares at March 31, 1997 and 48,662,489 at December 31, 1996 495 488 Additional paid-in capital 97,209 77,259 Retained earnings 90,786 71,780 -------- -------- Total stockholders' equity 188,490 149,527 -------- -------- Total liabilities and stockholders' equity $242,063 $194,485 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 MCAFEE ASSOCIATES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) --------
Three months Ended March 31 -------------------- 1997 1996 ------- ------- Net revenue $73,357 $33,845 Operating costs and expenses: Cost of net revenue 5,918 2,067 Research and development 9,658 3,810 Marketing and sales 21,987 9,583 General and administrative 5,555 2,713 Amortization of intangibles 104 550 Acquisition and other unusual costs -- 8,297 ------- ------- Total operating costs and expenses 43,222 27,020 ------- ------- Income from operations 30,135 6,825 Other income 1,632 597 ------- ------- Income before income taxes 31,767 7,422 Provision for income taxes 12,071 6,339 ------- ------- Net income $19,696 $ 1,083 ======= ======= Net income per share $ 0.37 $ 0.02 ======= ======= Shares used in per share calculation 53,610 51,795 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 MCAFEE ASSOCIATES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) --------
Three months Ended March 31, ---------------------- 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 19,696 $ 1,083 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 897 996 Provision for doubtful accounts receivable and allowance for returns 28 320 Unrealized loss on investments (242) -- Deferred taxes (632) 900 Changes in assets and liabilities: Accounts receivable (10,442) 96 Prepaids and other assets (1,800) (132) Refundable income taxes (405) -- Accounts payable and accrued liabilities 4,119 2,817 Prepaid income taxes -- 4,551 Deferred revenue 4,495 (3,269) -------- -------- Net cash provided by operating activities 15,714 7,362 -------- -------- Cash flows from investing activities: Purchase of intangibles (9) (911) Sale (Purchases) of investment securities (12,279) 399 Additions to fixed assets (3,961) (1,094) Net liabilities of Jade K.K. acquired under pooling transaction (1,122) -- Net assets of SHBV acquired under pooling transaction 925 -- -------- -------- Net cash used in investing activities (16,446) (1,606) -------- -------- Cash flows from financing activities: Effect of exchange rate fluctuations (250) (21) Stock option exercises 6,132 2,066 Tax benefit from exercise of nonqualified stock options 13,825 5,400 -------- -------- Net cash provided by financing activities 19,707 7,445 -------- -------- Net increase in cash and cash equivalents 18,975 13,201 Cash and cash equivalents at beginning of period 76,363 30,299 -------- -------- Cash and cash equivalents at end of period $ 95,338 $ 43,500 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 MCAFEE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ---------- 1. Basis of Presentation: The accompanying consolidated financial statements have been prepared by the Company without audit in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three month period ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year or for any future periods. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 1997. The balance sheet as at December 31, 1996 has been derived from the audited financial statements as of and for the year ended December 31, 1996, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. 2. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share", which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and is effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 requires restatement of all prior-period earnings per share data presented after the effective date. FAS 128 will not have a material impact on the Company's financial position, results of operations or cash flows. 3. Acquisitions: On February 28, 1997, the Company acquired Jade KK of Japan ("Jade") and a former Dutch distributor, Shuijers Holding B.V. ("SHBV") for 336,071 and 63,721 shares of its common stock, respectively. Jade is a developer and distributor of anti-virus software in Japan. These combinations were accounted for as poolings of interest. Each of Jade's and SHBV's results for the quarter ended March 31, 1997 has been included in the Company's consolidated results for that period. However, the Company's results for the quarter ended March 31, 1996 do not include the results of Jade or SHBV for that period as the effect is not material. 6 7 MCAFEE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ---------- 4. Subsequent Events On April 1, 1997, the Company was named as defendant in an action filed by CyberMedia, Inc. ("CyberMedia") in the United States District Court for the Northern District of California. The complaint alleges that the packaging and advertisement of the Company's PC Medic 97 product, which was introduced in March 1997, constitute unfair competition, false advertising and trade libel with respect to CyberMedia's "First Aid 97" product. The complaint seeks unspecified damages and injunctive relief, including a temporary restraining order. On April 9,1997, the court denied CyberMedia's application for a temporary restraining order. A date has been set in June 1997, for a hearing on plaintiff's request for a preliminary injunction. McAfee has filed an opposition to the request for a preliminary injunction. McAfee has filed an opposition to the request for a restraining order which denies the allegations of CyberMedia's complaint. The parties have recently reached an agreement pursuant to which the complaint will be dismissed. On April 15, 1997, the Company acquired a controlling interest in its former distributor, Compusul-Consultores de Informatica Ltda. ("Compusul") of Sao Paolo, Brazil, for an aggregate purchase price of $3.6 million, represented by an initial payment of $2.6 million and an additional $1.0 million payable upon the achievement of certain earnings targets. The acquisition was accounted for as a purchase transaction. On April 24, 1997, the Company, received notice that Symantec Corporation ("Symantec"), filed in United States District Court, Northern District of California, San Jose Division, a complaint alleging copyright infringement and unfair competition by the Company. Symantec alleges that the Company's computer software program called "PC Medic 1997" copied portions of Symantec's computer software program entitled "CrashGuard." Symantec's complaint seeks injunctive relief and unspecified money damages. McAfee intends to file a response to Symantec's complaint by June 2, 1997. 7 8 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected for the full year or any future periods. This Report on Form 10-Q contains forward-looking statements, including but not limited to those specifically identified as such, that involve risks and uncertainties. The statements contained in this Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Report on Form 10-Q are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth in "Risk Factors" and elsewhere in this Report on Form 10-Q. OVERVIEW McAfee Associates, Inc. ("McAfee" or the "Company") licenses network security and management products, including help desk and storage management software. Prior to July 1, 1995, net revenue from licenses for anti-virus software was generally recognized ratably over the two year license period because there was no basis for unbundling the separate maintenance portion of the license, while net revenue from licenses for network management software was generally recognized 80% at the time of the licensing transaction with the remaining 20%, representing the maintenance portion of the license fee, recognized ratably over the two year license period. Effective July 1, 1995, the Company established a basis for unbundling the maintenance portion of the anti-virus license and began to generally recognize 80% of license fees for electronically distributed anti-virus software at the time of the licensing transaction. The deferred revenue from anti-virus licenses entered into prior to July 1, 1995, however, continues to be recognized over the original 24-month period. This change in the Company's revenue recognition policy has resulted in incremental revenue being recognized over the last seven quarters with a corresponding decrease in the amount of deferred revenue on the Company's balance sheet. The quarter ending June 30, 1997 will be the last quarter where this incremental revenue will be recognized. 8 9 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- As a result of the change in revenue recognition for anti-virus licenses, period-to-period results are not directly comparable and should not be relied upon as indicative of future performance. In addition, since a decreasing percentage of the Company's net revenue is attributable to the recognition of previously deferred revenue, the Company's net revenue in future periods may be subject to greater fluctuations on a quarter-to-quarter basis. In addition to generating net revenue through licenses, the Company sells its network security and management products with shrink-wrap licenses through traditional distribution channels. The Company recognizes revenue from sales to distributors upon shipment, subject to a reserve for returns. On February 28, 1997, the Company acquired Jade KK of Japan ("Jade") and a former Dutch distributor, Shuijers Holding B.V. ("SHBV"). These combinations were accounted for as poolings of interest. Each of Jade's and SHBV's results for the quarter ended March 31, 1997 has been included in the Company's consolidated results for that period. However, the Company's results for the quarter ended March 31, 1996 do not include the results of Jade or SHBV for that period as the effect is not material. The Company's results of operations can fluctuate significantly on a quarterly basis. Causes of such fluctuations may include the volume and timing of new orders and renewals, the introduction of new products, distributor inventory levels and return rates, Company inventory levels, product upgrades or updates released by the Company or its competitors, changes in product prices, the impact of competitive pricing or products, timely availability and acceptance of new products, changes in product mix, changes in the market for anti-virus or network management software, inclusion of network security or management software functionality in system software, failure to manage growth and/or potential acquisitions, seasonality, trends in the computer industry, general economic conditions, extraordinary events such as acquisitions or litigation and the occurrence of unexpected events. Historically, renewals have accounted for a significant portion of the Company's net revenue, however, there can be no assurance that the Company will be able to sustain current renewal rates in the future. The Company's results for any given period should not be relied upon as indicative of future performance. See "Risk Factors -- Variability of Quarterly Operating Results." The Company's future earnings and stock price may be subject to volatility in any period. Any shortfall in various operating results, including licensing activity, product sales, net revenue, operating income, net income or net income per share from historical levels or expectations of securities analysts may have significant adverse effects on the trading price of the Company's stock. Furthermore, other factors such as acquisitions or unforeseen events in the technology or software industry or in the Company's day to day activities can have a material adverse effect on the Company's stock performance. See "Risk Factors -- Volatility of Stock Price" and "Risk Factors - -- Risks Associated with Failure to Manage Growth; Potential Future Acquisitions." 9 10 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net revenue represented by certain items in the Company's statements of operations for the three month periods ended March 31, 1997 and 1996:
Three months ended March 31 ------------------ 1997 1996 ----- ----- Net revenue 100.0% 100.0% Operating costs and expenses: Cost of net revenue 8.1 6.1 Research and development 13.2 11.3 Marketing and sales 30.0 28.3 General and administrative 7.5 8.0 Amortization of intangibles 0.1 1.6 Acquisition and other unusual costs -- 24.5 ----- ----- Total operating costs and expenses 58.9 79.8 ----- ----- Income from operations 41.1 20.2 Other income 2.2 1.7 ----- ----- Income before income taxes 43.3 21.9 Provision for income taxes 16.4 18.7 ----- ----- Net income 26.9% 3.2% ===== =====
Net Revenue. Net revenue increased 117% to $73.4 million in the three months ended March 31, 1997 from $33.8 million in the three months ended March 31, 1996 This increase is largely attributable to increased revenue from licenses for anti-virus products and renewal of expiring anti-virus licenses and, to a lesser extent, licenses for network management, security and help desk products. Net revenue also increased as a result of increased sales of shrink-wrapped products through traditional distribution channels. The Company has been experiencing increased price competition for its 10 11 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- products and expects competition to increase in the future which will reduce average selling prices.* Net revenue from international sales accounted for approximately 25% and 18% of net revenue for the three months ended March 31, 1997 and 1996, respectively. This increase was due to increased sales through traditional distribution channels as well as the expansion of the Company's international operations in Japan and the Netherlands as a result of the acquisitions of Jade KK and a former Dutch distributor, SHBV. The Company denominates certain international license fees in local currencies, primarily European currencies. As a result, the Company is subject to the risks associated with fluctuations in currency exchange rates. To date, the Company has not engaged in significant hedging activities and there can be no assurance that it will not incur significant losses related to currency fluctuations. Risks inherent in the Company's international sales generally include the impact of fluctuating exchange rates, longer payment cycles, greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, seasonality due to the slowdown in European business activity during the third quarter, and tariffs and other trade barriers. There can be no assurance that these factors will not have a material adverse effect on the Company's future business, financial condition and results of operations. Further, in countries with a high incidence of software piracy, the Company may experience a higher rate of piracy of its products.* In addition, a portion of the Company's international sales are generated through independent agents. Since these agents are not employees of the Company and are not required to offer the Company's products exclusively, there can be no assurance that they will continue to market the Company's products. Also, despite the Company's dependence in the international market upon the marketing, sales and customer support of its agents, the Company currently has limited control over its agents. For example, the Company is dependent upon its international agents to provide it with information regarding licensees and there can be no assurance that the Company will be able to obtain sufficient information to contact such licensees, if necessary, regarding renewal. In addition, the Company may be unaware of the nature and scope of the representations made to customers by these agents. See "Risk Factors -- Risks Related to International License Revenue." Cost of Net Revenue. The Company has historically distributed the majority of its products electronically, and as a result, its cost of net revenue has been low relative to other software vendors. The Company's cost of net revenue includes the cost of media, manuals and packaging for products distributed through traditional distribution channels and third-party royalties. The cost of net revenue varies among the Company's products because, in part, some products may include third party technology on which royalties are payable. The cost of net revenue also differs between international and domestic sales as international sales are primarily through traditional distribution channels and costs of media, manuals and packaging for products sold internationally tend to be higher. - ---------- * This statement is a forward looking statement reflecting current expectations. There can be no assurance that McAfee's actual future performance will meet McAfee's current expectations. See the Risk Factors on page 15 for a discussion of certain factors that could effect future performance. 11 12 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- For the three months ended March 31, 1997 and 1996, the Company's cost of net revenue was $5.9 million and $2.1 million, respectively. As a percentage of net revenue, cost of net revenue increased to 8.1% from 6.1% in the three month periods ended March 31, 1997 and 1996 respectively. The cost of revenue fluctuates slightly on a quarter to quarter basis depending on the percentage of revenue that is distributed electronically versus traditional channels. The increase in cost as a percent of revenue is attributable to an increasing percentage of the Company's products being distributed through traditional distribution channels, partially as a result of the increase in the overall percentage of international sales. To the extent this trend continues, the Company's cost of net revenue would increase and, accordingly, gross margins would decrease.* See "Risk Factors -- Variability of Quarterly Operating Results." Research and Development. Research and development expenses consist primarily of salary and benefits for the Company's software development and technical support staff and to a lesser extent, costs associated with independent contractors. Research and development expenses increased 153% to $9.7 million in the three months ended March 31, 1997 from $3.8 million in same period in 1996. This increase was primarily due to growth in the Company's product development staff, increased use of third-party contractors and increased development activity as well as the transition to the Company's VirusScan 3.0 product. As a percentage of net revenue, research and development expenses increased to 13.2% from 11.3% for the three month periods ended March 31, 1997 and 1996, respectively. This increase primarily reflects the Company's continued investment in new and existing products. The Company anticipates that research and development expenses will continue to increase in absolute dollars but may fluctuate as a percentage of net revenue.* The Company's future success will depend in large part upon its ability to continue to offer a broad range of network management, help desk and security products, to continue to enhance its existing products, to develop and introduce in a timely manner new products that take advantage of technological advances and respond to new customer requirements.* The Company also believes that providing a high level of technical support is key to success in the network management and help desk markets.* Furthermore, while the Company updates its products on a regular basis, competitors may announce new products with capabilities or technologies that could have the potential to replace or shorten the life cycles of the Company's existing or new products.* As a result, the Company believes that significant investments in product development and technical support are essential.* The timing and amount of research and development expenses may vary significantly based upon the number of new products and significant upgrades under development during a given period.* See "Risk Factors -- Rapid Technological Change; Risks Associated with Product Development." - ---------- * This statement is a forward looking statement reflecting current expectations. There can be no assurance that McAfee's actual future performance will meet McAfee's current expectations. See the Risk Factors on page 15 for a discussion of certain factors that could effect future performance. 12 13 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- Marketing and Sales. Marketing and sales expenses consist principally of salary, commissions and benefits for marketing, sales and customer support personnel and costs associated with advertising and promotions. Marketing and sales expenses increased 129% to $22.0 million in the three months ended March 31, 1997 from $9.6 million in the three months ended March 31, 1996. This increase principally reflects growth in the Company's sales and marketing staff, including the expansion of the Company's international operations, and increased advertising and promotional expenses. As a percentage of net revenue, marketing and sales expenses increased to 30.0% in the three months ended March 31, 1997, from 28.3% in the same period in 1996. This principally reflects greater proportionate growth in the Company's sales and marketing staff and advertising and promotional expenses as compared to revenue growth. The Company is seeking to expand its product line in the future, and such expansion could contribute to an increase in marketing and sales expenses as a percentage of revenue.* General and Administrative. General and administrative expenses consist principally of salary and benefit costs for administrative personnel, general operating costs and legal, accounting and other professional fees. General and administrative costs increased 105% to $5.6 million in the three months ended March 31, 1997 from $2.7 million in the three months ended March 31, 1996. This increase is largely a result of a concerted effort to strengthen the infrastructure of the Company both domestically and internationally to accommodate its growth in revenue. As a percentage of net revenue, general and administrative expenses decreased to 7.5% in the three months ended March 31, 1997 from 8.0% in the same period in 1996. This decrease reflects growth in the Company's net revenue. The Company intends to continue to make investments in its general and administrative infrastructure, and, as a result, expects general and administrative expenses to increase in absolute dollars.* Amortization of Intangibles. The Company expensed $104,000 and $550,000 of amortization related to intangibles in the three months ended March 31, 1997 and 1996, respectively. Intangibles consist of purchased goodwill and certain technology acquired through acquisitions. Other Income. Other income consists primarily of interest income earned on the Company's cash and short and long term investments. Other income totaled $1.6 million and $597,000 in the three months ended March 31, 1997 and 1996, respectively. This increase in the Company's other income relates to higher interest income resulting from higher average balances invested due to net cash generated from operations. - ---------- * This statement is a forward looking statement reflecting current expectations. There can be no assurance that McAfee's actual future performance will meet McAfee's current expectations. See the Risk Factors on page 15 for a discussion of certain factors that could effect future performance. 13 14 MCAFEE ASSOCIATES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- Provision for Income Taxes. The provision for income taxes is recorded at the Company's effective tax rate which, for the three month periods ended March 31, 1997 and 1996, was 38.0% and 85.4%, respectively. The Company's effective tax rate reflects the non-deductibility for tax purposes of $8.3 million in acquisition costs expensed during the three months ended March 31, 1996. The Company has not reduced the deferred tax asset by a valuation allowance as it is likely that all of the deferred tax asset will be realized due to sufficient taxable income available through carryback to prior years and to carryforward to future years.* LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had $95.3 million in cash and cash equivalents and $76.7 million in marketable securities. Net cash provided by operating activities was $15.7 million and $7.4 million for the three months ended March 31, 1997 and 1996, respectively. Net cash provided by operating activities for the three months ended March 31, 1997 consisted primarily of net income, an increase in accounts payable and accrued liabilities together with an increase in deferred revenue offset by increases in accounts receivable and prepaid expenses. Net cash provided by operating activities for the three months ended March 31, 1996 consisted primarily of net income plus an increase in accounts payable and accrued liabilities and a decrease in prepaid income taxes offset by an decrease in deferred revenue. Net cash used in investing activities was $16.4 million in the three months ended March 31, 1997, primarily reflecting purchases of marketable securities and fixed assets. Net cash used by investing activities in the three months ended March 31, 1996 was $1.6 million, which consisted principally of purchases of intangibles and additions to fixed assets. Net cash provided by financing activities was $19.7 million and $7.4 million in the three months ended March 31, 1997 and 1996, respectively, consisting primarily of the proceeds and tax benefits associated with the exercise of nonqualified stock options. The Company believes that its available cash and anticipated cash flow from operations will be sufficient to fund the Company's working capital and capital expenditure requirements for at least the next twelve months.* - ---------- * This statement is a forward looking statement reflecting current expectations. There can be no assurance that McAfee's actual future performance will meet McAfee's current expectations. See the Risk Factors on page 15 for a discussion of certain factors that could effect future performance. 14 15 RISK FACTORS The following risk factors should be considered in conjunction with the information in this Report on Form 10-Q. Variability of Quarterly Operating Results. McAfee's licensing activity and results of operations can fluctuate significantly on a quarterly basis. Causes of such fluctuations may include the volume and timing of new orders and renewals, the introduction of new products, distributor inventory levels and return rates, McAfee inventory levels, upgrades or updates by McAfee or its competitors, changes in product prices, changes in product mix, seasonality, trends in the computer industry, general economic conditions, extraordinary events such as acquisitions or litigation and the occurrence of unexpected events. Because of the nature of its distribution methods, McAfee generally cannot predict when a user will license its products. Historically, renewals have accounted for a significant portion of McAfee's net revenue; however, there can be no assurance that McAfee will be able to sustain historic renewal rates in the future. Prior to July 1, 1995, McAfee recognized substantially all license revenue ratably over a two-year license period, during which time users generally received all product upgrades, updates and technical support at no additional charge. As a result, quarterly fluctuations in licensing activity have had a reduced quarter-to-quarter impact on McAfee's net revenue and net income. However, since July 1, 1995, McAfee generally recognizes 80% of its revenue from licenses at the time of the initial licensing transaction, which more directly impacts net revenue and net income in the quarters in which the licensing activity occurs. Furthermore, since McAfee's cost of net revenue is low, and operating expenses are relatively fixed, any revenue shortfall in a quarter will result in a substantially similar shortfall in net income. As a result of this change in revenue recognition in July 1995, McAfee believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance. The operating results of many software companies reflect seasonal trends, and McAfee's business, financial condition and results of operations may be affected by such trends in the future. Such trends may include higher net revenue in the fourth quarter as many customers complete annual budgetary cycles, and lower net revenue in the summer months when many businesses experience lower sales, particularly in the European market. The Company has historically distributed the majority of its products electronically, and as a result, its cost of net revenue has been low relative to other software vendors. The Company's cost of net revenue includes the cost of media, manuals and packaging for products distributed through traditional distribution channels and third-party royalties. The cost of revenue fluctuates slightly on a quarter to quarter basis depending on the percentage of revenue that is distributed electronically versus traditional channels. As a percentage of net revenue, cost of net revenue increased to 8.1% from 6.1% in the three month periods ended March 31, 1997 and 1996 respectively. The increase in cost as a percent of revenue is attributable to an increasing percentage of the Company's products being distributed through traditional distribution channels. To the extent this trend continues, the Company's cost of net revenue 15 16 would increase and, accordingly, gross margins would decrease. See "Results of Operations -- Cost of Net Revenue." Risk of Inclusion of Network Security and Management Functionality in Other Software. In the future, vendors of operating system software or other software (such as firewall or electronic mail software) may continue to enhance their products (including separate products that are bundled together) to include functionality that is currently provided most often by network security and management software. This enhancement could be achieved through the addition of functionality to operating system software or other software or the bundling of network security and management software with operating system software or other products. For example, Microsoft introduced limited anti-virus functionality into MS-DOS versions in 1993. The widespread inclusion of the functionality of McAfee's products, and of the functionality of the network security or management products, as standard features of operating system software or other software could render McAfee's products obsolete and unmarketable, particularly if the quality of such functionality were comparable to that of McAfee's products. Furthermore, even if the network security and/or management functionality provided as standard features by operating systems or other software is more limited than that of McAfee's products, there can be no assurance that a significant number of customers would not elect to accept such functionality in lieu of purchasing additional software. If McAfee was unable to develop new network security and management products to further enhance operating systems or other software and to replace successfully any obsolete products, McAfee's business, financial condition and results of operations would be materially adversely affected. Rapid Technological Change; Risks Associated with Product Development. The network security and management market is highly fragmented and is characterized by ongoing technological developments, evolving industry standards and rapid changes in customer requirements. McAfee's success depends upon its ability to offer a broad range of network security and management software products, to continue to enhance existing products, to develop and introduce in a timely manner new products that take advantage of technological advances, and to respond promptly to new customer requirements. While McAfee believes that it currently offers one of the broadest product lines in the network management and security market, this market is continuing to evolve and customer requirements are continuing to change. As the market evolves and competitive pressures increase, McAfee believes that it will need to further expand its product offerings. McAfee has identified a number of enhancements to its existing product offerings which it believes are important to its continued success in the network security and management market. There can be no assurance that McAfee will be successful in developing and marketing, on a timely basis, enhancements to its existing products or new products, or that its new products will adequately address the changing needs of the marketplace. Failure by McAfee in any of these areas could materially and adversely affect its business, financial condition and results of operations. In addition, from time to time, McAfee or its competitors may announce new products with new or additional capabilities or technologies. Such announcements of new products could have the potential to replace or shorten the life cycles of McAfee's existing products and to cause customers to defer purchasing McAfee's existing products. McAfee has in the past experienced delays in software development, and there can be no assurance that McAfee will not experience delays in connection with its current or future product 16 17 development activities. Software products as complex as those offered by McAfee may contain undetected errors or version compatibility issues, particularly when first introduced or when new versions are released, resulting in loss of or delay in market acceptance. For example, McAfee's anti-virus software products have in the past falsely detected viruses that did not actually exist. See "Risk Factors -- Risk of False Detection of Viruses." Delays and difficulties associated with new product introductions, performance or enhancements could have a material adverse effect on McAfee's business, financial condition and results of operations. In addition to developing new products, McAfee's internal development staff is focused on developing upgrades and updates to existing products and modifying and enhancing acquired products. Future upgrades and updates may, among other things, include additional functionality, respond to user problems or address issues of compatibility with changing operating systems and environments. McAfee believes that the ability to provide these upgrades and updates to users frequently and at a low cost is key to its success. In particular, the proliferation of new and changing viruses makes it imperative to update anti-virus products frequently in order for the products to avoid obsolescence. Failure to release such upgrades and updates on a timely basis could have a material adverse effect on McAfee's business, financial condition and results of operations. There can be no assurance that McAfee will be successful in these efforts. In addition, future changes in Windows 95, Windows NT, NetWare or other popular operating systems may result in compatibility problems with McAfee's products. Further, delays in the introduction of future versions of operating systems or lack of market acceptance of future versions of operating systems would result in a delay or a reduction in the demand for McAfee's future products and product versions which are designed to operate with such future versions of operating systems. McAfee's failure to introduce new products in a timely manner that are compatible with operating systems and environments preferred by desktop computer users would have a material adverse effect on McAfee's business, financial condition and results of operations. McAfee's Dependence on Anti-Virus Product Revenue. McAfee derived a substantial majority of its net revenue in 1996 and the quarter ended March 31, 1997 from licensing its anti-virus software products, and these products are expected to continue to account for a substantial portion of McAfee's net revenue for the foreseeable future. Because of this concentration of revenue, a decline in demand for, or in the prices of, McAfee's anti-virus software products as a result of competition, technological change, the inclusion of anti-virus functionality in operating system or other software or otherwise, could have a material adverse effect on McAfee's business, financial condition and results of operations. In addition, while McAfee will continue to focus on growing its anti-virus revenue, factors such as increased competition, technological change or expanded operating system functionality may affect McAfee's future rate of growth. Dependence on Emergence of Network Management and Network Security Markets. The markets for McAfee's network management and network security products are evolving, and their growth depends upon broader market acceptance of network management software, including help desk software, and network security software. Although the number of LAN-attached personal computers ("PCs") has increased dramatically, the network management and network security markets continue to be emerging markets and there can be no assurance that such markets will continue to develop or that further market development will be rapid enough to significantly benefit McAfee. In addition, there are a number of potential approaches to network management and network security, including management and security tools incorporated into 17 18 network operating systems. Therefore, even if network management and network security tools gain broader market acceptance, there can be no assurance that McAfee's products will be chosen by organizations which acquire network management or network security tools. Furthermore, to the extent that either the network management market or network security market does continue to develop, McAfee expects that competition will increase. See "Risk Factors -- Competition" and "Risk Factors -- Risk of Inclusion of Network Security and Management Functionality in Other Software." Competition. The market for McAfee's products is intensely competitive and McAfee expects competition to increase in the future. McAfee believes that the principal competitive factors affecting the market for its products include performance, functionality, quality, customer support, breadth of product line, frequency of upgrades and updates, brand name recognition, company reputation and price. Certain of the criteria upon which the performance and quality of McAfee's anti-virus software products compete include the number and types of viruses detected, the speed at which the products run and ease of use. Certain of McAfee's competitors have been in the network management market longer than McAfee, and other competitors, such as Symantec, Intel and Seagate, are larger and have greater name recognition than McAfee. In addition, certain larger competitors such as Intel, Microsoft and Novell have established relationships with hardware vendors related to their other product lines. These relationships may provide them with a competitive advantage in penetrating the OEM market with their network management products. As is the case in many segments of the software industry, McAfee has been encountering, and expects to further encounter, increasing competition. This will reduce average selling prices and, therefore, profit margins. Competitive pressures could result not only in sustained price reductions but also in a decline in sales volume, which could materially adversely affect McAfee's business, financial condition and results of operations. The network security and management market is highly fragmented with products offered by many vendors. McAfee's principal competitor is the Peter Norton Group of Symantec in the network security market and Intel's LanDesk in the network management market. Other competitors include Computer Associates/Cheyenne Software, Intel, Seagate, Checkpoint Systems, Inc., Security Dynamics Technology, Inc., the Dr. Solomon Group and Trend Micro Inc., as well as numerous smaller companies and shareware authors that may in the future develop into stronger competitors or be consolidated into larger competitors. McAfee also faces competition from large and established software companies such as Microsoft and Novell which offer network management products as enhancements to their network operating systems. McAfee believes that as the network management market develops, McAfee may face increased competition from these large companies, as well as other companies seeking to enter the market. The trend toward enterprise-wide network management and security solutions may result in a consolidation of the network management and security market around a smaller number of vendors who are able to provide the necessary software and support capabilities. With the acquisition of Vycor Corporation, the Company faces new competition from vendors in the help desk market. The Company's principal competitors in the help desk market are Remedy Corporation and Software Artistry. The Company also faces significant competition in the storage management market. There can be no assurance that McAfee will continue to compete effectively against existing and potential competitors, many of whom have substantially greater financial, technical, marketing and support resources and name recognition than McAfee. In addition, there can be no assurance that software vendors who currently use traditional distribution methods will 18 19 not in the future decide to compete more directly with McAfee by utilizing electronic software distribution. The competitive environment for anti-virus software internationally is similar to that in North America, although local competitors in specific foreign markets present stronger competition and shareware authors control a more significant portion of the European market. The international market for network management software has developed more slowly than the North American market, although larger competitors such as Intel and Symantec have begun to penetrate European markets. Asian markets have significantly lagged behind North America and Europe in their adoption of networking technology. There can be no assurance that McAfee will be able to compete successfully in international markets. Risks Associated with Acquisitions. McAfee has consummated a series of acquisitions since 1995, including the acquisition of the following: Jade KK of Japan on February 28, 1997 a controlling interest in FSA Corporation of Canada on August 30, 1996, Vycor Corporation in the first quarter of 1996 and Saber Software Corporation, Inc. in the third quarter of 1995. In addition, since 1995 McAfee has acquired a number of its international distributors, including distributors in France, England and the Netherlands. Past McAfee acquisitions have consisted of, and future acquisitions will likely include, acquisitions of businesses, interests in businesses and assets of businesses. McAfee's past acquisitions have presented, and any future acquisitions by McAfee could present, challenges to McAfee's management, such as integration and incorporation of new operations, product lines, technologies and personnel. If McAfee's management is unable to manage these challenges, McAfee's business, financial condition and results of operations could be materially adversely affected. Any acquisition, depending on its size, could result in the use of a significant portion of McAfee's available cash, or if such acquisition is made utilizing McAfee's securities, could result in significant dilution to McAfee's stockholders. McAfee's acquisitions may result in the incurrence or the assumption of liabilities, including liabilities that are unknown or not fully known to McAfee at the time of acquisition, which could have a material adverse effect on McAfee's business, financial condition and results of operations. Furthermore, there can be no assurance that any products acquired in connection with such acquisitions will gain acceptance in McAfee's markets. Risks Associated with Failure to Manage Growth. The growth of McAfee has placed, and any further expansion would continue to place, a significant strain on the Company's limited personnel, management and other resources. McAfee's ability to manage any further growth will require it to attract, train, motivate and manage new employees successfully, to effectively integrate new employees into its operations and to continue to improve its operational, financial, management and information systems and controls. The failure of McAfee's management team to effectively manage any further growth could have a material adverse effect on McAfee's business, financial condition and results of operations. Reliance on Indirect Channels of Distribution. McAfee markets a significant portion of its products to end-users through distributors. In particular, Ingram Micro Devices has accounted for 17%, 12% and 12% of net revenue in 1996, 1995 and 1994, respectively. In the quarter ended March 31, 1997, Ingram Micro Devices accounted for 19% of net revenue. These distributors also sell other products that are complementary to, or compete with, those of McAfee. While McAfee encourages its distributors to focus on their respective products through marketing and support programs, there can be no assurance that these distributors will not give greater priority to products of other suppliers, including 19 20 competitors. Distributors have no long-term obligations to purchase products from McAfee. In addition, McAfee has begun to recognize revenue for products sold through distributors upon sales to distributors. Since McAfee's agreements with its distributors provide for a right of return, revenue recognized upon sales to distributors is subject to a reserve for returns. Returns could exceed reserves as a result of distributors holding excessive McAfee product inventory. Such excessive distributor inventories could result from among other things, returns to distributors by end users, inaccurate estimates of end user demand by distributors, increased purchases by distributors in response to sales incentives or transitions to new products or versions of products. There can be no assurance that any future reserves for returns will be adequate. As the Company's help desk, network management and network security products become more complex and require additional customer support, the Company will require distributors, resellers and system integrators to provide a portion of this increasing level of support. There can be no assurance that such third parties will be able or willing to provide additional support services. Moreover, increased reliance on these third parties will reduce the Company's control over the provision of support services for its products and place a greater burden on these third parties, which, in turn, could harm the Company's relationships or reputation with such third parties or the end users of its products and result in decreased sales of, or prices for, its products. Proprietary Technology. McAfee's success is heavily dependent upon its proprietary software technology. McAfee relies on a combination of contractual rights, trademarks, trade secrets and copyrights to establish and protect proprietary rights in its software. McAfee has not to date applied for or obtained any patents or registered any of its copyrights and has only registered selected trademarks. SABER is a trademark of a subsidiary of the SABRE Group, Inc. and is licensed to McAfee pursuant to a non-exclusive worldwide, royalty free license. McAfee is not otherwise affiliated with the SABRE Group, Inc. or SABRE Travel Information Network. In the event that the license of the trademark were to expire, or be terminated, McAfee could be required to cease using the trademark on its products, which could involve significant expense and the possibility of customer confusion. Any loss of McAfee's ability to use this trademark could have a material adverse effect on McAfee's business, financial condition and results of operations. McAfee does not typically obtain signed license agreements from its corporate, government and institutional customers who license products directly from McAfee. McAfee includes an electronic version of a "shrink-wrap" license in all of its electronically distributed software and a printed license in the box for its products distributed through traditional distribution channels in order to protect its copyrights and trade secrets in those products. Since none of these licenses are signed by the licensee, many authorities believe that they may not be enforceable under many state laws and the laws of many foreign jurisdictions. In addition, the laws of some foreign countries either do not protect McAfee's proprietary rights or offer only limited protection for those rights. Furthermore, McAfee has obtained only one foreign registration of its "McAfee" trademark, and publication in two jurisdictions, due to the significant costs involved. As a result, McAfee may not be able to prevent a third party from using its trademarks in many foreign jurisdictions. There can be no assurance that the steps taken by McAfee to protect its proprietary software technology will be adequate to deter misappropriation of this technology. McAfee is aware that a substantial number of users of its anti-virus products have not paid any registration or license fees to McAfee. Changing legal interpretations of liability for unauthorized use of McAfee's software, or lessened sensitivity by corporate, government or institutional users to avoiding copyright infringement, would have a material adverse effect on McAfee's business, financial condition and results of operations. 20 21 There has also been substantial industry litigation regarding intellectual property rights of technology companies. Although McAfee does not believe that it has knowingly infringed the intellectual property rights of others, it receives claims from time to time, and McAfee has in the past been subject to litigation related to its intellectual property. There can be no assurance that such claims will not be asserted against McAfee in the future or that the outcome of any such claims would not have a material adverse effect on McAfee's business, financial condition and results of operations. In addition, as McAfee may acquire a portion of the software included in its future products from third parties, its exposure to infringement actions may increase because McAfee must rely upon such third parties for information as to the origin and ownership of any software being acquired. In the future, litigation may be necessary to enforce and protect trade secrets and other intellectual property rights owned by McAfee. McAfee may also be subject to litigation to defend it against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. Any such litigation could be costly and cause diversion of management's attention, either of which could have a material adverse effect on McAfee's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of McAfee's proprietary rights, subject McAfee to significant liabilities, require McAfee to seek licenses from third parties or prevent McAfee from manufacturing or selling its products, any one of which could have a material adverse effect on McAfee's business, financial condition and results of operations. Furthermore, there can be no assurance that any necessary licenses will be available on reasonable terms, or at all. Risks Related to International License Revenue. In 1996, 1995 and 1994 net revenue from international licenses (license revenue from outside the United States and Canada) represented approximately 19%, 29% and 23%, respectively, of McAfee's net revenue. In the quarter ended March 31, 1997, net revenue from international licenses represented approximately 25% of McAfee's net revenue. McAfee expects that net revenue from international licenses will continue to account for a significant portion of net revenue. With the acquisition of European distributors in late 1995, a significant portion of McAfee's international revenue in 1997 is expected to be denominated in local currency. The Company has not engaged in any material attempt to offset or "hedge" U.S. foreign currency transaction exposure. To date, the Company's results of operations have not been significantly affected by currency fluctuation, however, there can be no assurance that the Company's future results of operations will not be adversely affected by such fluctuations. Risks inherent in McAfee's international revenue generally include the impact of fluctuating exchange rates, longer payment cycles, greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, seasonality due to the slowdown in European business activity during the third quarter, and tariffs and other trade barriers. There can be no assurance that these factors will not have a material adverse effect on McAfee's future international license revenue. Further, in countries with a high incidence of software piracy, McAfee may experience a higher rate of piracy of its products. In addition, a significant portion of McAfee's international revenue is generated through independent agents. Since these agents are not employees of McAfee and are not required to offer McAfee's products exclusively, there can be no assurance that they will continue to market McAfee's products. Also, McAfee currently has limited control over its agents. For example, McAfee is dependent upon its international agents to provide it with information regarding licensees and there can be no assurance that McAfee will be able to obtain sufficient information to contact such licensees, if 21 22 necessary, regarding renewal. In addition, McAfee may be unaware of the nature and scope of the representations made to customers by these agents. For example, independent agents could make representations to customers about McAfee's current and future products which are inaccurate or incomplete, which could result in the products not meeting customers' expectations or requirements. Risk of Sabotage. Given McAfee's high profile in the anti-virus software market, McAfee has been a target of computer "hackers" who have created viruses to sabotage McAfee's products. While to date these viruses have been discovered quickly and their dissemination has been limited, there can be no assurance that similar viruses will not be created in the future, that they will not cause damage to users' computer systems and that demand for McAfee's software products will not suffer as a result. In addition, since McAfee does not control diskette duplication by distributors or its independent agents, there can be no assurance that diskettes containing McAfee's software will not be infected. Risk of False Detection of Viruses. McAfee's anti-virus software products have in the past and may at times in the future falsely detect viruses that do not actually exist. Such "false alarms," while typical in the industry, may impair the perceived reliability of McAfee's products and may therefore adversely impact market acceptance of McAfee's products. In addition, McAfee has in the past been subject to litigation claiming damages related to a false alarm, and there can be no assurance that similar claims will not be made in the future. Product Liability. McAfee's anti-virus software products and network management products are used to protect and manage computer systems and networks that may be critical to organizations and, as a result, the sale and support of these products by the Company may entail the risk of product liability and related claims. The Company's license agreement with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions, particularly given the Company's reliance on unsigned licenses. A product liability claim brought against the Company could have a material adverse effect on its business, financial condition and results of operations. Dependence upon Key Personnel. McAfee's success will depend to a significant extent upon a number of key technical and management employees. While McAfee's employees are required to sign standard agreements concerning confidentiality and ownership of inventions, the employees are generally not otherwise subject to employment agreements and McAfee employees are generally not subject to noncompetition covenants. The loss of the services of any of McAfee's key employees could have a material adverse effect on its business, financial condition and results of operations. McAfee does not maintain life insurance policies on its key employees. McAfee's success also depends in large part upon its ability to attract and retain highly-skilled technical, managerial, sales and marketing personnel. Competition for such personnel is intense. There can be no assurance that McAfee will be successful in retaining its existing key personnel and in attracting and retaining the personnel it requires. Volatility of Stock Price. The trading price of McAfee Common Stock has historically been subject to wide fluctuations in response to quarterly variations in financial performance, shortfalls in revenue or earnings from levels forecast by securities analysts, changes in estimates by such analysts, 22 23 market conditions in the computer software or hardware industries, product introductions by McAfee or its competitors, announcements of extraordinary events such as acquisitions or litigation or general economic conditions. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many high technology and emerging growth companies, often unrelated to the operating performance of the specific companies. On several occasions during 1995, 1996 and 1997, the closing sales prices for McAfee Common Stock on successive days fluctuated in excess of 10%. There can be no assurance that such fluctuations in McAfee's Common Stock price will not continue in the future. Effect of Certain Provisions; Anti-Takeover Effects of Certificate of Incorporation, Bylaws and Delaware Law; Limitation of Liability of Directors. The McAfee Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by its stockholders. The rights of the holders of McAfee Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of McAfee. McAfee has no present plans to issue shares of Preferred Stock. Further, certain provisions of Delaware law and McAfee's Certificate of Incorporation and Bylaws, such as a classified board, could delay or make more difficult a merger, tender offer or proxy contest involving McAfee. While such provisions are intended to enable the McAfee Board of Directors to maximize stockholder value, they may have the effect of discouraging takeovers which could be in the best interest of certain stockholders. There is no assurance that such provisions will not have an adverse effect on the market value of McAfee Common Stock in the future. In addition, McAfee's charter provides that its directors shall not be personally liable to McAfee or its stockholders for monetary damages in the event of a breach of fiduciary duty to the extent permitted by Delaware law. 23 24 MCAFEE ASSOCIATES, INC. FORM 10-Q, March 31, 1997 --------- PART II: OTHER INFORMATION Item 3. Legal Proceedings: Information with respect to this item is incorporated by reference to Note 4 of the Notes to the Consolidated Financial Statements included herein on page 7 of this Report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-K: (a) The Company filed a report on Form 8-K on March 14, 1997 describing the acquisition by the Company of Jade KK. (b) The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Report. 24 25 MCAFEE ASSOCIATES, INC. FORM 10-Q, March 31, 1997 ---------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, and the results and regulations promulgated thereunder, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McAFEE ASSOCIATES, INC. /s/ Prabhat K. Goyal ----------------------------- Date: May 14, 1997 Name: Prabhat K. Goyal Title: Vice President Administration, Chief Financial Officer and Secretary 25 26 McAFEE ASSOCIATES, INC. Form 10-Q, March 31, 1997 EXHIBIT INDEX
Exhibit No. Exhibit Title Page No. - ----------- ------------- ------- 3.1 Second Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10Q for the fiscal quarter ended September 31, 1996. 3.2 By-laws, incorporated by reference to Exhibit 3.1 of the Company's Registration Statement No. 33-51042 on Form S-1 (the "S-1"). 3.3 Certificate of Designation of Series A Preferred Stock of the Company, incorporated by reference to Exhibit 3.3 of the Company's form 10-Q for the Quarter ended September 30, 1996. 4.1 See Exhibit 10.44, 10.49 and 10.50. 10.5* 1992 Stock Option Plan, incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K"), as amended. 10.7* Outside Directors Stock Option Plan, incorporated by reference to Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1992. 10.8 Lease Agreement for the Company's facility at 2710 Walsh Avenue dated May 10, 1993, between the Company and John Arillaga and Richard T. Peery Separate Property Trusts, incorporated by reference to Exhibit 10.8 to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1993.
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Exhibit No. Exhibit Title Page No. - ----------- ------------- ------- 10.10 Asset Acquisition Agreement among the Company and Brightwork, Jack Bell, Thomas Dolan, Rosemarie Dubrowsky, Greg Gianforte, Kerry Giftos, Roman Michalowski and Philip Raffiani dated March 16, 1994, together with the Escrow Agreement among the Company, Brightwork, BDI Partners, and Silicon Valley Bank as Escrow Agent, dated March 30, 1994 (Exhibit 2.3(b) to the Asset Acquisition Agreement) and the Employment Agreement, dated March 30, 1994 between the Company and Greg Gianforte (Exhibit 8.5 to the Asset Acquisition Agreement) incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated March 30, 1994, as filed with the Securities and Exchange Commission on April 12, 1994. 10.11 Asset Acquisition Agreement by and between the Company and ADS dated April 19, 1994, incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K, dated May 6, 1994, as filed with the Securities and Exchange Commission on May 20, 1994. 10.12* Confidential Resignation Agreement and Mutual General Release of Claims between the Company and William S. McKiernan dated April 18, 1994, incorporated by reference from Exhibit 10.12 to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1994. 10.14* Employment Agreement between the Company and Gregory Gianforte dated March 31, 1994, as amended September 28, 1994, incorporated by reference to Exhibit 10.14 of the 1994 Form 10-K. 10.15 Lease Agreement between Jerral Office Associates, a New Jersey limited partnership, and Brightwork Development, Inc. dated October 19, 1992, as amended May 26, 1994 to substitute the Company as the tenant, incorporated by reference to Exhibit 10.15 of the 1994 Form 10-K. 10.16* Employee Stock Purchase Plan, as amended. 10.17 Lease Agreement between John Arrillaga, Trustee, UTA dated 7/20/77 (John Arrillaga Separate Property Trust), Richard Peery, Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) and the Company dated November 2, 1994, incorporated by reference to Exhibit 10.17 of the 1994 Form 10-K. 10.18* Offer letter to Richard Kreysar dated December 16, 1994, incorporated by reference to Exhibit 10.18 of the 1994 Form 10-K.
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Exhibit No. Exhibit Title Page No. - ----------- ------------- ------- 10.19* Offer letter to Dennis Cline dated September 21, 1994, incorporated by reference to Exhibit 10.19 of the 1994 Form 10-K. 10.20 401(k) Plan, incorporated by reference to Exhibit 10.20 of the 1994 Form 10-K. 10.21* Change in control agreement between McAfee and Robert S. Chappelear dated April 14, 1995, incorporated by reference to Exhibit 10.1 of the Company's Registration Statement No. 33-93296 on Form S-4 ("the S-4"). 10.22* Change in control agreement between McAfee and Dennis Cline dated April 14, 1995, incorporated by reference to Exhibit 10.2 of the S-4. 10.23* Change in control agreement between McAfee and Richard D. Kreysar dated April 14, 1995, incorporated by reference to Exhibit 10.3 of the S-4. 10.24* Change in control agreement between McAfee and Robert J. Schwei dated April 14, 1995, incorporated by reference to Exhibit 10.4 of the S-4. 10.25* Change in control agreement between McAfee and R. Terry Duryea dated May 1, 1995, incorporated by reference to Exhibit 10.5 of the S-4. 10.26* Change in control agreement between McAfee and Peter Watkins dated May 1, 1995, incorporated by reference to Exhibit 10.6 of the S-4. 10.27* Change in control agreement between McAfee and William L. Larson dated April 14, 1995, incorporated by reference to Exhibit 10.7 of the S-4. 10.28 Management Agreement between McAfee and Saber Software Corporation dated July 20, 1995, incorporated by reference to Exhibit 10.8 of the S-4. 10.29 Cross Distribution Agreement between McAfee and Saber Software Corporation dated July 21, 1995, incorporated by reference to Exhibit 10.9 of the S-4. 10.30 Dilg Settlement Agreement and Release and Covenant Not to Sue dated as of October 24, 1995 between Saber Software Corporation and Dilg Properties, Inc. ("Dilg"), ContactPerfect Corporation ("CPC"), Jerry D. Blackburn, J. Robert Dilg, and Alvin D. Gilbert, incorporated by reference to Exhibit 10.30 of the Company's Form 10-Q for the Quarter Ended September 30, 1995 (the "September 30, 1995 10-Q").
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Exhibit No. Exhibit Title Page No. - ----------- ------------- ------- 10.31 Sale and Purchase Agreement Relating to 850 shares between Patrick Legranche and the Company dated July 27, 1995, incorporated by reference to Exhibit 10.31 of the Company's September 30, 1995 10-Q. 10.32 Sales and Purchase Agreement Relating to 1,650 shares between Serge Gauthron, Patrick Legranche, Valorisation Informatique de Fichiers and the Company dated July 27, 1995, incorporated by reference to Exhibit 10.32 of the Company's September 30, 1995 10-Q. 10.33 Common Stock Purchase Warrant to purchase 10,000 shares of the Company's Common Stock held by RT Software dated July 27,1995, incorporated by reference to Exhibit 10.33 of the Company's September 30, 1995 10-Q. 10.34 Share Purchase Agreement between International Data Security Limited (an Australian company), the Company and International Data Security Limited (an English company) dated September 13, 1995, incorporated by reference to Exhibit 10.34 of the Company's September 30, 1995 10-Q. 10.35 Agreement and Plan of Merger dated March 6, 1996 and among McAfee McCor Acquisition Corporation and Vycor Corporation, incorporated by reference to Exhibit 10.35 of the Company's Form 10-K filed for the year ended December 31, 1995 (the "1995 10-K"). 10.36* Change of Control Agreement between McAfee and Mark Woodward dated November 10, 1995, incorporated by reference to Exhibit 10.36 of the Company's 1995 10-K. 10.37* Confidential Agreement and Release of Claims between McAfee and Robert Chappaelear dated January 30, 1996, incorporated by reference to Exhibit 10.37 of the Company's 1995 10-K. 10.38 Sublease Agreement dated November 15, 1995 between the Company and Digital Video Systems, incorporated by reference to Exhibit 10.38 of the Company's 1995 10-K. 10.39 Amendment No. 1 to Lease dated September 27, 1995 by and between the Company and Arrilliga Family Trust and Richard T. Peery Separate Property Trust, incorporated by reference to Exhibit 10.39 of the Company's 1995 10-K. 10.40 1995 Stock Incentive Plan, incorporated by reference to Exhibit 10.40 of the Company's Form 10-Q for the Quarter ended March 31, 1996.
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Exhibit No. Exhibit Title Page No. - ----------- ------------- ------- 10.41 Lease by and between Herndon Associates, a Virginia general partnership and the Company dated July 22, 1996, incorporated by reference to Exhibit 10.41 of the Company's Form 10-Q for the Quarter ended June 30, 1996. 10.42 Purchase contract by and between Interactive Distributed Systems Software GmbH and the Company effective June 30, 1996, incorporated by reference to Exhibit 10.42 of the Company's Form 10-Q for the Quarter ended June 30, 1996. 10.43 Change in control agreement between McAfee and Prabhat K. Goyal incorporated by reference to Exhibit 10.43 of the Company's Form 10-Q for the Quarter ended June 30, 1996. 10.44 Combination Agreement by and among the Company, FSA Combination Corp., FSA Corporation, and Daniel Freedman, the sole shareholder of FSA Corporation, dated August 16, 1996, the Registration Rights Agreement, dated August 30, 1996 by and between the Company and Daniel Freedman, and the Voting and Exchange Trust Agreement, dated August 30, 1996, by and among the Company, FSA Combination Corp. and FSA Corporation, all incorporated by reference to the Company's Report on Form 8-K, as filed with the Securities and Exchange Commission on September 24, 1996. 10.45 Amendment No. 2 to Lease dated May 9, 1996, by and between the Company and Arrilliga Family Trust and Richard T. Peery Separate Property Trust, incorporated by reference to Exhibit 10.45 of the Company's Form 10-K filed for the year ended December 31, 1996 (the "1996 Form 10-K"). 10.46 Lease Agreement for facility at 2855 Bowers Avenue dated October 22, 1996 between the Company and Arrilliga Family Trust and Richard T. Peery Separate Property Trust, incorporated by reference to Exhibit 10.46 of the 1996 Form 10-K. 10.47 Lease Agreement for facility at 4099 McEwen Road, Dallas dated November 14, 1996, between the Company and Blue Lake Partners, Ltd., incorporated by reference to Exhibit 10.47 of the 1996 Form 10-K. 10.48 Resignation Agreement and General Release of Claims, dated November 19, 1996 between the Company and Richard Kreysar, incorporated by reference to Exhibit 10.47 of the 1996 Form 10-K.
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Exhibit No. Exhibit Title Page No. - ----------- ------------- ------- 10.49 Stock Exchange Agreement, dated January 13, 1997, by and among the Company, FSA Combination Corp., Kabushiki Kaisha Jade ("Jade") and the shareholders of Jade, and the Registration Rights Agreement, dated January 13, 1997 by and between the Company and the shareholders of Jade, all incorporated by reference to the Company's Report on Form 8-K, as filed with the Securities and Exchange Commission on March 14, 1997, incorporated by reference to Exhibit 10.49 of the 1996 Form 10-K. 10.50 Stock Exchange Agreement, dated February 28, 1997, by and among the Company, FSA Combination Corp., Schuijers Holding B.V. ("Schuijers") and the shareholders of Schuijers, and the Registration Rights Agreement, dated February 28, 1997, by and between the Company and shareholders of Schuijers, incorporated by reference to Exhibit 10.50 of the 1996 Form 10-K. 10.51 Sublease Agreement for facility at 2805 Bowers Avenue, Santa Clara dated February 20, 1997 by and between the Company and National Semiconductor Corporation. 10.52 Quota Purchase Assignment Agreement, dated April 14, 1997, by and among the Company and McAfee Do Brasil Ltda., Compusul-Consultoria E Comercio De Informatica Ltda., and The Stockholders of Compusul-Consultoria E Comercio De Informatica Ltda. 11.1 Computation of Net Income Per Share. 27.1 Financial Data Schedule.
- ----------------------------- * Management contracts or compensatory plans or arrangements covering executive officers or directors of McAfee. 31 EX-10.16 2 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED 1 EXHIBIT 10.16 MCAFEE ASSOCIATES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED ON JANUARY 20, 1997) 1. Purpose. The McAfee Associates, Inc. 1994 Employee Stock Purchase Plan (the "PLAN") is established, effective August 1, 1994, to provide eligible employees of McAfee Associates, Inc., a Delaware corporation, and any successor corporation thereto (collectively, "MCAFEE ASSOCIATES"), and any current or future parent corporation or subsidiary corporations of McAfee Associates which the Board of Directors of McAfee Associates (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 common stock of McAfee Associates. McAfee Associates and any parent or subsidiary corporation designated by the Board as a corporation included in the Plan shall be individually referred to as a "PARTICIPATING COMPANY." 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. For purposes of the Plan, a parent corporation and a subsidiary corporation shall be as defined in sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the "CODE"). The Company intends that the Plan shall qualify as an "employee stock purchase plan" under section 423 of the Code (including any 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) and terminate participation in the Plan or any Offering (as defined below) therein at any time during a Purchase 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 a Purchase Period. 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. 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 one hundred fifty thousand (150,000) shares of McAfee Associates' authorized but unissued common stock (the "Shares"). In the event that any Purchase Right for any reason expires or is 2 canceled 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 are customarily employed by the Company for twenty (20) hours or less per week; (b) employees who have not completed thirty (30) days of continuous employment with the Company as of the commencement of an Offering Period; (c) employees who own or hold options to purchase or who, as a result of participation in the 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. Notwithstanding anything herein to the contrary, any individual performing services for a Participating Company solely through a leasing agency or employment agency shall not be deemed an "EMPLOYEE" of such Participating Company. 5. Offering Dates. (a) Offering Periods. Except as otherwise set forth below, the Plan shall be implemented by offerings (individually, an "OFFERING") of approximately twelve (12) months duration (an "OFFERING PERIOD"). The first Offering shall commence on August 1, 1994 and end on July 31, 1995 (the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on February 1 and August 1 of each year and end on the first January 31 and July 31, respectively, occurring thereafter. 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. Eligible employees may not participate in more than one Offering at a time. 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, McAfee Associates shall specify the business day that will be deemed the first or last day, as the case may be, of the Offering Period. (b) Purchase Periods. Each Offering Period shall consist of two (2) consecutive purchase periods of approximately six (6) months duration (individually, a "PURCHASE PERIOD"). The last day of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A Purchase Period commencing on February 1 shall end on the next July 31. A Purchase Period commencing on August 1 shall end on the next January 31. Notwithstanding the foregoing, the Board may establish a different term for one or more Purchase Periods and/or different commencing dates and/or Purchase -2- 3 Dates for such Purchase Periods. In the event the first and/or last day of a Purchase Period is not a business day, McAfee Associates shall specify the business day that will be deemed the first or last day, as the case may be, of the Purchase Period. (c) Governmental Approval, Shareholder Approval. Notwithstanding any other provision of the Plan to the contrary, any Purchase Right granted pursuant to the Plan shall be subject to (i) obtaining an necessary governmental approvals and/or qualifications of the sale and/or issuance of the Purchase Rights and/or the Shares, and (ii) obtaining shareholder approval of the Plan. Notwithstanding the foregoing, shareholder approval shall not be necessary in order to grant any Purchase Right granted in the Plan's Initial Offering Period; provided, however, that the exercise of any such Purchase Right shall be subject to obtaining shareholder approval of the Plan. 6. Participation in the Plan. (a) Initial Participation. An eligible employee shall become a Participant on the first Offering Date after satisfying the eligibility requirements and delivering to the Company's payroll office not later than the close of business for such payroll office 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's payroll office on or before the Subscription Date shall not participate in the Plan for that Offering Period or for any subsequent Offering Period unless such employee subsequently enrolls in the Plan by filing a subscription agreement with the Company by the Subscription Date for such subsequent Offering Period. McAfee Associates may, from time to time, change the Subscription Date as deemed advisable by McAfee Associates in its sole discretion for proper administration of the Plan. (b) Continued Participation. A Participant shall automatically participate in the Offering Period commencing immediately after the final Purchase Date of each Offering Period in which the Participant participates until such time as such Participant (i) ceases to be eligible as provided in paragraph 4, (ii) withdraws from the Plan pursuant to paragraph 11(b) or (iii) terminates employment as provided in paragraph 12. If a Participant is automatically withdrawn from an Offering at the end of a Purchase Period of such Offering pursuant to paragraph 11(d), then the Participant shall automatically participate in the Offering Period commencing on the next business day. If a Participant automatically may participate in a subsequent Offering Period pursuant to this paragraph 6(b), then the Participant is not required to file any additional subscription agreement for such subsequent Offering Period in order to continue participation in the Plan. However, a Participant may file a subscription agreement with respect to a 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. Except as set forth below, during an Offering Period each Participant in such Offering Period shall have a Purchase Right consisting of the right to purchase that number of whole Shares arrived at by dividing Twenty-Five Thousand Dollars ($25,000) by the fair market value of a share of the common stock of McAfee Associates on the Offering Date of such -3- 4 Offering Period; provided, however, that such number shall not exceed five thousand (5,000) Shares. The fair market value of such share shall be determined in accordance with paragraph 8 below. Shares may only be purchased through a Participant's payroll withholding pursuant to paragraph 9 below. 8. Purchase Price. The purchase price at which Shares may be acquired in a given Purchase Period 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 Offering Exercise 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 the Offering Period of which the Purchase Period is a part, or (b) the fair market value of the Shares on the Purchase Date for such Purchase Period. Unless otherwise provided by the Board prior to the commencement of an Offering Period, the Offering Exercise Price for each Purchase Period in that Offering Period 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 on the given Purchase Date. The fair market value per share of the common stock of McAfee Associates on any relevant date shall be the closing price (or the mean of the closing bid and asked prices if such stock is so quoted instead) of the common stock of McAfee Associates quoted on the National Association of Securities Dealers Automated Quotation ("NASDAQ") System or as reported on such other national or regional securities exchange or market system constituting the primary market for such stock, or as determined by the Board ff such stock is not so reported. If the relevant date does not fall on a day on which the common stock of McAfee Associates is quoted on NASDAQ or such other national or regional securities exchange or market system, the date on which the fair market value per share of such stock shall be established shall be the last day on which the common stock of McAfee Associates was so quoted prior to such relevant date. 9. Payment of Purchase Price. Shares which are acquired pursuant to the exercise of all or any portion of a Purchase Right 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 Participan'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 or Stop Withholding. During an Offering Period, a Participant may elect to decrease the amount withheld or stop withholding 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 -4- 5 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 fifteen percent (15%) of the Participant's Compensation for such pay period. Amounts shall be withheld in whole percentages only. Notwithstanding the foregoing, the Board may change the limits on payroll withholding effective as of a future Offering Date, as determined by the Board. Amounts withheld 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. AR payroll deductions received or held by the Company may be used by the Company for any corporate purpose. (e) No Interest Paid. Interest shall not be paid on sums withheld from a Participant's Compensation. (f) Exercise of Purchase Right. On each Purchase Date 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 Purchase Date 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 Purchase 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 a Purchase Date on behalf of a Participant whose participation in the Offering or the Plan has terminated on or before such Purchase Date. (g) Return of Cash Balance. Any cash balance remaining in the Participant's account shall be refunded to the Participant as soon as practicable after the Purchase Date. 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 Purchase Period or Offering Period. (h) Tax 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 the 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, respectively. The -5- 6 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 or change (i) a minimum required withholding amount for participation in an 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, (v) the date(s) and manner by which the fair market value of the Shares is determined for purposes of administration of the Plan and/or (vi) such other limitations or procedures as deemed advisable by the Company in the Company's sole discretion which are consistent with the Plan and in accordance with the requirements of 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 (or any other employee stock purchase plan which is intended to meet the requirements of section 423 of the Code sponsored by McAfee Associates or a parent or subsidiary corporation of McAfee Associates) at a rate which exceeds $25,000 in fair market value, which fair market value is determined for Shares purchased during a given Offering Period as of the Offering Date for such 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 (or any other employee stock purchase plan described in this sentence). (b) Pro Rata Allocation. 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 Shareholder and Employee. A Participant shall have no rights as a shareholder 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. -6- 7 11. Withdrawal. (a) Withdrawal From an Offering. A Participant may withdraw from an Offering by signing and delivering to the Company's payroll office a written notice of withdrawal on a form provided by the Company for such purpose. Such withdrawal may be elected at any time prior to the end of an Offering Period; provided, however, ff a Participant withdraws after the Purchase Date for a Purchase Period of an Offering, the withdrawal shall not affect Shares acquired by the Participant in such Purchase Period. Unless otherwise indicated, 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 at any time upon withdrawal from such Offering. The Company may impose, from time to time, a requirement that the notice of withdrawal be on file with the Company's payroll office 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 and delivering to the Company's payroll office a written notice of withdrawal on a form provided by the Company for such purpose. Withdrawals made after a Purchase Date for a Purchase Period shall not affect Shares acquired by the Participant on such Purchase Date. 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 paragraphs 4 and 6(a) above. The Company may impose, from time to time, a requirement that the notice of withdrawal be on file with the Company's payroll office for a reasonable period prior to the effectiveness of the Participant's withdrawal from the Plan. (c) Return of Payroll Deductions. Upon withdrawal from an Offering or the Plan pursuant to paragraphs 11(a) or 11(b), respectively, the withdrawn Participant's accumulated payroll deductions which have not been applied toward the purchase of Shares shall be returned as soon as practicable after the withdrawal, without the payment of any interest, to the Participant, and the Participant's interest in the Offering and/or the Plan, as applicable, shall terminate. Such accumulated payroll deductions may not be applied to any other Offering under the Plan. (d) Automatic Withdrawal From an Offering. If the fair market value of the Shares on a Purchase Date of an Offering (other than the last such Purchase Date) is less than the fair market value of the Shares on the Offering Date for such Offering, then every Participant shall automatically (i) be withdrawn from such Offering at the close of such Purchase Date and after the acquisition of Shares for such Purchase Period and (ii) be enrolled in the Offering commencing on the first business day subsequent to such Purchase Period. A Participant may elect not to be automatically withdrawn from an Offering Period pursuant to this paragraph 11(d) by delivering to the Company not later than the close of business on the last day before the Purchase Date a written notice indicating such election. (e) Limitation Following Cessation of Participation by Certain Employees. Notwithstanding any provision herein to the contrary, an employee shall be prohibited from again -7- 8 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: (1) an officer or director of the Company 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. (f) 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 a Purchase Date, to have all payroll deductions accumulated in such Participant's Plan account as of such Purchase 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 Purchase 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 Purchase Date for which such election is to be first effective. 12. Termination of Employment. Termination of a Participant's employment with the Company for any reason, including retirement, disability or death or the failure of a Participant to remain an employee eligible to participate in the Plan, shall terminate the Participant's participation in the Plan immediately. In such event, the payroll deductions credited to the Participant's account since the last Purchase Date shall, as soon as practicable, be returned 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. Interest shall not be paid on sums returned to a Participant pursuant to this paragraph 13. 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(a) above. 13. 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 McAfee Associates: (a) the direct or indirect sale or exchange by the shareholders of McAfee Associates of all or substantially all of the stock of McAfee Associates where the shareholders of McAfee Associates before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of McAfee Associates after such sale or exchange; -8- 9 (b) a merger or consolidation where the shareholders of McAfee Associates before such merger or consolidation do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of McAfee Associates after such merger; (c) the sale, exchange, or transfer of all or substantially all of McAfee Associates' assets (other than a sale, exchange, or transfer to one (1) or more subsidiary corporations (as defined in paragraph 1 above) of McAfee Associates); or (d) a liquidation or dissolution of McAfee Associates. In the event of a Transfer of Control, the Board, in its sole discretion, may arrange with the surviving, continuing, successor, or purchasing corporation, as the case may be (the "Acquiring Corporation"), for the Acquiring Corporation to 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 Acquiring Corporation. 14. Capital Changes. In the event of changes in the common stock of the Company due to a stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification, or like change in the Company's capitalization, or in the event of any merger (including a merger effected for the purpose of changing McAfee Associates' domicile), sale of assets or other reorganization, appropriate adjustments shall be made by the Company in the securities subject to purchase under a Purchase Right the Plan's share reserve, the number of shares subject to a Purchase Right, and in the purchase price per share. 15. Non-Transferable. 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. The Company, in its absolute discretion, may impose such restrictions on the transferability of the Shares purchasable upon the exercise of a Purchase Right as it deems appropriate and any such restriction shall be set forth in the respective subscription agreement and may be referred to on the certificates evidencing such Shares. 16. Reports. Each Participant who exercised all or part of his or her Purchase Right for a Purchase Period shall receive, as soon as practicable after the Purchase Date of such Purchase Period, a report of such Participant's account setting forth the total payroll deductions accumulated, the number of Shares purchased, the fair market value of such Shares, the date of purchase and the remaining cash balance to be refunded or retained in the Participant's account pursuant to paragraph 9(g) above, if any. Each Participant shall be provided information concerning the Company equivalent to that information generally made available to the Company's common stockholders. Notwithstanding the preceding sentence, at any such time as securities offered or sold pursuant to the Plan are required to be qualified pursuant to the California Corporations Code, copies of the Company's balance sheet and income statement for the just completed fiscal year shall be made available annually to the Participants. -9- 10 17. 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 or until ten (10) years from the date the Plan is adopted, whichever shall first occur. 18. Restriction on Issuance of Shares. The issuance of shares under the Plan shall be subject to compliance with all applicable requirements of foreign, federal or state law with respect to such securities. A Purchase Right may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable foreign, 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 a 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. 19. Legends. The Company may at any time place legends or other identifying symbols referencing any applicable foreign, federal and/or state securities restrictions or 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: THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER THE EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 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 _______, 19__. 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." 20. 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. ne Company may require that until such time as a Participant disposes of shares -10- 11 acquired upon exercise of a Purchase Right, the Participant shall hold all such shares in the Participant's name (and not in the name of any nominee) until the lapse of the time periods with respect to such Purchase Right referred to in the preceding sentence. The Company may direct that the certificates evidencing Shares acquired by exercise of a Purchase Right refer to such requirement to give prompt notice of disposition. 21. Amendment or Termination of the Plan. The Board may at any time amend or terminate the Plan, except that (i) such termination shall not affect Purchase Rights previously granted under the Plan, except as permitted under the Plan, and (ii) no amendment may adversely affect a Purchase Right previously granted under the Plan (except to the extent permitted by the Plan or as may be necessary to qualify the Plan as an employee stock purchase plan pursuant to Section 423 of the Code or to obtain qualification or registration of the Shares under applicable foreign, federal or state securities laws). In addition, an amendment to the Plan must be approved by the shareholders of the Company 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 Participating Companies. Furthermore, the approval of the Company's shareholders shall be sought for any amendment to the Plan for which the Board deems shareholder approval necessary in order to comply with Rule 16b-3. IN WITNESS WHEREOF, the undersigned Secretary of McAfee Associates, Inc. certifies that the foregoing McAfee Associates, Inc. 1994 Employee Stock Purchase Plan was duly adopted by the Board of Directors of McAfee Associates on April 14, 1994 and amended on January 20, 1997 by the Board of Directors of MacAfee Associates. --------------------------------------- Secretary -11- 12 MCAFEE ASSOCIATES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT [ ] Original Application [ ] Change in Percentage of Payroll Deductions I hereby elect to participate in the 1994 Employee Stock Purchase Plan (the "PLAN") of McAfee Associates, Inc. (the "COMPANY") and subscribe to purchase shares of the Company's common stock as determined in accordance with the terms of the Plan. I hereby authorize payroll deductions in the amount of percent (in 1% increments not exceeding 15%) of my compensation from each paycheck throughout the "OFFERING PERIOD" (as defined in the Plan) in accordance with the terms of the Plan. ("COMPENSATION" for purposes of the Plan includes salaries, commissions, bonuses, overtime and salary deferrals under Section 401(k) of the Internal Revenue Code but excludes reimbursements of expenses, allowances and certain other amounts described in the Plan.) 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 Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the last day of each Purchase Period unless I withdraw from the 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 which commences immediately after the last day of an Offering in which I am participating under the Plan until such time as I file with the Company a notice of withdrawal from the 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 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: --------------------------------------- I hereby authorize withholding from my compensation in order to satisfy the foreign, federal and state tax withholding obligations, ff any, which may arise upon my purchase of shares under the Plan and/or upon my disposition of shares I acquired under the Plan. Unless otherwise permitted by the Company, I hereby agree that until I dispose of the shares, I will hold all shares I acquire under the Plan in the name entered above (and not in the name of any nominee) for at least two (2) years from the first day of the Offering Period in which, and at least one (1) year from the Purchase Date on which, I acquired such shares. I further agree that I will promptly notify the Chief Financial Officer of the Company in writing of any transfer of such shares prior to the end of the periods referred to in the preceding sentence. I am familiar with the terms and provisions of the Plan and hereby agree to participate in the Plan subject to all of the terms and provisions thereof I understand that the Board of Directors of the Company reserves the right to amend the Plan and my right to purchase stock under the 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, or to obtain qualification or registration of the Company's common stock to be issued out of the Plan under applicable foreign, federal and state securities laws. I understand that the effectiveness of this subscription agreement is dependent upon my eligibility to participate in the Plan. Date: Signature: -------------- --------------------------------------- Name Printed: --------------------------------------- 13 MCAFEE ASSOCIATES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I hereby elect to withdraw from the current offering (the "Current Offering") of the common stock of McAfee Associates, Inc. (the "Company") under the Company's 1994 Employee Stock Purchase Plan (the "Plan"). MAKE ONE ELECTION UNDER SECTION A AND ONE ELECTION UNDER SECTION B: A. Current Offering. As to my participation in the current purchase period (the "CURRENT PURCHASE PERIOD") of the Current Offering under the Plan, I elect as follows (check one): 1. I elect to terminate my participation in the Current Purchase - ------- Period immediately. I hereby request that all payroll deductions credited to my account under the Plan (if any) not previously used to purchase shares under the Plan shall not be used to purchase shares on the last day of the Current Purchase Period. Instead, I request that all such amounts be paid to me as soon as practicable. I understand that this election immediately terminates my interest in the Current Offering. 2. 1 elect to terminate my participation in the Current Offering - -------- following my purchase of shares on the last day of the Current Purchase Period. I hereby request that all payroll deductions credited to my account under the Plan (if any) not previously used to purchase shares under the Plan shall be used to purchase shares on the last day of the Current Purchase Period. I understand that this election will terminate my interest in the Current Offering immediately following such purchase. I request that any cash balance remaining in my account under the Plan after my purchase of shares be returned to me as soon as practicable. I understand that if no election is made as to participation in the Current Offering under the Plan, will be deemed to have elected to participate in the Current Offering. B. Future Offerings. As to my participation in future offerings of common stock under the Plan, I elect as follows (check one): 1. I elect to participate in future offerings under the Plan. - ------- I understand that by making this election I win participate in the next offering under the Plan commencing subsequent to the Current Offering, and in each subsequent offering commencing immediately after the last day of an offering in which I participate, until such time as I elect to withdraw from the Plan or from any such subsequent offering. (However, if I am subject to Section 16 of the Securities Exchange Act of 1934, 1 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.) 2. I elect not to participate in future offerings under the Plan. - ------- I understand that by making this election I terminate my interest in the Plan and that no further payroll deductions will be made unless I elect in accordance with the Plan to become a participant in another offering under the Plan. I understand that if no election is made as to participation in future offerings under the Plan, I will be deemed to have elected to participate in such future offerings. Date: Signature: -------------- --------------------------------------- Name Printed: --------------------------------------- 14 MCAFEE ASSOCIATES, INC 1994 EMPLOYEE STOCK PURCHASE PLAN IRREVOCABLE ELECTION BY OFFICER I, _________________, am a participant in the McAfee Associates, Inc. 1994 Employee Stock Purchase Plan (the "PLAN"). In order to exempt my future purchasers) 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 purchase 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 purchase 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 or purchase 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 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) 15 MCAFEE ASSOCIATES, INC 1994 EMPLOYEE STOCK PURCHASE PLAN REVOCATION OF ELECTION BY OFFICER I, _____________________________, hereby revoke my Election, dated _________________________ 199__, with respect to my participation in the McAfee Associates, Inc. 1994 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: MCAFEE ASSOCIATES, INC. AUTHORIZED REPRESENTATIVE Date: ---------------- --------------------------------------------- (Signature) --------------------------------------------- (Name Printed) EX-10.51 3 SUBLEASE AGREEMENT FOR FACILITY AT 2805 BOWERS AVE 1 EXHIBIT 10.51 SUBLEASE by and between NATIONAL SEMICONDUCTOR CORPORATION ("Sublessor") and MCAFEE ASSOCIATES, INC. ("Sublessee") 2 SUBLEASE 1. Parties. This Sublease ("Sublease") is entered into as of the 20th day of February, 1997, by and between NATIONAL SEMICONDUCTOR CORPORATION, a Delaware corporation ("Sublessor") and MCAFEE ASSOCIATES, INC., a Delaware corporation ("Sublessee") as a sublease under that certain Lease dated October 6, 1995 ("Lease") by and between WTA-Bowers LLC, a California limited liability company, as lessor ("Lessor"), and Sublessor, as lessee. A copy of the Lease is attached hereto as Exhibit "A" and made a part hereof. All capitalized terms used in this Sublease but not defined herein shall have the meanings set forth in the Lease. 2. Subordination; Defaults; Provisions Constituting Sublease. 2.1 Subordination; Condition Precedent; Default Under Lease. This Sublease is subject and subordinate in all respects to the Lease, and to the matters to which the Lease is subject and subordinate, and to any amendments to the Lease or supplemental agreements thereunder made between Sublessor and Lessor. The effectiveness of this Sublease is conditioned upon the Lessor's written consent hereto in form and substance acceptable to Sublessor; provided, however, that if Sublessee enters or occupies the Premises for any purpose prior to the effectiveness of this Sublease (whether to inspect the Premises or otherwise), such entry and occupancy shall be subject to the following sentence and to Section 15 of this Sublease which shall constitute a separate agreement between Sublessor and Sublessee. Sublessee covenants and agrees to refrain from doing or causing to be done, or permitting any thing or act to be done, which would constitute a default under the Lease or might cause the Lease or the rights of Sublessor as lessee under the Lease to be terminated or surrendered, or which would or might make Sublessor liable for any damages, claims or penalties. Notwithstanding anything in this Sublease to the contrary, Sublessee agrees that Sublessor shall have no liability of any nature whatsoever to Sublessee as a consequence of Lessor's failure or delay in performing its obligations under the Lease. Sublessee's obligations hereunder (including without limitation the obligation of Sublessee to pay rent) shall not be impaired nor shall the performance thereof be excused because of any failure or delay on Lessor's part in performing its obligations under the Lease unless (i) such failure or delay results from Sublessor's being in default under the Lease and Sublessor's default thereunder is not due to a default of Sublessee hereunder, or (ii) such failure or delay results from Sublessor's willful misconduct. Under no circumstances shall Sublessee have the right to require performance by Sublessor of Lessor's obligations under the Lease. In the event of the termination of Sublessor's interest as lessee under the Lease for any reason (including, without limitation, Sublessor's election to terminate the Lease as a result of a default by Lessor or pursuant to a right to terminate under the Lease), then this Sublease shall terminate concurrently therewith, and unless the termination of Sublessor's interest under the Lease results from a default by Sublessor under the Lease that was not caused by Sublessee, Sublessor shall have no liability to Sublessee as a result of such termination of this Sublease. 2.2 Provisions of Lease Constituting Sublease. Paragraphs 10 (Reimbursable Expenses and Utilities), 12 (Alterations and Additions), 14 (Default), 17 (Free from Liens), 18 1 3 (Compliance with Laws), 22 (Parking Charges) and 23 (Insolvency or Bankruptcy) of the Lease are hereby incorporated herein as part of the terms and conditions of this Sublease (with each reference therein to "Lessor" and "Lessee" to be deemed to refer to Sublessor and Sublessee, respectively, and each reference to the "Lease" to be deemed to refer to this Sublease). Notwithstanding the foregoing: (i) in no event shall Sublessor be under any obligation to make improvements under Section 18 of the Lease as incorporated into this Sublease, but Sublessee shall be responsible for its proportional share of the cost of the improvements made by Lessor thereunder, as described therein; and (ii) all notices to be given to or posted for the benefit of Sublessor by Sublessee under Section 17 of the Lease as incorporated into this Sublease shall also be addressed and given to Lessor and posted for the benefit of Lessor, as applicable. 3. Premises. 3.1 Subleased Premises. Sublessor hereby leases to Sublessee, and Sublessee hereby leases from Sublessor, the Premises (as such term is defined in the Lease), subject to all of the terms and conditions set forth in this Sublease. The Premises are sometimes referred to hereinafter as the "Subleased Premises". Sublessor is hereby giving to Sublessee the right to possess and occupy the Subleased Premises during the term of this Sublease, subject to the terms and conditions of this Sublease (including, without limitation, Section 2.2 and Section 21 of this Sublease). Sublessor shall perform all obligations of Sublessor as tenant under the Lease except to the extent such obligations are to be performed by Sublessee pursuant to the terms of this Sublease. 3.2 Condition of Premises. Sublessee hereby accepts, and on the Commencement Date (defined in Paragraph 4.1 below), Sublessee shall be deemed to have accepted, the Subleased Premises and appurtenances thereto: (i) in their current "As Is" condition, and as being in good and sanitary order, condition and repair, except that Sublessor shall reasonable clean the Subleased Premises prior to delivering the Subleased Premises to Sublessee; (ii) without representation or warranty, except as may be expressly set forth in this Sublease, and (iii) subject to the Lease, all applicable laws, and all covenants, conditions, restrictions, easements and other matters of public record. Without limiting the foregoing, Sublessee hereby expressly acknowledges that neither Sublessor nor Sublessor's agents have any representation or warranty as to the suitability of the Subleased Premises for the conduct of Sublessee's business, the condition of the Subleased Premises, or the use or occupancy which may be made, and that Sublessee had independently investigated the Subleased Premises and is satisfied that the Subleased Premises are suitable for Sublessee's intended use and that the Subleased Premises meet all governmental requirements for such intended use. The foregoing shall not limit Sublessee's rights under applicable law against Lessor and Sublessor for those environmental matters described in Paragraph 6 of the Lease. 4. Term. 4.1 Sublease Term: Extension Terms. The term of this Sublease ("Sublease Term") shall commence on March 15, 1997 ("Commencement Date") and shall expire on April 30, 2001, unless extended as hereinafter set forth. Provided Sublessee is not in default under this -2- 4 Sublease as of the date Sublessee exercises its applicable Extension Option (hereinafter defined), Sublessee is not in default under this Sublease as of the date Sublessor intends to exercise its corresponding extension option under Section 4 of the Lease and Sublessee exercises its applicable Extension Option in strict accordance with the terms set forth below, Sublessee shall have options ("Extension Options") to extend the term of this Sublease for two (2) one (1)-year periods (each, an "Extension Term") upon all of the terms of this Sublease except that Sublessee shall not be entitled to any additional Extension Options and the monthly rental rate shall be the applicable rate set forth in Section 5.1 below. In order to effectively exercise an Extension Option, Sublessee must give Sublessor written notice of its exercise of the applicable Extension Option at least nine (9) months prior to the end of the then-current Sublease term, and provided Sublessee is not in default under this Sublease as of the date Sublessee gives such a notice and Sublessee is not in default under this Sublease as of the date Sublessor intends to exercise its corresponding extension option under Section 4 of the Lease, Sublessor shall exercise its corresponding extension option under Section 4 of the Lease. Notwithstanding anything to the contrary herein, if Sublessor's exercise of its corresponding extension option under the Lease is not effective for any reason, then Sublessee's exercise of its Extension Option shall be of no force or effect. In no event may Sublessee exercise its second Extension Option unless Sublessee shall have effectively exercised its first Extension Option. 4.2 Holding Over. If Sublessee remains in possession of the Premises after the expiration of the Sublease Term with the express, written consent of Sublessor (which may be withheld or conditioned in the sole and absolute discretion of Sublessor), such tenancy shall be a month-to-month tenancy terminable at any time upon thirty (30)days prior written notice to the other; provided, however, that in no event shall such month-to-month tenancy continue beyond the end of the corresponding month-to-month holdover tenancy described in Section 30 of the Lease that requires the consent of Lessor, and in no event shall Sublessee be entitled to remain in possession of the Premises after the expiration or earlier termination of the Lease. In the event of such a hold over tenancy, the monthly rental rate hereunder shall be equal to the monthly rental rate under the Lease then payable by Sublessor. Such holdover rent shall be payable at the times specified in Paragraph 5. Such hold over tenancy shall otherwise be subject to every applicable term, covenant and agreement contained herein. 5. Rent. 5.1 Rent. Commencing on April 1, 1997 and continuing until April 30, 2001 (or the end of the applicable Extension Term, if any), Sublessee shall pay to Sublessor, without offset or deduction, monthly rent for the Premises as follows: Period Monthly Rent April 1, 1997-April 30, 1998 $119,600.00 May 1, 1998-April 30, 1999 $122,720.00 May 1, 1999-April 30, 2000 $125,840.00 May 1, 2000-April 30, 2001 $128,960.00 -3- 5 Extension Terms, if applicable: May 1, 2001-April 30, 2002 $133,120.00 May 1, 2002-April 30, 2003 $136,240.00 Monthly rent shall be payable in advance on the first day of each calendar month without prior notice or demand in lawful money of the United States at the address set forth in Paragraph 10, or at such other place or places as Sublessor may from time to time direct. All other sums payable by Sublessee to Sublessor under this Sublease shall also be deemed to be rent and are hereinafter referred to as "Additional Rent". 5.2 Late Charge. Sublessee hereby acknowledges that late payment by Sublessee to Sublessor of Rent will cause Sublessor to incur costs not contemplated by this Sublease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges. Accordingly, Sublessee shall pay to Sublessor, as Additional Rent (defined in Paragraph 5.3(a) below), without the necessity of prior notice or demand, a late charge equal to six percent (6%) of any installment of Rent which is not received by Sublessor within five (5) days after the due date for such installment. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Sublessor will incur by reason of late payment by Sublessee. In no event shall this provision for a late charge be deemed to grant to Sublessee a grace period or extension of time within which to pay any installment of Rent or prevent Sublessor from exercising any right or remedy available to Sublessor upon Sublessee's failure to pay such installment of Rent when due, including without limitation the right to terminate the Sublease. Any installment of Rent which is not paid when due shall bear interest at the annual rate set forth in Paragraph 11 below. 5.3 Additional Rent. (a) Payment of Additional Rent. In addition to the monthly rent due pursuant to Paragraph 5.1 of this Sublease, Sublessee shall pay to Sublessor an amount equal to the additional rent required to be paid by Sublessor to Lessor pursuant to Paragraph 3B and any other provision of the Lease (other than sums payable to Lessor under the fifth paragraph of Paragraph 21 of the Lease) for the period commencing on the Commencement Date and continuing through the expiration of the Sublease Term (together with the sums described below, "Additional Rent") within ten (10) days after notice from Sublessor of the amount of the Additional Rent (provided, however, that Sublessor shall not be obligated to give Sublessee more than one notice of the amount of monthly installments payable under Paragraph 3B of the Lease and Sublessee shall pay such installments to Sublessor on the first day of each calendar month, without deduction or offset, but Sublessor shall notify Sublessee of any change in such amount). Additional Rent shall also include all charges, costs and expenses and other sums which Sublessee is required to pay under this Sublease (together with all interest and charges that may accrue thereon in the event of Sublessee's failure to pay the same), and if Sublessee fails to pay any Additional Rent when due, Sublessor shall have all of the remedies available to Sublessor under California law for nonpayment of rent. The term "Rent" as used in this Sublease shall mean Rent and/or Additional Rent. -4- 6 6. Utilities. Sublessee shall pay during the Sublease Term and prior to delinquency all charges for water, gas, light, heat, power, electricity, telephone or other communication service, janitorial service, trash pickup, sewer and all other services supplied to or consumed on the Premises (collectively the "Services") and all taxes, levies, fees or surcharges therefor. Sublessee shall arrange for Services to be supplied to the Premises and shall contract for all of the Services in Sublessee's name prior to the Commencement Date. The Commencement Date shall not be delayed by reason of any failure by Sublessee to so contract for Services. In the event that any of the Services are not separately billed or metered to the Premises, Sublessee shall pay such cost to Sublessor, as Additional Rent. The lack or shortage of any Services due to any cause whatsoever shall not affect any obligation of Sublessee hereunder, and Sublessee shall faithfully keep and observe all the terms, conditions and covenants of this Sublease and pay all Rentals due hereunder, all without diminution, credit or deduction. 7. Maintenance of Premises. 7.1 Lessor's and Sublessor's Obligations. Sublessor shall not be responsible to Sublessee for furnishing any service, maintenance, repairs or improvements to the Premises, it being understood that such obligations are solely those of the Lessor pursuant to Paragraphs 11A and 18 of the Lease or of Sublessee pursuant to this Sublease. The failure of Lessor to fulfill its obligations under the Lease or the exercise by Lessor of any rights specified in the Lease (excluding an exercise by Lessor of its rights and remedies as the result of a default by Sublessor under the Lease which is not caused by Sublessee) shall not (i) entitle Sublessee to any allowance, reduction or adjustment of Rentals, (ii) make Sublessor liable to Sublessee, (iii) excuse or impair the obligation of Sublessee to perform or observe any of the terms or conditions of this Sublease or (iv) entitle Sublessee to any claim of constructive eviction. If Lessor shall be in material default under the Lease in any of its obligations to Sublessor with respect to the Premises, Sublessor shall have no obligation to bring any action or proceeding or to take any steps to enforce Sublessor's rights against Lessor. Any steps, actions, or proceedings so instituted by Sublessor at the request of Sublessee shall be at the expense of Sublessee. Sublessee shall, by written notice to Sublessor, specify any such alleged default by Lessor and Sublessor may, but shall not be obligated to, after such notice elect to take action for the enforcement of Sublessor's rights against Lessor with respect to such default. If Sublessor does not elect to do either of the foregoing, then to the extent permitted by the Lease or applicable law, Sublessee shall have the right to take enforcement action against Lessor in its own name and, for that purpose and only to such extent, all of the rights of Sublessor to enforce the obligations of Lessor under the Lease are hereby conferred upon and are conditionally assigned to Sublessee and Sublessee hereby is subrogated to such rights (including the benefit of any recovery or relief). Notwithstanding the provisions of the immediately preceding sentence, in no event shall Sublessee be entitled to take such action in its own name if such action would constitute a default under the Lease. Sublessee shall indemnify and hold Sublessor harmless from and against all loss, cost, liability, claims, damages and expenses (including without limitation reasonable attorneys' fees), penalties and fines incurred in connection with or arising from the taking of any such action by Sublessee or from the taking of any action at the request of Sublessee. -5- 7 7.2 Sublessee's Obligations. Sublessee shall perform all of the obligations of Sublessor under Paragraph 11B of the Lease, including, without limitation, keeping in effect a service contract for the maintenance of the heating, ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and maintenance contractor approved by Lessor which provides for periodic inspection and servicing at least once every three (3) months during the term of the Lease, and providing Lessor with a copy of such contract and all periodic service reports. Sublessee shall also provide Sublessor with a copy of such contract and all periodic service reports. If Sublessee fails to make repairs or perform maintenance work required of Sublessee hereunder, Sublessor may, in addition to all other rights and remedies available hereunder or by law and without waiving any alternative remedies, enter into the Premises and make such repairs and/or perform such maintenance work without notice to Sublessee. Sublessee hereby specifically acknowledges that the Lease does not provide for any written notice of default or cure period to be provided by Lessor to Sublessor for a default under the Lease. If Sublessor makes such repairs and/or performs such maintenance work, Sublessee shall reimburse Sublessor upon demand and as Additional Rent, for the cost of such repairs and/or maintenance work. Sublessor shall have no liability to Sublessee for any damage, inconvenience or interference with the use of the Premises by Sublessee as a result of Sublessor performing any such repairs or maintenance. Sublessee shall reimburse Sublessor, on demand and as Additional Rent, for the cost of damage to the Premises caused by Sublessee or Sublessee's agents. Sublessee expressly waives the benefits of any statute now or hereafter in effect (including without limitation the provisions of subsection 1 of Section 1932, Section 1941 and Section 1942 of the California Civil Code and any similar law, statute or ordinance now or hereafter in effect) which would otherwise afford Sublessee the right to make repairs at Sublessor's expense (or to deduct the cost of such repairs from rentals due hereunder) or to terminate this Sublease because of Sublessor's failure to keep the Premises in good and sanitary order. 8. Taxes. 8.1 Personal Property Taxes. Sublessee shall cause Sublessee's trade fixtures, equipment, furnishings, furniture, merchandise, inventory, machinery, appliances and other personal property installed or located on the Premises (collectively "Sublessee's personal property") to be assessed and billed separately from the Premises. Sublessee shall pay before delinquency any and all taxes, assessments and public charges levied, assessed or imposed upon or against Sublessee's personal property. If any of Sublessee's personal property shall be assessed with the real property comprising the Premises, Sublessee shall pay to Sublessor, as Additional Rent, the amounts attributable to Sublessee's personal property within five (5) days after receipt of a written statement from Sublessor setting forth the amount of such taxes, assessments and public charges attributable to Sublessee's personal property. Sublessee shall comply with the provisions of any law, ordinance, rule or regulation of taxing authorities which require Sublessee to file a report of Sublessee's personal property located on the Premises. 8.2 Other Taxes Payable by Sublessee. Sublessee shall pay or reimburse Sublessor, as Additional Rent within five (5) days after receipt of Sublessor's statement thereof, any and all taxes, levies, assessments or surcharges imposed by a governmental authority and payable by Sublessor or Sublessee (other than Sublessor's net income, succession, transfer, gift, -6- 8 franchise, estate or inheritance taxes), whether or not now customary or within the contemplation of the parties hereto, whether or not now in force or which may hereafter become effective, which are: (a) Upon, allocable to, or measured by the area of the Premises or the Rentals payable hereunder, including without limitation any gross income, gross receipts, excise, or other tax levied by the state, any political subdivision thereof, city or federal government with respect to the receipt of such Rentals; (b) Upon or with respect to the use, possession, occupancy, leasing, operation and management of the Premises or any portion thereof; (c) Upon this transaction or this Sublease; or (d) Imposed in connection with the Premises as a means of controlling or abating environmental pollution or the use of energy, including, without limitation, any parking taxes, levies or charges or vehicular regulations imposed by any governmental agency. Sublessee shall also pay, prior to delinquency, all privilege, sales, excise, use, business, occupation, or other taxes, assessments, license fees or charges levied, assessed or imposed upon Sublessee's business operations conducted at the Premises. (e) Any other taxes, levies, assessments or surcharges with respect to the Premises payable by Sublessor to Lessor or to the taxing authorities pursuant to the Lease (including, without limitation, Section 8B of the Lease). In the event any such taxes are payable by Sublessor and it shall not be lawful for Sublessee to reimburse Sublessor for such taxes, then the Rentals payable hereunder shall be increased to net Sublessor the same net Rental after imposition of any such tax upon Sublessor as would have been payable to Sublessor prior to the imposition of any such tax. 9. Use. Sublessee shall use the Premises for general office use, research and development of computer related products and lab use for computer related products and for no other purpose without the prior written consent of Sublessor, which may be withheld in Sublessor's sole and absolute discretion. Sublessee's business shall be established and conducted throughout the term hereof in a first-class manner. Sublessee shall not use the Premises for, or carry on, or permit to be carried on, any offensive, noisy or dangerous trade, business, manufacture or occupation, nor permit any auction sale to be held or conducted on or about the Premises. Sublessee shall not do or suffer anything to be done within the Premises which will cause structural injury to the Premises. Sublessee shall not dispose of, or suffer the disposal, drainage, leakage or other discharge onto, into or about the Premises of any hazardous, toxic or radioactive materials including without limitation, those specified in Sections 66680 through 66685 of Title 22 of the California Administrative Code, Division 4, Chapter 30, as the same may be amended from time to time, if such disposal, drainage, leakage or other discharge is prohibited by law. Sublessee shall not use or permit the use of the Premises or any part thereof for any purpose which will increase the existing rate of insurance upon the Premises or cause a -7- 9 cancellation of any insurance policy covering the Premises or any part thereof. If any act on the part of Sublessee or use of the Premises by Sublessee shall cause, directly or indirectly, any increase of Sublessor's insurance expense, said additional expense shall be paid by Sublessee to Sublessor, as Additional Rent, upon demand. No such payment by Sublessee shall limit Sublessor in the exercise of any other right or remedies, or constitute a waiver of Sublessor's right to require Sublessee to discontinue such act or use. 10. Notices. 10.1 General. Any notice required or desired to be given under this Sublease shall be in writing and all notices shall be given by personal delivery, mailing, or by reputable overnight courier. All notices personally given to Sublessee at the Premises may be delivered to any person apparently in charge at the Premises, or any corporate officer or agent of Sublessee (but a copy must also be delivered to the addresses set forth below). All notices given by mail shall be served by first-class mail (registered or certified, return receipt requested), postage prepaid. All notices shall be addressed and delivered to Sublessee and to Sublessor at the following address(es): To Sublessor: National Semiconductor Corporation 1120 Kifer Road, Mail Stop 10-460 Sunnyvale, California 94086 To Sublessee: The Premises, with copies to: McAfee Associates Inc. 2710 Walsh Avenue, Santa Clara, California 95051, and to Attention: Mr. Prabhat Goyal Kent H. Roberts, Esq. Moseley & Standerfer 4311 Oak Lawn Avenue, suite 500 Dallas, Texas 75219-3488 Either party may change its address for purposes of notice by giving notice of such change of address to the other party in accordance with the provisions of this paragraph. Any notice given pursuant to this paragraph shall be deemed served when delivered by personal service, with delivery evidenced by a signed receipt, on the business day following delivery to a reputable overnight courier, or as of forty-eight (48) hours after the deposit thereof in the United States mail. 10.2 Notices from Lessor. Sublessee shall send to Sublessor a copy of all notices and other communications it receives from Lessor within twenty-four (24) hours after receipt. -8- 10 11. Interest. Any payment due from Sublessee shall bear interest from the date due until paid at an annual rate equal to the lesser of twelve percent (12%) or the maximum rate allowable by law. 12. Right of Entry. Sublessor shall be entitled to enter into and upon the Premises in the event of an emergency, in order to cure a default by Sublessee under the Lease and in order to perform any obligations of Sublessor under the Lease, in each case without prior notice to Sublessee. 13. Damage and Destruction. Sublessor shall have no obligation to rebuild, restore or repair all or a portion of the Premises in the event of any damage or destruction thereto. If the Premises are damaged or destroyed and Sublessor has the right to terminate the Lease under Paragraph 15 of the Lease, then provided Sublessee notifies Sublessor within ten (10) business days after the damage or destruction that Sublessee desires Sublessor to terminate the Lease (and this Sublease), Sublessor shall use reasonable efforts, at no cost to Sublessor, to so terminate the Lease. If either Lessor or Sublessor elects to terminate the Lease pursuant to the terms and conditions of Paragraph 15 of the Lease, this Sublease shall terminate concurrently therewith without any liability of Sublessor to Sublessee. Except as expressly set forth in this Sublease, Sublessee shall have no right to terminate this Sublease in the event of damage or destruction to all or a portion of the Premises and Sublessee hereby expressly waives any rights to terminate this Sublease based on damage or destruction, including without limitation any rights pursuant to the provisions of Subdivision 2 of Section 1932 and Subdivision 4 of Section 1933 of the California Civil Code, as amended from time to time, and the provisions of any similar law hereinafter enacted, which provisions relate to the termination of the hiring of a thing upon its substantial damage and destruction. If the Premises are to be rebuilt or restored, and Sublessor receives an abatement of rent under the Lease, the Rent payable under this Sublease shall be proportionately reduced during the period of repair or restoration (provided such damage and destruction shall not have been caused by the fault or neglect of Sublessee, its agents, employees, or invitees), based upon the extent to which the making of repairs interferes with Sublessee's business conducted on the Premises, as reasonably determined by Sublessor, but in no greater proportion than the rent paid by Sublessor to Lessor for the Premises is abated to Sublessor. All other amounts due pursuant to this Sublease shall continue unaffected. 14. Insurance. Sublessee shall pay or reimburse Sublessor within ten (10) days after demand for all sums payable by Sublessor to Lessor under Paragraph 9C of the Lease. All insurance policies required to be carried by Sublessor pursuant to Paragraph 9 of the Lease shall instead be carried by Sublessee, and in addition to the requirements of Paragraph 9 of the Lease, shall name both Lessor and Sublessor as additional insureds and shall provide that such policy or policies shall not be subject to cancellation or change except after at least thirty (30) days prior written notice to Lessor and Sublessor, and Sublessee shall deliver a certificate of such insurance to Sublessor prior to the Commencement Date. Sublessee hereby releases Sublessor from any and all claims, demands, losses, expenses and injuries to the Premises or to the furnishings, fixtures, equipment, inventory, or other property of Sublessee in, about, or upon the Premises, which is caused by or results from perils, events, or happenings which are the subject of the insurance required to be maintained by Sublessee. -9- 11 15. Indemnification. Sublessee shall indemnify, hold harmless, and defend Sublessor (except for Sublessor's negligence or willful misconduct) against all claims, losses, liabilities, costs and expenses (including, without limitation, attorneys' fees and costs), and damages to the extent arising from or relating to any breach or default in the performance of any obligation on Sublessee's part to be performed under the terms of this Sublease, any injury or death to any person or any damage to or loss of use of any property arising out of any occurrence in, on or about the Premises or on account of the use, condition, or occupancy of the Premises. The provisions of this Paragraph shall survive termination of this Sublease with respect to any damage, injury, death, breach or default occurring prior to such termination. This Sublease is made on the express condition that Sublessor shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause (other than Sublessor's negligence or willful misconduct), in any way connected with the condition, use, or occupancy of the Premises, specifically including, without limitation, any liability for injury to the person or property of Sublessee or Sublessee's agents or invitees. 16. Property Loss; Damage. Sublessor shall not be liable for any damage to property of Sublessee, nor for loss of or damage to any property of Sublessee by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the active negligence or willful misconduct of Sublessor. 17. Assignment and Subletting. Sublessee shall not assign or sublease all or any portion of Sublessee's interest in the Sublease or in the Premises or any part thereof or sublease all or any part of the Premises during the term hereof without the written consent of Sublessor, which consent Sublessor shall not unreasonably withhold. Any assigning or subletting by Sublessee, however, shall be subject to Sublessor's ability to assign and sublet pursuant to the terms and conditions of the Lease. Sublessor's consent to any one assignment or sublet shall not constitute a waiver of the provisions of this Paragraph as to any subsequent assignment or sublet nor a consent to any subsequent assignment or sublet; further, Sublessor's consent to an assignment or sublet shall not release Sublessee from Sublessee's obligations under this Sublease, and Sublessee shall remain jointly and severally liable with the assignee or sub-sublessee. It is the intent of the parties hereto that this Sublease shall confer upon Sublessee only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Sublessee by this Sublease. The parties agree that this Sublease is not intended to have a bonus value, nor to serve as a vehicle but whereby Sublessee may profit by future assignment or sublease of this Sublease or the right to use or occupy the Premises as a result of any terms contained herein. It is the intent of the parties that any such bonus value that may attach to the Sublease (including, without limitation, any consideration for assignment, and any sub-sublease rentals in excess of the rent payable under this Sublease) shall be paid to Sublessor and shall be and remain the exclusive property of Sublessor. (As used herein, the term "bonus value" shall not include any of the income of Sublessee, other than income paid by an assignee or sub-sublessee that exceeds the rent payable under this Sublease.) Sublessee shall not hypothecate, mortgage or encumber Sublessee's interest in this Sublease or in the Premises or otherwise use this Sublease as a security device in any manner without the consent of Sublessor, which consent Sublessor may withhold in its absolute discretion. Consent by Sublessor to any such hypothecation or creation of lien or mortgage -10- 12 shall not constitute consent to an assignment or other transfer of this Sublease following foreclosure of any permitted lien or mortgage. 18. Surrender of Premises. On the last day of the Sublease Term or upon sooner termination of this Sublease, Sublease shall, to the reasonable satisfaction of Sublessor, surrender the Premises, together with all alterations, additions and improvements which may have been made in, to, or on the Premises by Lessor, Sublessor or (to the extent permitted by this Sublease) Sublessee to Sublessor in good condition (reasonable wear and tear excepted) with all walls and columns painted, all carpets steam cleaned, the air conditioning, ventilating and heating equipment inspected, serviced and repaired by a reputable and licensed service firm, all floors cleaned and waxed, all damaged ceiling tiles replaced, the windows cleaned, the blinds cleaned and any damaged doors replaced. Sublessee shall remove all of Sublessee's personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Sublessee. Furthermore, Sublessee shall immediately repair all damage to the Premises caused by any such removal. If the Premises are not so surrendered at termination of this Sublease, Sublessee shall indemnify Sublessor against any loss or liability resulting from delay by Sublessee in so surrendering the Premises, including, without limitation, any claims made by Lessor due to failure to surrender the Premises in accordance with the Lease. 19. Condemnation. If either Lessor or Sublessor elects to terminate the Lease pursuant to the terms and conditions of Paragraph 16 of the Lease, this Sublease shall terminate concurrently therewith without any liability of Sublessor to Sublessee. Sublessee shall have no right to terminate this Sublease in the event of condemnation of all or a portion of the Premises and Sublessee hereby expressly waives any rights to terminate this Sublease based thereon. If a condemnation occurs and the Lease is not terminated, and Sublessor receives an abatement of rent under the Lease as a result of the condemnation, the Rent payable under this Sublease shall be proportionately reduced in the proportion than the rent paid by Sublessor to Lessor for the Premises is abated to Sublessor. All other amounts due pursuant to this Sublease shall continue unaffected. Any award received by Sublessor as a result of the taking of all or a portion of the Premises under any right of eminent domain, or any transfer in lieu thereof including without limitation any award for the value of this Sublease), shall belong to Sublessor, however, Sublessee shall have the right to recover any award specifically made to Sublessee for moving expenses or for Sublessee's trade fixtures, furnishings, equipment and other personal property. 20. Lessor's Consent. Sublessee acknowledges that as to certain matters set forth in this Sublease, Lessor has rights of approval or disapproval. If any matter requiring Lessor's approval is submitted to Sublessor by Sublessee and Sublessor approves such matter, Sublessor shall submit the same to Lessor within a reasonable time after written request from Sublessee and shall use reasonable efforts, at no cost to Sublessor, to obtain Lessor's approval of such matter. In no event, however, shall Sublessor's disapproval be deemed unreasonable if Lessor has disapproved of such matter nor shall Sublessor have any liability to Sublessee by reason thereof. The preceding sentence shall not limit Sublessee's rights under Section 7.1 above to challenge the reasonableness of Lessor's action in disapproving the requested action. -11- 13 21. Sublessor's Right to Perform Sublessee's Covenants. Except as otherwise provided herein, if Sublessee shall at any time fail to make any payment or perform any other act required to be made or performed by Sublessee under this Sublease, Sublessor may without notice to Sublessee, but shall not be obligated to and without waiving or releasing Sublessee from any obligation under this Sublease, make such payment or perform such other act to the extent that Sublessor is required pursuant to the Lease, and in connection therewith, pay expenses and employ counsel. All sums so paid by Sublessor and all penalties, interest (in accordance with the terms of Paragraph 14 above) and costs incurred in connection therewith shall be due and payable by Sublessee upon demand by Sublessor. Notwithstanding the foregoing, Sublessor has all of the rights against Sublessee that Lessor has against Sublessor under the Lease. 22. Brokers. Each party hereby represents to the other that it has not dealt with any broker, salesperson or finder in connection with this sublease transaction other than Cooper/Brady Corporate Real Estate Services ("Broker"), which represents Sublessee. Each party shall defend, indemnify and hold the other harmless from and against any and all claims, liabilities, losses, damages, costs and expenses (including, without limitation, attorneys' fees and costs) arising from or in connection with any dealings by the indemnifying party with any other broker, salesperson or finder. Sublessor shall pay a broker's commission to Broker pursuant to a separate written agreement between Sublessor and Broker, and Sublessee shall defend, indemnify and hold Sublessor harmless from and against any and all claims, liabilities, losses, damages, costs and expenses (including, without limitation, attorneys' fees and costs) arising from any brokerage fees or commissions or similar charges payable to Broker that exceed the sum payable by Sublessor to Broker pursuant to said separate written agreement between Sublessor and Broker. 23. General. 23.1 Surrender of Sublease Not Merger. The voluntary or other surrender of this Sublease, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Sublessor, terminate all or any existing subleases or subtenants, or may, at the option of Sublessor, operate as an assignment to Sublessor of any or all such subleases or subtenants. 23.2 Interpretation of Terms. The words "Sublessor" and "Sublessee" as used herein shall include the plural as well as the singular. Words in the neuter gender include the masculine and feminine and words in the masculine or feminine gender include the neuter. 23.3 Counterparts. This Sublease may be executed in counterparts, each of which shall be deemed an original for all purposes and together shall constitute one instrument. 23.4 Governing Law. This Sublease shall be construed and enforced in accordance with the laws of the State of California. 23.5 Joint and Several Liability. If Sublessee is more than one person or entity, each such person or entity shall be jointly and severally liable for the obligations of Sublessee hereunder. -12- 14 23.6 Construction of Sublease Provisions. This Sublease shall not be construed either for or against Sublessee or Sublessor, but shall be construed in accordance with the general tenor of the language to reach a fair and equitable result. 23.7 Conditions. All agreements by Sublessee contained in this Sublease, whether expressed as covenants or conditions, shall be construed to be both covenants and conditions, conferring upon Sublessor, in the event of a breach thereof, the right to terminate this Sublease. 23.8 Attorneys' Fees. If a dispute arises under or in connection with this Sublease or the interpretation thereof, the prevailing party (as determined by the trier of fact) shall be entitled to recover from the other party all of the attorneys' fees and costs incurred by it in connection with the dispute. 23.9 Withholding of Sublessor's Consent. Notwithstanding any other provision of this Sublease, where Sublessee is required to obtain the consent of Sublessor to do any act, or to refrain from the performance of any act, or for any other matter, Sublessee agrees that if Sublessee is in default with respect to any sum payable by Sublessee under this Sublease or is in material default with respect to any term, condition, covenant or provision of this Sublease, or if Lessor refuses to consent to such act or matter, then Sublessor shall be deemed to have acted reasonably in withholding its consent if said consent is, in fact, withheld. 23.10 No Partnership or Joint Venture. Nothing in this Sublease shall be construed as creating a partnership or joint venture between Sublessor, Sublessee, or any other party, or cause Sublessor to be responsible for the debts or obligations of Sublessee or any other party. 23.11 Entire Agreement. This Sublease, together with all exhibits attached hereto, is the entire agreement between the parties, and there are no binding agreements or representations between the parties except as expressed herein. Any agreements, warranties or representations not expressly contained herein shall in no way bind either Sublessor or Sublessee, and Sublessor and Sublessee expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Sublease. This Sublease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, whether written or oral, between Sublessor and Sublessee with respect to the Premises and appurtenances thereto. No addition to, or modification of, any term or provision of this Sublease shall be effective until and unless set forth in a written instrument signed by both Sublessor and Sublessee. 23.12 Exhibits. All exhibits attached to this Sublease shall be deemed to be incorporated herein by the individual references to each such exhibit, and all such exhibits shall be deemed a part of this Sublease as though set forth in full in the body of the Sublease. -13- 15 23.13 Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Sublease on behalf of the Sublessor and Sublessee, respectively. Each individual executing this Sublease represents and warrants that he is duly authorized to execute and deliver this Sublease in accordance with a duly adopted resolution of the Board of Directors of Sublessee or Sublessor, as applicable, or in accordance with the by-laws of Sublessee or Sublessor, as applicable. Each party shall upon written request of the other, deliver a certified copy of a resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Sublease, or other reasonable evidence of authority. Sublessee warrants that Sublessee is a valid and existing corporation and Sublessee is qualified to do business in California. 24. Not an Offer. The submission of this Sublease for examination does not constitute an option or offer to sublease the Premises. This Sublease shall have no binding effect on the parties unless executed by Sublessor and Sublessee and a fully executed copy is delivered to Sublessor. 25. Time of the Essence. Time is of the essence of each and every provision of this Sublease. 26. Waiver. The waiver by Sublessor or Sublessee of any breach of any provision of this Sublease shall not be deemed to be a waiver of such provision with respect to any other breach of that provision. The acceptance of rent by Sublessor shall not be deemed to be a waiver of any breach by Sublessee of any provision of this Sublease other than the failure of Sublessee to pay the particular rent so accepted, regardless of Sublessor's knowledge of such breach at the time of acceptance of such rent. IN WITNESS WHEREOF, the parties have executed this Sublease effective as of the date first set forth above. SUBLESSOR: NATIONAL SEMICONDUCTOR CORPORATION, a Delaware corporation By: /s/ DAVID S. DAHMEN ----------------------------------- David S. Dahmen, Treasurer SUBLESSEE: MCAFEE ASSOCIATES, INC. a Delaware corporation By: /s/ PRABHAT K. GOYAL ----------------------------------- Prabhat K. Goyal, Vice President- Finance and Administration -14- 16 EXHIBIT "A" LEASE -1- 17 LEASE THIS LEASE is made on the 6th day of October, 1995, by and between WTA-Bowers (hereinafter called "Lessor") and National Semiconductor Corporation (hereinafter called "Lessee"). IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: 1. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the terms and conditions herein set forth, those certain Premises ("Premises") situated in the City of Santa Clara, County of Santa Clara, California, as outlined in Exhibit "A" attached hereto and described as follows: +/- 104,000 rentable square foot building located at 2805 Bowers Avenue, Santa Clara, California. 2. Term. The term of this Lease shall be for a period of five (5) years, commencing on the date which is three weeks following the date on which Lessor obtains a final Certificate of Occupancy from the City of Santa Clara and tenders possession of the Premises to Lessee ("Commencement Date"). Lessor anticipates that Lessor will obtain a final Certificate of Occupancy on February 9, 1996, and therefore the Commencement Date will be March 1, 1996 and the Lease will expire on February 28, 2001, unless sooner terminated pursuant to any provision hereof. If for any reason whatsoever, Lessor has not obtained a final Certificate of Occupancy and delivered possession of the Premises to Lessee by February 9, 1996, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom; but in such event, Lessee shall not be obligated to pay rent until the date on which Lessor obtains a final Certificate of Occupancy from the City of Santa Clara and tenders possession of the Premises to Lessee, and the Commencement Date and termination date of this Lease shall be revised to conform to such date. The foregoing notwithstanding, if Lessor has not obtained a final Certificate of Occupancy and delivered possession of the Premises to Lessee by April 1, 1996, Lessee shall have the right to terminate this Lease by written notice to Lessor delivered at any time thereafter prior to the date on which Lessor obtains a final Certificate of Occupancy and delivers possession of the Premises to Lessee. In addition, the effectiveness of this Lease is conditioned upon Lessor acquiring fee title to the Premises on or before November 15, 1995. If Lessor has not acquired fee title to the Premises on or before November 15, 1995, either party may terminate this Lease by written notice to the other delivered at any time before Lessor acquires fee title to the Premises. Lessee shall be permitted to occupy the Premises from the date on which Lessor obtains a final Certificate of Occupancy from the City of Santa Clara and tenders possession of the Premises to Lessee, provided that Lessee abides by all terms and conditions of the Lease except for the provision to pay rent. Lessee shall not be obligated to pay Rent until the Commencement Date. 3. Rent. Commencing on the Commencement Date, Lessee shall pay to Lessor rent for the Premises of One Hundred Four Thousand and 00/100 Dollars ($104,000.00) per month in lawful money of the United States of America, subject to adjustment as provided in Section A of this Paragraph. Rent shall be paid without deduction or offset, prior notice, or demand, at such place as may be designated from time to time by Lessor as follows: $104,000.00 shall be paid upon execution of the Lease, which sum represents the amount of the first month's rent. Rent shall be paid in advance on the first (1st) day of each calendar month as follows: Months Monthly Rent/NNN ------ ---------------- 01-12 $104,000.00 1 EXHIBIT A 18 13-24 $107,120.00 25-36 $110,334.00 37-48 $113,644.00 49-60 $117,053.00 Rent for any period during the term hereof which is for less than one (1) full month shall be a prorate portion of the monthly rent payment. Lessee acknowledges that late payment by Lessee to Lessor of rent or any other payment due Lessor will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any installment of rent or other payment due from Lessee is not received by Lessor within five (5) days following the date it is due and payable, Lessee shall pay to Lessor an additional sum of five percent (5%) of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. A. Cost-of-Living Increase. Not applicable. B. All taxes, insurance premiums, late charges, costs and expenses which Lessee is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Lessee's failure to pay such amounts, and all reasonable damages, costs, and attorney's fees and expenses which Lessor may incur by reason of any default of Lessee or failure on Lessee's part to comply with the terms of this Lease, shall be deemed to be additional rent (hereinafter, "Additional Rent"), and, in the event of non-payment by Lessee, Lessor shall have all of the rights and remedies with respect thereto as Lessor has for the non-payment of monthly installment of rent. Notwithstanding anything in this Paragraph 3.B. or elsewhere in the Lease to the contrary: from and after the commencement date, lessee shall pay to Lessor on the first day of each calendar month of the lease term an amount estimated by Lessor to be 1/12th of the annual total of Additional Rent as defined herein. Additional Rent shall include reimbursement for all out-of-pocket expenses as defined in Paragraph 10 of this Lease, except that property taxes and property insurance premiums shall be invoiced separately to Lessee as billed by the taxing authority and insurance carrier, and Lessee shall be obligated to pay said property taxes and insurance premiums in accordance with Paragraphs 8 and 9, respectively. Within ninety (90) days following the end of each calendar year Lessor shall furnish Lessee with a statement setting forth (i) the actual expenses incurred by Lessor in the calendar year for which Lessor is entitled to receive Additional Rent, and (ii) the payments of Additional Rent actually made by Lessee with respect to such period; if Lessee's payments of Additional Rent are less than the amount of Additional Rent to which Lessor is entitled (based on actual expenses), Lessee shall pay Lessor the deficiency within ten (10) business days after receipt of such statement; if Lessee's payments of Additional Rent exceed the amount of Additional Rent to which Lessor is entitled (based on actual expenses), Lessor shall offset the excess against the Additional Rent next thereafter to become due to Lessor. Lessee shall have the right to review Lessor's books and records from time to time to verify the Additional Rent charges hereunder. Prior to commencement of this Lease, and on an annual or semi-annual basis thereafter, Lessor shall determine the amount of the Additional Rent as described herein, based on a review of the then-current operating costs of the subject property. Concurrent 2 19 with its review of actual costs, Lessor may elect to make adjustments to the monthly estimated payment, so that the Additional Rent Payment is consistent with actual out-of-pocket expenses. 4. Option to Extend Term. A. Lessee shall have the option to extend the term on all the provisions contained in this Lease for two (2) one (1)-year periods ("extended term(s)") at an adjusted rental calculated as provided in Subparagraph B below on the condition that: (a) Lessee has given to Lessor written notice of exercise of that option ("option notice") at least six (6) months before expiration of the initial term or extended term(s), as the case may be. (b) Lessee is not in default in the performance of any of the terms and conditions of the Lease on the date of giving the option notice, and Lessee is not in default on the date that the extended term is to commence. B. Monthly rent for the extended term shall be as follows: Option 1 $120,565.00/mo/NNN Option 2 $124,181.00/mo/NNN 5. Security Deposit. Not applicable. 6. Use of the Premises. The Premises shall be used exclusively for the purpose of general office, R&D and lab use for computer related products. Lessee shall not use or permit the Premises, or any part thereof, to be used for any purpose or purposes other than the purpose for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which will increase the existing rate of insurance upon the building in which the Premises are located, or cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall not commit or suffer to be committed any waste upon the Premises; nor, without limiting the generality of the foregoing, shall Lessee allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose. Lessee shall not place any harmful liquids in the drainage system. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the building proper except in trash containers placed inside exterior enclosures designated for that purpose by Lessor, or inside the building proper where designated by Lessor. No materials, supplies, equipment, finished or semi-finished products, raw materials, or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building proper that causes a nuisance or violates and applicable governmental codes or regulations; Lessee shall comply with all the covenants, conditions, and/or restrictions ("C.C.&R.'s") affecting the Premises. Lessor represents to Lessee that soil and groundwater remediation and testing have been performed on the Premises by a previous tenant, Xerox Corporation ("Xerox") and that Xerox has caused certain releases of Toxic or Hazardous Materials to soil and groundwater at, on, and beneath the Premises. For purposes of this paragraph 6 "Toxic or Hazardous Materials" shall mean any product, substance, chemical, material or waste whose presence, nature, quality and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect, is either 3 20 (i) potentially injurious to the public health, safety or welfare, the environment, or the leased premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessee and Lessor to any governmental agency or third party under any applicable statute or common law theory. Toxic or Hazardous Materials shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessor also represents that Xerox is in final stages of groundwater sampling required by the Regional Water Quality Control Board ("RWQCB") and that site closure is pending. Xerox has provided an indemnification to Lessor as owner of the Premises against liability arising in connection with any soil or groundwater contamination caused by Xerox. Lessor shall provide a copy of the Xerox indemnification to Lessee. In addition, Lessor shall indemnify, defend and hold harmless Lessee, directors, officers, employees, lenders, and successors against all claims, obligations, liabilities, demands, damages, judgments, costs and expenses, including reasonable attorneys' fees arising from or in connection with the release or presence of any Toxic or Hazardous Materials at, on, under, beneath, or emanating from the Premises prior to Lessee's occupancy of the Premises. Lessee represents to Lessor that it will not permit the use or storage on the Premises of Toxic or Hazardous Materials, excluding, however, basic janitorial, maintenance and office supplies, and materials commonly used in connection with Lessee's business as described in Paragraph 6 hereof. Lessee shall indemnify, defend, and hold Lessor and its partners, directors, officers, employees, lenders, successors from and against all claims, obligations, liabilities, demands, damages, judgments and costs, including reasonable attorneys' fees arising from or in connection with the release or presence of Toxic or Hazardous Materials on, under, or about the Premises during the Lessee's occupancy of the Premises. Lessee's and Lessor's obligations hereunder shall survive the termination of this Lease. Lessor shall have the right, upon reasonable advance written notice to Lessee, to inspect, investigate, sample and/or monitor (collectively, an "Inspection") the Premises to the extent reasonably necessary to determine whether Lessee is complying with the terms of this Lease with respect to Hazardous Materials. In connection with an Inspection, Lessor shall not interfere with the operation of Lessee's business on the Premises, or Lessee's use and enjoyment of the Premises, and shall comply with all reasonable safety and business security restrictions of Lessee. Lessee shall have the right, but not obligation, to accompany Lessor during an Inspection and to obtain duplicates of any samples taken. All costs incurred by Lessor pursuant to this paragraph shall be the responsibility of Lessor, unless an Inspection discloses the presence of Hazardous Materials and it is shown that Lessee is in violation of the covenants contained in this Paragraph 6, in which event such costs shall be reimbursed by Lessee to Lessor within fifteen (15) days after Lessor notifies Lessee of the obligations hereunder. If Lessee causes or knowingly permits a release of Hazardous Materials at the Premises, Lessee shall perform such investigations, undertake such monitoring of site conditions, and perform such clean-up, containment, restoration, removal and other remedial work (collectively "Remedial Work") as is required under and in compliance with all applicable federal, state or local law, statute, regulation, rule, ordinance, permit, license, order, requirement, agreement or approval, of any determination, judgement, directive or order of any executive or judicial authority at any federal, state or local level relating to pollution or the protection of the environment or public health and safety. All costs and expenses of such Remedial Work shall be paid by Lessee, including without limitation, the charges of contractors and consulting engineers. 7. Improvements: Lessor shall, at Lessor's sole cost, construct and provide interior and exterior improvements to the Premises as specified in the Space Plan attached as Exhibit "B-1" hereto and by this reference made a part hereof, and in conformance with the Schedule of Tenant Improvements attached as Exhibit "B-2" hereto and by this reference made a part hereof and the Final Plans to be developed and approved by Lessor and Lessee pursuant to this Paragraph 7. 4 21 A. Prior to the execution of this Lease, Lessee delivered to Lessor a preliminary space plan, showing the location of hardwalls and open office areas, together with Lessee's basic mechanical, electrical, and heating and air conditioning design requirements (the "Preliminary Plans"). Lessor shall cause to be prepared final plans and specifications for the improvements that are consistent with and are logical evolutions of the Preliminary Plans and consistent with Exhibit "B-1", and shall deliver the same to Lessee for its approval on or before October 4, 1995. If Lessee disapproves any portion of such plans and specifications, then the parties shall confer and negotiate in good faith to reach agreement on the final plans and specifications. Such final plans and specifications shall be approved by Lessee on or before October 2, 1995. As soon as the final plans, inclusive of design drawings and specifications, are approved by Lessee, four (4) copies of such final plans and specifications shall be initialled and dated by Lessor and Lessee, and Lessor shall submit such final plans and specifications and working drawings to all appropriate governmental agencies for approval. Lessor shall obtain the building permit for the improvements by December 1, 1995. Immediately after all such governmental approvals have been obtained, the final plans and specifications so approved (including and governmentally required changes), and all changes orders specifically permitted by this Agreement, are referred to herein as the "Final Plans" and shall become part of this Lease as though set forth in full. B. Once the Final Plans have been finally approved by Lessor and Lessee, neither Lessor nor Lessee shall have the right to order extra work or change orders with respect to the construction of the improvements without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. All extra work or change orders requested by either party shall be made in writing, shall specify the amount of delay or the time saved resulting therefrom, shall specify any added or reduced cost resulting therefrom, shall specify whether Lessee or Lessor shall be responsible for extra or reduced cost, and shall become effective and a part of the Final Plans once approved in writing by both parties. In the event of any excess costs created by Lessee, Lessee shall pay to Lessor said costs on the Commencement Date of the Lease. Should there be any cost savings created by Lessee, Lessee's rental account shall be credited an amount equal to the cost savings, such credit to be applied to the second month's rent. C. As soon as the Final Plans have been developed as provided above, and all necessary governmental approvals have been obtained, Lessor shall cause construction of the improvements to be commenced and diligently prosecuted to completion so that the improvements may be substantially completed and the Certificate of Occupancy may be obtained on or before February 9, 1996, but without representation or warranty as to when the improvements will be completed. D. Lessor shall provide Lessee access and entry to the Premises on or before January 5, 1996 to permit Lessee to commence rough installation of Lessee's communication system, and on or before February 2, 1996 to permit Lessee to commence installation of cubical panels and modular furniture. Lessee shall conduct its installation work in a manner that will cause the least interference with Lessor's construction work. E. As soon as Lessor's improvements are substantially completed (i.e., completed except for punchlist items which do not prevent Lessee from using the Premises for its intended use), Lessor and Lessee shall together walk through and inspect the improvements, to identify all uncompleted or defective construction. After such inspection has been completed, the parties shall mutually agree upon and execute a list of all "punchlist" items which are to be corrected by Lessor. Lessor shall use its best efforts to complete and/or repair punchlist items within thirty (30) days after execution of said punchlist. Lessee shall have the right to submit to Lessor one additional punchlist of incomplete or defective items within thirty (30) days after Commencement Date. Lessor shall use its best efforts to complete and/or repair punchlist items within thirty (30) days after delivery of said additional punchlist. 5 22 Lessee shall not be obligated to accept possession of the Premises unless and until the improvements installed, by Lessor as outlined on Exhibits B-1 and B-2, are substantially completed and Lessor has delivered to Lessee a true and correct copy of a validly issued Certificate of Occupancy for the Premises. F. Lessor hereby represents that, upon completion, the improvements constructed by Lessor will be in compliance with all applicable laws, ordinances, orders, rules, permits, requirements and regulations of any federal, state, country or municipal government and any department, subdivision, bureau or office thereof, or of any other governmental, public or quasi-public authorities, including, without limitation, requirements of Title 24 and Title III of the Americans With Disabilities Act of 1990, 42 U.S.C. & 12101 et. seq., and the regulations promulgated thereunder. G. Lessor warrants for one (1) year after lease commencement, the newly installed HVAC and electrical systems inclusive of transformer. Lessor shall also warrant that Lessor's insurance covers mechanical failure of the main electrical panel. These warranties regarding the electrical systems and panel shall be void in the event that Lessee is the cause of any failure of said electrical systems or panel. Lessor shall warrant the improvements constructed by Lessor against defects in material and workmanship for a period of one (1) year. Lessee's acceptance of the Premises or submission of a punchlist shall not be deemed a waiver of Lessee's right to have defects in the improvements constructed by Lessor repaired at no cost to Lessee. Lessee shall give notice to Lessor whenever any such defect becomes reasonably apparent during the first year of the Lease term, and Lessor shall repair the defect as soon as practical. Lessor's sole obligation shall be either to repair or replace, as Lessor determines appropriate, any defect which is warranted hereunder. Lessee agrees that Lessor shall not be liable for consequential damages arising as a result of a defect warranted hereunder. Lessor shall inform Lessee of all written equipment warranties existing in favor of Lessor which affect any equipment included in the improvements, as to which Lessee has the obligation to repair or maintain. Lessor shall reasonably cooperate with Lessee in enforcing such warranties and in bringing any suit that may be necessary to enforce liability with regard to any defective operation or equipment, or at Lessor's election, Lessor will assign such warranties to Lessee. 8. Taxes and Assessments. A. Lessee shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed upon or against Lessee's fixtures, equipment, furnishings, furniture, appliances, and personal property installed or located on or within the Premises. Lessee shall cause said fixtures, equipment, furnishings, furniture, appliances, and personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement from Lessor setting forth the taxes applicable to Lessee's property. B. All property taxes or assessments levied or assessed by or hereafter levied or assessed by any governmental authority against the Premises or any portion of such taxes or assessments which becomes due or accrued during the term of this Lease shall be paid by Lessor. Lessee shall pay to Lessor on a semi-annual basis the amount of such taxes or assessments within ten (10) business days of receipt of Lessor's invoice demanding such payment, but not sooner than ten (10) days prior to tax installment delinquency date. Lessee's liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. 6 23 9. Insurance. A. Indemnity. Lessee agrees to indemnify and defend Lessor against and hold Lessor harmless from any and all demands, claims, causes of action, judgments, obligations, or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys fees) on account of, or arising out of, the condition, excluding construction defects, use, or occupancy of the Premises. This Lease is made on the express condition that Lessor shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause, in any way connected with the condition, use, or occupancy of the Premises, specifically including, without limitation, any liability for injury to the person or property of Lessee, its agents, officers, employees, licensees, and invitees. B. Liability Insurance. Lessee shall, at its expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Lessor and Lessee, with cross-liability endorsements, against any liability arising out of the condition, use, or occupancy of the Premises and all areas appurtenant thereto, including parking areas. Such insurance shall be in an amount satisfactory to Lessor of not less than one million dollars ($1,000,000) for bodily injury or death as a result of one occurrence, and five hundred thousand dollars ($500,000) for damage to property as a result of any one occurrence. The insurance shall be with companies approved by Lessor, which approval Lessor agrees not to withhold unreasonably. Prior to possession, Lessee shall deliver to Lessor a certificate of insurance evidencing the existence of the policy which (1) names Lessor as an additional insured, (2) shall not be canceled or altered without thirty (30) days' prior written notice to lessor, (3) insures performance of the indemnity set forth in Section A of Paragraph 9, and (4) coverage is primarily and any coverage by Lessor is in excess thereto. C. Property Insurance. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises, in the amount of the full replacement value thereof. Lessee shall pay to Lessor the cost of said insurance within ten (10) business days of Lessee's receipt of Lessor's invoice demanding such payment. Lessee acknowledges that such insurance procured by Lessor shall contain a deductible which reduces Lessee's cost for such insurance, and, in the event of loss or damage, Lessee shall be required to pay to Lessor the amount of such deductible. Lessor does not currently carry earthquake insurance. However, Lessor reserves the right to do so should it become available at commercially reasonable rates. Should Lessor obtain earthquake insurance, Lessee shall not be obligated to contribute to the cost of such insurance more than in amount equal to two (2) times the then annual cost of fire and "all-risk" insurance per year. D. Lessee and Lessor hereby release each other, and its partners, officers, agents, employees, and servants, from any and all claims, demands, loss, expense, or injury to the Premises or to the furnishings, fixtures, equipment, inventory, or other property of Lessee in, about, or upon the Premises, which is caused by or results from perils, events, or happenings which are the subject of insurance in force at the time of such loss. 10. Reimbursable Expenses and Utilities. Lessee shall pay for all water, gas, light, heat, power, electricity, telephone, trash removal, landscaping, sewer charges, and all other services, including normal and customary property management fees to be capped at three percent (3%) of the net rents, supplied to or consumed on the Premises. In the event that any such services are billed directly to Lessor, then Lessee shall pay Lessor for such expenses within ten (10) business days of Lessee's receipt of Lessor's invoice demanding payment. 7 24 11. Repairs and Maintenance. A. Subject to provisions of paragraph 15, Lessor shall keep and maintain in good order, condition and repair the structural elements of the Premises including the roof, roof membrane, paving, floor slab, foundation, exterior walls, landscaping, irrigation and elevators. Lessor shall make such repairs, replacements, alterations or improvements as Lessor deems reasonably necessary with respect to such structural elements and Lessee shall pay to Lessor, within ten (10) business days of Lessor's invoice to Lessee therefor, Lessee's pro-rata share of such repairs, replacements, alterations or improvements; provided, however, that replacement and improvement costs shall be amortized over the useful life of such replacements or improvements, and Lessee shall be obligated to pay, as additional rent, only the amount which coincides with the remaining term of the Lease. Notwithstanding the foregoing, if the reason for any repair, replacement, alteration or improvement is caused by Lessee or arises because of a breach of Lessee's obligations under this Lease, then Lessee shall pay 100% of the costs or expense to remedy the same. B. Except as expressly provided in Subparagraph A above, Lessee shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including, without limitation, the windows, window frames, plate glass, glazing, truck doors, doors, all door hardware, interior of the Premises, interior walls and partitions, and electrical, plumbing, lighting, heating, and air conditioning systems in good and sanitary order, condition, and repair. Lessee shall, at all times during the Lease term and at his expense, have in effect a service contract for the maintenance of the heating, ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and maintenance contractor approved by Lessor which provides for periodic inspection and servicing at least once every three (3) months during the term hereof. Lessee shall further provide Lessor with a copy of such contract and all periodic service reports. Should Lessee fail to maintain the Premises or make repairs required of Lessee hereunder forthwith upon notice from Lessor, Lessor, in addition to all other remedies available hereunder or by law, and without waiving any alternative remedies, may make the same, and in that event, Lessee shall reimburse Lessor as additional rent for the cost of such maintenance or repairs on the next date upon which rent becomes due. Lessee hereby expressly waives the provision of Subsection 1 of Section 1932, and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Lessor, as provided in Section 942 of said Civil Code. 12. Alterations and Additions. Lessee shall not make, or suffer to be made, any alterations, improvements, or additions in, on, or about, or to the Premises or any part thereof, without prior written consent of Lessor and without a valid building permit issued by the appropriate governmental authority, except for non-structural alterations that do not exceed $50,000 in cost and that do not affect the electrical or mechanical systems and do not penetrate any structural element of the building. Lessor retains, at his sole option, the right to retain a General Contractor of his own choosing to perform all repairs, alterations, improvements, or additions in, on, about, or to said Premises or any part thereof. As a condition to giving such consent, Lessor may require that Lessee agree to remove any such alterations, improvements, or additions at the termination of this Lease, and to restore the Premises to their prior condition. At the time Lessee requests Lessor's approval for any alteration or addition, Lessee shall also request that Lessor determine if such alteration or addition will be required to be removed at the expiration of Lease. Any alteration, addition, or improvement to the Premises, shall become the property of Lessor upon installation, and shall remain upon and be surrendered with the Premises at the termination of this Lease. Alterations and additions which are not to be deemed as trade fixtures include heating, lighting, 8 25 electrical systems, air conditioning, partitioning, electrical signs, carpeting, or any other installation which has become an integral part of the Premises. In the event that Lessor consents to Lessee's making any alterations, improvements,, or additions, Lessee shall be responsible for the timely posting of notices of non-responsibility on Lessor's behalf, which shall remain posted until completion of the alterations, additions, or improvements. Lessee's failure to post notices of non-responsibility as required hereunder shall be a breach of this Lease. If, during the term hereof, any alteration, addition, or change of any sort through all or any portion of the Premises or of the building of which the Premises form a part, is required by law, regulation, ordinance, or order of any public agency, Lessee, at its sole cost and expense, shall promptly make the same. 13. Acceptance of the Premises and Covenant to Surrender. By entry (excluding Lessee's early access to the Premises as referred to in Paragraph 7D above) and taking possession of the Premises pursuant to this Lease, Lessee accepts the Premises as being in good and sanitary order, condition, and repair, and accepts the Premises in their condition existing as of date of such entry, and Lessee further accepts any tenant improvements to be constructed by Lessor, if any, as being completed in accordance with the plans and specifications for such improvements. In each case, excluding punchlist items noted or described in Paragraph 7, code compliance as of the Commencement Date of Lease, blatant defects, and warranty work that may be required of a Lessor. Lessee agrees on the last day of the term hereof, or on sooner termination of this Lease, to surrender the Premises, together with all alterations, additions, and improvements which may have been made in, to, or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary order, condition, and repair, excepting for such wear and tear as would be normal for the period of the Lessee's occupancy, and excepting Acts of God, casualty, and condemnation. Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Lessee. Lessee further agrees that at the end of the term or sooner termination of this Lease, Lessee, at its sole expense, shall have the carpets steam cleaned, the walls and columns painted, the flooring waxed, any damaged ceiling tile replaced, the windows cleaned, the drapes cleaned, and any damaged doors replaced, if necessary to restore the Premises to its original condition, normal wear and tear excepted. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. 14. Default. In the event of any breach of this Lease by the Lessee, the Lessor has the option of (1.) removing all persons and property from the Premises and repossessing the Premises, in which case any of the Lessee's property which the Lessor removes from the Premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of, Lessee; or (2.) allowing the Lessee to remain in full possession and control of the Premiss. If the Lessor chooses to repossess the Premises, the Lease will automatically terminate in accordance with the provisions of the California Civil Code, Section 1951.2. In the event of such termination of the Lease, the Lessor may recover from the Lessee: (1.) the worth at the time of award of the unpaid rent which had been earned at the time of termination, including interest at the maximum rate an individual is permitted by law to charge; (2.) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided, including interest at the maximum rate an individual is permitted by law to charge; (3.) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and 9 26 (4.) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which, in the ordinary course of things, would be likely to result therefrom. "The worth at the time of award," as used in (1.) and (2.) of this Paragraph, is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of award," as used in (3.) of this Paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). If the Lessor chooses not to repossess the Premises, but allows the Lessee to remain in full possession and control of the Premises, then, in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the Lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the Lease, as specified in the Lease. For the purpose of this paragraph, the following do not constitute a termination of Lessee's right to possession: (1.) acts of maintenance or preservation, or efforts to relet the property; (2.) the appointment of a receiver on the initiative of the Lessor to protect his interest under this Lease. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises, including, without limitation, any unamortized brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of tis Lease. Lessee shall pay to Lessor the rent due under this Lease on the dates the rent is due, less the rent Lessor receives from any reletting. No act by Lessor allowed by this Section shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease. After Lessee's default and for as long as Lessor does not terminate Lessee's right to possession of the Premises, if Lessee obtains Lessor's consent, Lessee shall have the right to assign or sublet its interest in this Lease, but Lessee shall not be released from liability. Lessor's consent to a proposed assignment or subletting shall not be unreasonably withheld. If Lessor elects to relet the Premises as provided in this Paragraph, rent that Lessor receives from reletting shall be applied to the payment of: (1.) any indebtedness from Lessee to Lessor other than rent due from Lessee; (2.) all costs, including for maintenance, incurred by Lessor in reletting; (3.) rent due and unpaid under this Lease. After deducting the payments referred to in this Paragraph, any sum remaining from the rent Lessor receives from reletting shall be held by Lessor and applied in payment of future rent as rent becomes due under this Lease. In no event shall Lessee by entitled to any excess rent received by Lessor. If, on the date rent is due under this Lease, the rent received from reletting is less than the rent due on that date, Lessee shall pay to Lessor, in addition to the remaining rent due, all costs, including for maintenance, Lessor incurred in reletting that remain after applying the rent received from the reletting, as provided in this Paragraph. Lessor, at any time after Lessee commits a default, can cure the default at Lessee's cost. If Lessor at any time, by reason of Lessee's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Lessor shall be due immediately from Lessee to Lessor at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Lessor until Lessor is reimbursed by Lessee. The sum, together with interest on it, shall be additional rent. Rent not paid when due shall bear interest at the maximum rate an individual is permitted by law to charge from the date due until paid. 15. Destruction. In the event the Premises are destroyed in whole or in part from any cause, Lessor may, at its option, (1.) rebuild or restore the Premises to their condition prior to the damage or destruction or (2.) terminate the Lease. If Lessor does not give Lessee notice in writing within thirty (30) days from the destruction of the Premises of its election neither to rebuild and restore the Premises, or to terminate this Lease, Lessor shall be deemed to have elected to rebuild or restore them, in which event Lessor agrees, 10 27 at its expense, promptly to rebuild or restore the Premises to its condition prior to the damage or destruction. If Lessor does not complete the rebuilding or restoration within one hundred fifty (150) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Lessee or because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond control of Lessor, (provided however such extension is not more than thirty (30) days), then Lessee shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Lessor. Lessor's obligation to rebuild or restore shall not include restoration of Lessee's trade fixtures, equipment, merchandise, or any improvements, alterations, or additions made by Lessee to the Premises. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Lessee hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code. Lessee shall have the right to terminate this Lease in the event the Premises are damaged or destroyed and: (i) in the reasonable opinion of Lessor's architect or contractor, the restoration of the Premises cannot be substantially completed within one hundred fifty (150) days after the event of damage or destruction, which election shall be made by written notice to Lessor within thirty (30) days after Lessee receives from Lessor the estimate of the time needed to complete repair or restoration of the Premises, or (ii) the restoration of the Premises is not actually substantially completed within one hundred fifty (150) days after the event of damage or destruction, which election shall be made by written notice to Lessor within thirty (30) days after the expiration of said one hundred fifty (150) day period but before the repair or restoration is actually completed; or (iii) the event of damage or destruction occurs in the last twelve (12) months of the Lease term. If Lessee so elects to terminate the Lease, the Lease shall terminate as of the date that Lessor elects not to proceed with the restoration and/or repairs. 16. Condemnation. If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain, or private purchase in lieu thereof, and a part thereof remains, which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after taking such bears to the value of the entire Premises prior to such taking. Lessor shall have the option to terminate this Lease in the event that such taking causes a reduction in rent payable hereunder by fifty percent (50%) or more. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, as reasonably necessary for Lessee's conduct of its business as contemplated in this Lease, this Lease shall thereupon terminate. If a part of all of the Premises be taken, all compensation awarded upon such taking shall go the Lessor, and the Lessee shall have no claim thereto, and the Lessee hereby irrevocably assigns and transfers to the Lessor any right to compensation or damages to which the Lessee may become entitled during the term hereof by reason of the purchase or condemnation of all or a part of the Premises, except that Lessee shall have the right to recover its share of any award or consideration for (1.) moving expenses; (2.) loss or damage to Lessee's trade fixtures, furnishings, equipment, and other personal property; and (3.) business goodwill. Each party waives the provisions of the Code of 11 28 Civil Procedure. Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. 17. Free from Liens. Lessee shall (1.) pay for all labor and services performed for materials used by or furnished to Lessee, or any contractor employed by Lessee with respect to the Premises, and (2.) indemnify, defend, and hold Lessor and the Premises harmless and free from any liens, claims, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for materials used by or furnished to Lessee or any contractor employed by Lessee with respect to the Premises, and (3.) give notice to lessor in writing five (5) days prior to employing any laborer or contractor to perform services related, or receiving materials for use upon the Premises, and (4.) shall post, on behalf of Lessor, a notice of non-responsibility in accordance with the statutory requirements of the California Civil Code, Section 3904, or any amendment thereof. In the event an improvement bond with a public agency in connection with the above is required to be posted, Lessee agrees to include Lessor as an additional obligee. 18. Compliance with Laws. Lessee shall, at its own cost, comply with and observe all requirements of all municipal, county, state, and federal authority now in force, or which may hereafter be in force, pertaining to the use and occupancy of the Premises. Notwithstanding anything contained in Paragraphs 11, 12 and 18 of Lease, if it becomes necessary to make capital improvements required by laws enacted or legal requirements imposed by governmental agency(ies), then if such legal requirement is not imposed because of Lessee's specific use of the Premises and is not "triggered" by Lessee's alterations or Lessee's application for a building permit or any other governmental approval (in which instance Lessee shall be responsible for 100% of the cost of such improvement). Lessor shall be responsible for constructing such improvement and Lessee shall be responsible for its proportional share of the cost for said improvement, amortized over the useful life of such improvement that coincides with the remaining Lease term. 19. Subordination. Lessee agrees that this Lease shall, at the option of Lessor, be subjected and subordinated to any mortgage, deed of trust, or other instrument of security, which has been or shall be placed on the land and building, or land or building of which the Premises form a part, and this subordination is hereby made effective without any further act of Lessee or Lessor. The Lessee shall, at any time hereinafter, on demand, execute any instruments, releases, or other documents that may be required by any mortgagee, mortgagor, trustor, or beneficiary under any deed of trust, for the purpose of subjecting or subordinating this Lease to the lien of any such mortgage, deed of trust, or other instrument of security, provided that such agreement complies with Lessee's occupancy. If Lessee fails to execute and deliver any such documents or instruments, Lessee irrevocably constitutes and appoints Lessor as Lessee's special attorney-in-fact to execute and deliver any such documents or instruments. 20. Abandonment. If Lessee shall dispossessed by process of law, any personal property belonging to Lessee and left on the Premises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor; Lessee shall not be deemed to have abandoned or vacated the Premises so long as Lessee continues to pay all rents as and when due, and otherwise performs pursuant to the terms and conditions of this Lease. 21. Assignment and Subletting. Lessee's interest in this Lease is not assignable, by operation of law or otherwise, nor shall Lessee have the right to sublet the Premises, transfer any interest of Lessee's therein, or permit any use of the Premises by another party, without the prior written consent of Lessor to such assignment, subletting, or transfer of use, which consent shall not be withheld or delayed unreasonably. 12 29 If Lessee is a partnership, a withdrawal or change, voluntary, involuntary, or by operation of law, of any partner(s) owning fifty percent (50%) or more of the partnership, of the dissolution of the partnership, shall be deemed as a voluntary assignment. If Lessee consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from one person to the other or from a majority of persons to the others, shall be deemed a voluntary assignment. If Lessee is a corporation, any dissolution, merger, consolidation, or other reorganization of Lessee, or the sale or other transfer of a controlling percentage of the capital stock of Lessee, or sale of at least fifty-one percent (51%) of the value of the assets of Lessee, shall be deemed a voluntary assignment. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty-one percent (51%) of the total combined voting power of all classes of Lessee's capital stock issued, outstanding, and entitled to vote for the election of directors. This paragraph shall not apply to corporations the stock of which is traded through an exchange or over the counter. In the event of any subletting or transfer which is consented to, or not consented to, by Lessor, a subtenant or transferee agrees to pay monies or other consideration, whether by increased rent or otherwise, in excess of or in addition to those provided for herein, then all of such excess or additional monies or other consideration shall be paid solely to Lessor, and this shall be one of the conditions to obtaining Lessor's consent. Lessee immediately and irrevocably assigns to Lessor, as security for Lessee's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted by this Lease, and Lessor, as assignee and as attorney-in-fact for Lessee, or a receiver for Lessee appointed on Lessor's application, may collect such rent and apply it toward Lessee's obligations under this Lease; except that, until the occurrence of an act of default by the Lessee, Lessee shall have the right to collect such rent. A consent to one assignment, subletting, occupation, or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupation, or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of the Lessor, terminate this Lease. Lessor's waiver or consent to any assignment or subletting hereunder shall not relieve Lessee from any obligation under this Lease unless the consent shall so provide. If Lessee requests Lessor to consent to a proposed assignment or subletting, Lessee shall pay to Lessor, whether or not consent is ultimately given, Lessor's reasonable attorneys' fees incurred in conjunction with each such request. 22. Parking Charges. Lessee agrees to pay upon demand any parking charges, surcharges, or any other cost hereafter levied or assessed by local, state, or federal governmental agencies in connection with the use of the parking serving the Premises, including, without limitation, parking surcharged imposed by or under the authority of the Federal Environmental Protection Agency. 23. Insolvency or Bankruptcy. Either (1.) the appointment of a receiver to take possession of all or substantially all of the assets of Lessee, or (2.) a general assignment by Lessee for the benefit of creditors, or (3.) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee. Upon the happening of any such event, this Lease shall terminate ten (10) days after written notice of termination from Lessor to Lessee. This section is to be applied consistent with the applicable state and federal laws in effect at the time such event occurs. 24. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor to (1.) execute and deliver to Lessor any documents, including estoppel certificates presented to Lessee by Lessor, (a.) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (b.) 13 30 acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, and (c.) evidencing the status of the Lease as may be required either by a lender making a loan to Lessor, to be secured by deed of trust or mortgage covering the Premises, or a purchaser of the Premises from Lessor, and (2.) to deliver to Lessor an Annual Report and a 10K. Lessee's failure to deliver an estoppel certificate within ten (10) business days following such request shall constitute a default under this Lease and shall be conclusive upon Lessee that this Lease is in full force and effect and has not been modified except as may be represented by Lessor. If Lessee fails to deliver the estoppel certificates within the three (3) days, Lessee irrevocably constitutes and appoints Lessor as its special attorney-in-fact to execute and deliver the certificate to any third party. 25. Surrender of Lease. The voluntary or other surrender of this Lease by Lessee shall not work a merger nor relieve Lessee of any of Lessee's obligations under this Lease, and shall, at the option of Lessor, terminate all or any existing Subleases or Subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such Subleases or Subtenancies. 26. Attorney's Fees. If, for any reason, any suit be initiated to enforce any provision of this Lease, the prevailing party shall be entitled to legal costs, expert witness expenses, and reasonable attorneys' fees, as fixed by the court. 26. Notices. All notices to be given to Lessee may be given in writing, personally, or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at the said Premises, whether or not Lessee has departed from, abandoned, or vacated the Premises. Any notice or document required or permitted by this Lease to be given Lessor shall be addressed to Lessor at the address set forth below, or at such other address as it may have theretofore specified by notice delivered in accordance herewith: LESSOR: WTA-Bowers 900 Welch Road, Suite 10 Palo Alto, California 94304 LESSEE: National Semiconductor Corporation 1120 Kifer Road, M/S 10-460 Sunnyvale, CA 94086 National Semiconductor Corporation 2805 Bowers Avenue Santa Clara, CA 95054 28. Transfer of Security. Not applicable. 29. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant, or condition, herein contained shall not be deemed to be a waiver of such term, covenant, or condition, or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of rent hereunder by lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 30. Holding Over. Any holding over after the expiration of the term or any extension thereof, with the consent of lessor, shall be construed to be a tenancy from month-to-month, at a rental of one and 14 31 one-quarter (1 1/4) times the previous month's rental rate per month, and shall otherwise be on the terms and conditions herein specified, so far as applicable. 31. Covenants, Conditions and Restrictions. Not applicable. 32. Limitation on Lessor's Liability. If Lessor is in default of this Lease, and, as a consequence, Lessee recovers a money judgment against Lessor, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title, and interest of Lessor in the Premises, or in the building, other improvements, and land of which the Premises are part, and out of rent or other income from such real property receivable by Lessor or out of the consideration received by Lessor from the sale or other disposition of all or any part of Lessor's right, title, and interest in the Premises or in the building, other improvements, and land of which the Premises are part. Neither Lessor nor any of the partners comprising the partnership designated as Lessor shall be personally liable for any deficiency. 33. Quiet Possession. Lessor covenants that the Lessee, on paying the rent and performing the covenants aforesaid, shall and may peacefully and quietly have, hold and enjoy the Premises for the term aforesaid. 34. Miscellaneous. A. Time is of the essence of this Lease, and of each and all of its provisions. B. LEFT BLANK C. LEFT BLANK D. Lessee's such reasonable use of parking areas shall not exceed that percent of the total parking areas which is equal to the ratio which floor space of the Premises bears to floor space of the building. E. The term "assign" shall include the term "transfer." F. The invalidity or unenforceability of any provision of this Lease shall not affect the validity or enforceability of the remainder of this Lease. G. All parties hereto have equally participated in the preparation of this Lease. H. The headings and titles to the Paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. I. Lessor has made no representation(s) whatsoever to Lessee (express or implied) except as may be expressly stated in writing in this Lease instrument. J. This instrument contains all of the agreements and conditions made between the parties hereto, and may not be modified orally or in any other manner than by agreement in writing, signed by all of the parties hereto or their respective successors in interest. 15 32 K. It is understood and agreed that the remedies herein given to Lessor shall be cumulative, and the exercise of any one remedy by Lessor shall not be to the exclusion of any other remedy. L. The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, and administrators, and assigns of all the parties hereto; and all of the parties hereto shall jointly and severally be liable hereunder. M. This Lease has been negotiated by the parties hereto and the language hereof shall not be construed for or against either party. N. All exhibits to which reference is made are deemed incorporated into this Lease, whether covenants or conditions, on the part of Lessee shall be deemed to be both covenants and conditions. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first above-written. LESSOR: LESSEE: WTA-BOWERS NATIONAL SEMICONDUCTOR CORPORATION BY: /s/ HOWARD WHITE BY: /s/ DAVID S. DAHMEN ---------------------------- ---------------------------- DAVID S. DAHMEN ITS: GEN PARTNER ITS: TREASURER --------------------------- --------------------------- DATE: 10/24/95 DATE: 10/16/95 -------------------------- -------------------------- 16 33 [FLOOR PLAN] BOWERS AVENUE EXHIBIT A 34 [Design Build BID Set] EXHIBIT B-1 35 [FLOOR PLAN] 36 EXHIBIT B-2 SCHEDULE OF TENANT IMPROVEMENTS NATIONAL SEMICONDUCTOR CORPORATION 2805 BOWERS AVENUE, SANTA CLARA EXTERIOR - -------- * Install storefront glass on first floor as shown on Exhibit B-1 * Paint all exterior - color to be mutually agreed on by Lessor and Lessee * Parking lot upgrade, including patching, sealing and striping * Refurbish landscape and irrigation * Concrete sidewalk repairs as necessary to comply with ADA * ADA upgrades to exterior as required to comply with code * New sprayed-in-place polyurethane foam/elastomeric coating roofing system with 1 year guarantee * Repair, if necessary, exterior lighting INTERIOR - -------- * Lessor will provide construction design per NSC's space plan (Exhibit B-1). Both parties shall use their best efforts to expedite and approve all design drawings. * Shell electrical, 2500 amp, 480/277 volt service with distribution to subpanels for NSC workstations as outlined on Exhibit B-1 * Fire sprinkler modifications as necessary (semi-recessed heads) * New walls, framing, HVAC and electrical to support NSC space plan shown on Exhibit B-1 * Replacement of HVAC system (including zoning of enclosed areas), 1 year warranty * Doors, frames and hardware per Exhibit B-1 * T-bar ceilings, 2x4 acoustic tiles as per Exhibit B-1 * Interior painting, color to be mutually agreed on by Lessor and Lessee * Hand rail upgrade per ADA * New flooring (allowance of $24 per yard), conductive flooring in labs and computer room (allowance of $7 per sq. ft.) * Millwork for coffee bars and lobby (allowance of $50,000) * Compliance with all applicable city, state and seismic codes * Upgrade of elevators with new carpet and ceiling and ADA compliance * 1 shower each in one set of first floor restrooms * Construct patio deck over existing loading dock outside cafeteria (allowance of $10,000) * Upgrade main lobby for displays (allowance of $10,000) * Provide overhead cable trays above T-bar ceilings as per Exhibit B-1 (allowance of $32,000) NOT INCLUDED - ------------ * All telephone/data/communication equipment and installation * Security system * Furniture, fixtures and installation * Electrical connection and distribution to work stations * Compressed air and vacuum lines * All items not specifically listed herein and not shown on Exhibit B-1 INITIALS: DAVID S. DAHMEN, NATIONAL SEMICONDUCTOR CORPORATION HOWARD WHITE, WTA-BOWERS LLC 10/16/95 EX-10.52 4 QUOTA PURCHASE ASSIGNMENT AGREEMENT 1 EXHIBIT 10.52 -------------------------------- QUOTA PURCHASE AND ASSIGNMENT AGREEMENT BY AND AMONG MCAFEE ASSOCIATES, INC., MCAFEE DO BRASIL LTDA., COMPUSUL-CONSULTORIA E COMERCIO DE INFORMATICA LTDA., AND THE STOCKHOLDERS OF COMPUSUL-CONSULTORIA E COMERCIO DE INFORMATICA LTDA. APRIL 14, 1997 ------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I - THE PURCHASE.....................................................................1 1.1 Purchase and Sale...............................................................1 1.2 Delivery of Net Revenue Schedule................................................2 1.3 Allocation of Purchase Price Among Stockholders.................................2 1.4 Closing.........................................................................3 1.5 Currency........................................................................3 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF COMPUSUL AND STOCKHOLDERS.....................3 2.1 Organization of Compusul........................................................3 2.2 Capitalization..................................................................4 2.3 Authority, No Conflict, Required Filings and Consents...........................4 2.4 Compusul Financial Statements...................................................5 2.5 No Undisclosed Liabilities......................................................5 2.6 Accounts Receivable.............................................................5 2.7 Absence of Certain Changes or Events............................................6 2.8 Taxes...........................................................................7 2.9 Intellectual Property...........................................................8 2.10 Agreements, Contracts and Commitments.........................................10 2.11 Labor Difficulties; No Discrimination.........................................11 2.12 Trade Regulation..............................................................12 2.13 Litigation....................................................................12 2.14 Employee Benefit Plans........................................................12 2.15 Compliance with Laws..........................................................13 2.16 Governmental Authorizations and Regulations...................................13 2.17 Corporate Documents...........................................................13 2.18 No Misrepresentation..........................................................13 2.19 Restrictions on Business Activities...........................................13 2.20 No Brokers....................................................................13 2.21 Insurance.....................................................................13 2.22 Interested Party Transactions.................................................14 2.23 Books and Records.............................................................14 2.24 Government Contracts..........................................................14 2.25 Severance Arrangements........................................................14 2.26 Banking Relationships.........................................................15 2.27 Distribution Agreements.......................................................15 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF MCAFEE......................................15 3.1 Organization and Good Standing.................................................15 3.2 Authority, No Conflict, Required Filings and Consents..........................15 3.3 Litigation.....................................................................16 ARTICLE IV - CONDUCT OF BUSINESS............................................................17 4.1 Covenants of Compusul..........................................................17
i 3 4.2 Cooperation....................................................................18 4.3 Notice of Breach...............................................................19 ARTICLE V - ADDITIONAL AGREEMENTS...........................................................19 5.1 No Solicitation................................................................19 5.2 Compusul Consents..............................................................19 5.3 Access of Information..........................................................19 5.4 Legal Conditions to Purchase...................................................20 5.5 Public Disclosure..............................................................20 5.6 Additional Agreements, Reasonable Efforts......................................20 ARTICLE VI - CONDITIONS TO EXCHANGE.........................................................20 6.1 Conditions to Each Party's Obligation to Effect the Purchase...................20 6.2 Additional Conditions to Obligations of McAfee.................................21 6.3 Additional Conditions to Obligations of Compusul...............................22 ARTICLE VII - TERMINATION AND AMENDMENT.....................................................22 7.1 Termination....................................................................22 7.2 Effect of Termination..........................................................23 ARTICLE VIII - SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS........................23 8.1 Survival.......................................................................23 ARTICLE IX ESCROW AND INDEMNIFICATION......................................................24 9.1 Indemnity......................................................................24 9.2 Escrow Fund....................................................................24 9.3 Escrow Period..................................................................24 9.4 Protection of Escrow Fund......................................................25 9.5 Claims Upon Escrow Fund........................................................25 9.6 Objections to Claims...........................................................25 9.7 Resolution of Conflicts........................................................25 9.8 Distribution Upon Termination of Escrow Period.................................26 9.9 Former Compusul Stockholder Agent..............................................26 9.10 Actions of the Former Compusul Agent..........................................27 9.11 Third-Party Claims............................................................27 ARTICLE X- MISCELLANEOUS....................................................................28 10.1 Notices.......................................................................28 10.2 Interpretation................................................................30 10.3 Counterparts..................................................................30 10.4 Entire Agreement; No Third Party Beneficiaries................................30 10.5 Governing Law.................................................................30 10.6 Assignment....................................................................30 10.7 Attachments and Schedules.....................................................30 10.8 Severability..................................................................30 10.9 Fees and Expenses.............................................................30 10.10 Amendment....................................................................31 10.11 Extension, Waiver............................................................31
ii 4 10.12 Remedies of McAfee...........................................................31 10.13 Attorneys' Fees..............................................................31
SCHEDULE A - SCHEDULE OF STOCKHOLDERS EXHIBIT 1.1 - EARNOUT SCHEDULE EXHIBIT 6.1(C) - ESCROW AGREEMENT EXHIBIT 6.1.(D) - EMPLOYMENT AGREEMENT EXHIBIT 6.2(G) - NON-COMPETITION AGREEMENT EXHIBIT 6.2(J) - OPINION FROM STROETER, HALLACK, APOCALYPSE DISCLOSURE SCHEDULE "Pursuant to Item 601(b)(2) of Regulation S-K, the exhibits and schedules to this Quota Purchase Assignment Agreement have been omitted. Such exhibits and schedules will be submitted to the Securities and Exchange Commission upon request." iii 5 QUOTA PURCHASE AND ASSIGNMENT AGREEMENT This QUOTA PURCHASE AND ASSIGNMENT AGREEMENT (the "Agreement"), dated as of April 14, 1997, is entered into by and among McAfee Associates, Inc., a Delaware corporation ("McAfee"), McAfee do Brasil Ltda., a limited liability company duly incorporated under the Laws of Brazil, with head offices in the City of Sao Paulo, State of Sao Paulo, at Rua Boa Vista, 254, 7th floor, suite 721, enrolled with C.G.C. under No. 01.550.586/0001-20 ("Sub"), Compusul-Consultoria e Comercio de Informatica Ltda., a limited liability company with head offices in the City of Sao Paulo, State of Sao Paulo, at Rua Unapitinga, 81, enrolled with C.G.C. under No. 63.051.171/0001-60, ("Compusul"), and the stockholders of Compusul ("Stockholders"), all of whom are listed on the Schedule of Stockholders attached hereto as Schedule A. WHEREAS, the Stockholders own an aggregate of 210,000 quotas of the stock of Compusul (collectively, the "Compusul Stock"), constituting all of the issued and outstanding stock of Compusul; and WHEREAS, Sub desires to purchase all of the Compusul Stock, and the Stockholders desire to sell to Sub all the Compusul Stock for cash, subject to the terms and conditions of this Agreement (the "Purchase"). NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements, the parties agree as set forth below. ARTICLE I THE PURCHASE 1.1 Purchase and Sale. Subject to the terms and conditions of this Agreement, at the Closing (as defined below), each Stockholder agrees to sell, assign, and deliver to Sub that number of quotas of Compusul Stock set forth opposite such Stockholder's name on the Schedule of Stockholders, free and clear of all liens, claims, options, charges and encumbrances whatsoever, in exchange for the purchase price ("Purchase Price"), to be paid or payable by Sub to the stockholders for the Compusul Stock, which shall be up to Three Million Six Hundred Thousand Dollars ($3,600,000), consisting of the following: (a) Two Million Three Hundred Forty Thousand Dollars ($2,340,000) all of which shall be payable by check or wire transfer to the Stockholders at the Closing. This amount includes a Five Hundred and Ten Thousand Dollars ($510,000) paid by Sub in aggregate as compensation for the Non-Competition Agreement referred to in paragraph 6.2(g). Each Stockholder shall receive, as compensation for entering into the Non- 6 Competition Agreement, the amount of One Hundred and Seventy Thousand Dollars ($ 170,000) on the Closing Date; (b) Two Hundred Sixty Thousand Dollars ($260,000) , to be subject to adjustment as provided in Article IX below, payable by check or wire transfer to the Escrow Agent (as defined herein) in accordance with the provisions of Article IX and the term of the Escrow Agreement (as defined herein); (c) payable by check or wire transfer to the Stockholders, within 60 days after each of September 30, 1997, and March 31, 1998 (each an "Earnout Payment") provided that Compusul recognizes Net Revenue (as defined below) for the six-month period ending September 30, 1997 and March 31, 1998 that equals or exceeds the Target Net Revenue amount for such periods as set forth on the Earnout Schedule attached hereto as Exhibit 1.1. In order for any portion of the Earnout Payment to become payable by Sub, recognized Net Revenue for such period must be equal to or greater than 90% of the Target Net Revenue amount set forth on the Earnout Schedule. (i) If Compusul does not recognize at least 90% of the Target Net Revenue for such period, no Earnout Payment for such period shall become payable to the Stockholders. (ii) If the recognized Net Revenue for such period is equal to or greater than the 90% of Target Net Revenue but less than the Target Net Revenue then the amount of Earnout Payment payable by Sub to the Stockholders shall be as set forth on the Earnout Schedule. "Net Revenue" shall mean all revenue (i) recognized by Compusul on a monthly basis from customers less value added based taxes, duties and uncollectible amounts (including provisions and reserves therefor) and (ii) currently billable under the terms of its contract and payable within 30 days of billing. Net Revenue shall be recognized under this Agreement using Compusul historical recognition policy .In the event that after the Closing McAfee decides to alter Compusul's business strategy or practice, the parties undertake to enter into good faith negotiations to adapt to the extent necessary the Target Net Revenue. 1.2 Delivery of Net Revenue Schedule. As soon as possible after each of the dates set forth in Section 1.1(c) above but in no event later than ten (10) days thereafter, Compusul shall deliver to McAfee a Net Revenue Schedule setting forth the Net Revenue of Compusul for the six-month period ending on the applicable date set forth in Section 1.1(c). The Net Revenue Schedule shall be true and correct as of such period, shall be in accordance with generally accepted accounting practices of Brazil ("Brazil GAAP") applied on a basis consistent with previous periods, and shall be reviewed and approved by McAfee and, at McAfee's discretion, McAfee's independent accountants. Such review shall occur within twenty (20) days after receipt by McAfee of the Net Revenue Schedule. Failure of McAfee to respond within such twenty (20) day period shall be deemed acceptance by McAfee. 1.3 Allocation of Purchase Price Among Stockholders. The Purchase Price shall be allocated among the Stockholders pro rata in accordance with each Stockholder's percentage holding in Compusul as provided on the Schedule of Stockholders attached as Schedule A hereto. Any amounts of the Purchase Price which are adjusted in 2 7 accordance with the terms of this Agreement shall be allocated in accordance with such Stockholder's ownership percentage in Compusul as set forth on the Schedule of Stockholders. 1.4 Closing. The closing of the Purchase (the "Closing") will take place on a date to be specified by McAfee and Compusul which shall be no later than the second business day after satisfaction of the latest to occur of the conditions set forth in Article VI of this Agreement (the "Closing Date") at the offices of Pinheiro Neto Advogados, at Rua Boa Vista, 254, 9th Floor, in the City of Sao Paulo, S.P. , or such other place as agreed to in writing by McAfee and Compusul. Upon the Closing the parties shall execute the proper amendment to the Articles of Association of Compusul so as to reflect the transfer of Compusul Stock from each of the Stockholders to Sub. 1.5 Currency. The amounts in U.S. dollars are indicated herein for convenience purposes only. The amounts established in Clause 1.1(a) shall be paid in Brazilian currency, in accordance with the average commercial exchange rate published by the Central Bank of Brazil (SISBACEN) at 11a.m. on the Closing. The same rule shall apply to the amounts indicated in item 1.1.(b). The amounts established in Clause 1.1.(c) and Exhibit 1.1. shall be adjusted in accordance with the variation of the IGP-M (Indice Geral de Precos - Mercado) from this date until the date of their actual payment if so authorized under Brazilian law. Unless otherwise specified, all references in this Agreement "cash," "cent," "dollars," or "$" shall mean United States dollars. ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPUSUL AND STOCKHOLDERS Each of Compusul and the Stockholders hereby represent and warrant to McAfee that the statements contained in this Article II are true and correct, except as set forth in the disclosure schedule delivered by Compusul to McAfee on or before the date of this Agreement (the "Compusul Disclosure Schedule"). 2.1 Organization of Compusul. (a) Compusul is a corporation duly organized, validly existing and in good standing under the laws of Brazil, has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, assets (including intangible assets), financial condition or results of operations (a "Material Adverse Effect") of Compusul. (b) Compusul does not directly or indirectly own any equity or similar interest in, or any interest convertible into or purchasable or exercisable for an equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 3 8 2.2 Capitalization. (a) The capital stock of Compusul consists of 210,000 quotas and have been duly subscribed and paid up by the Stockholders. (b) The Stockholders own all of the outstanding quotas of Compusul Stock, free and clear of any liens, claims, encumbrances or proprietary interests of any third party. There are no obligations, contingent or otherwise, of Compusul to repurchase, redeem or otherwise acquire any quotas of Compusul Stock, or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. (c) There are no equity securities of any class of Compusul, or any security purchasable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. There are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which Compusul or any Stockholder is a party or by which any of them is bound obligating Compusul to issue, deliver or sell, or cause to be issued, delivered or sold, additional quotas of capital stock of Compusul or obligating Compusul to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement. There are no voting trusts or other agreements or understandings to which Compusul or any Stockholder is a party with respect to the voting of the capital stock. 2.3 Authority; No Conflict; Required Filings and Consents. (a) Compusul and the Stockholders have all requisite power, corporate or otherwise, and authority to enter into this Agreement and the other Transaction Documents to which they are a party and to carry out their respective obligations and consummate the transactions contemplated hereunder and thereunder. "Transaction Documents" shall mean this Agreement, the Escrow Agreement, the Noncompetition Agreements, the Employment Agreements, and such other documents, agreements or instruments contemplated hereunder or thereunder. The execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary action, corporate or otherwise, on the part of Compusul and the Stockholders. This Agreement has been duly executed and delivered by Compusul and the Stockholders and constitutes the valid and binding obligation of Compusul and the Stockholders, enforceable against each of them in accordance with its terms, except as such terms may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights and remedies generally and except as the indemnification provisions of Article IX hereto may be limited by principles of public policy. The other Transaction Documents, when duly executed and delivered by Compusul and the Stockholders, will constitute valid and binding obligations of Compusul and the Stockholders, enforceable in accordance with their respective terms, except as such terms may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights and remedies generally and except as the indemnification provisions of Article IX hereto may be limited by principles of public policy. (b) The execution and delivery of this Agreement and the other Transaction Documents by Compusul and the Stockholders do not, and the consummation of 4 9 the transactions contemplated by this Agreement and the other Transaction Documents will not, (i) conflict with, or result in any violation or breach of any provision of the Articles of Association of Compusul, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Compusul is a party or by which any of its properties or assets may be bound, or (iii) conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Compusul or any of its properties or assets, except in the case of (ii) and (iii) for any such breaches, conflicts, violations, defaults, terminations, cancellations, accelerations or losses of benefits which would not have a Material Adverse Effect on Compusul. No consent of any person who is a party to a contract to which Compusul is a party is required to be obtained on the part of Compusul to permit the transactions contemplated herein, except where the failure to obtain such consent would not have a Material Adverse Effect on Compusul. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to Compusul in connection with the execution and delivery of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby. 2.4 Compusul Financial Statements. Compusul has delivered to McAfee, Compusul's balance sheet as of December 31, 1996, and its statement of operations and statement of stockholders' equity and statement of cash flows for the twelve months ended December 31, 1996 together with a balance sheet as of March 31, 1997 and an unaudited statement of operations, for the three-month period then ended (collectively, the "Compusul Financial Statements"). The Compusul Financial Statements agree with Compusul's books and records, have been prepared in accordance with Brazil GAAP consistently applied and fairly present in all respects the financial position of Compusul as of its respective dates and the results of Compusul's operations for the periods then ended, subject to normal year-end adjustments that are not material to Compusul and except that the unaudited statements may not contain the notes required by Brazilian GAAP. Except as stated in the Compusul Financial Statements, Compusul is not a guarantor or indemnitor of any indebtedness of any person, firm or corporation. 2.5 No Undisclosed Liabilities. Compusul does not have any liabilities, either accrued or contingent (whether or not required to be reflected in the Compusul Financial Statements in accordance with Brazil GAAP), whether due or to become due, which individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect on Compusul, other than (i) liabilities reflected in the Compusul Financial Statements, (ii) liabilities specifically described in this Agreement or the Compusul Disclosure Schedule, and (iii) normal or recurring liabilities incurred since the date of the Compusul Financial Statements in the ordinary course of business consistent with past practices and not material to Compusul. 2.6 Accounts Receivable. The accounts receivable shown on the latest interim balance sheet contained in the Compusul Financial Statements arose in the ordinary 5 10 course of business and have been collected or are collectible in the book amounts thereof, less an amount not in excess of the allowance for doubtful accounts and returns provided for in such balance sheet. Allowances for doubtful accounts and returns are adequate and have been prepared in accordance with the past practices of Compusul. The accounts receivable of Compusul arising after the date of the Compusul Financial Statements and prior to the Closing arose in the ordinary course of business and have been collected or are collectible in the book amounts thereof, less allowances for doubtful accounts and returns determined in accordance with the past practices of Compusul. None of the accounts receivable are subject to any material claim of offset or recoupment, or counterclaim and Compusul has no knowledge of any specific facts that would be reasonably likely to give rise to any such claim. No material amount of receivables are contingent upon the performance by Compusul of any obligation and no agreement for deduction or discount has been made with respect to any accounts receivable. 2.7 Absence of Certain Changes or Events. Since March 31, 1997, Compusul has conducted its business in the ordinary course and in a manner consistent with past practices and, since such date, Compusul has not: (a) suffered any material adverse change in its financial condition, its results of operations or its business, or any material adverse changes in its unaudited balance sheet at March 31, 1997 (analyzed as if prepared according to Brazil GAAP) (a "Material Adverse Change"), including but not limited to cash distributions or material decreases in the net assets of Compusul; (b) suffered any damage, destruction, loss, or change whether covered by insurance or not, that could reasonably be expected to have a Material Adverse Effect on Compusul; (c) granted or agreed to make any material increase in the compensation payable or to become payable by Compusul to its officers or employees; (d) declared, set aside or paid any dividend or made any other distribution on or in respect of the quotas of the capital stock of Compusul or declared any direct or indirect redemption, retirement, purchase or other acquisition by Compusul of such quotas; (e) issued any quotas of capital stock of Compusul or any warrants, rights, options or entered into any commitment relating to the quotas of Compusul or altered any outstanding security; (f) made any change in the accounting methods or practices it follows, whether for general financial or tax purposes, or any change in depreciation or amortization policies or rates adopted therein; (g) sold, leased, abandoned or otherwise disposed of any real property or any material amounts of machinery, equipment or other operating property other than in the ordinary course of business; 6 11 (h) sold, assigned, transferred, licensed or otherwise disposed of any patent, trademark, trade name, brand name, copyright (or pending application for any patent, trademark or copyright), invention, proprietary rights, software, work of authorship, process, know-how, formula or trade secret or interest thereunder or other material intangible asset except in the ordinary course of its business; (i) suffered any labor dispute or charge for unfair labor practice; (j) entered into any material commitment or transaction (including without limitation any borrowing or capital expenditure) other than in the ordinary course of business; (k) permitted or allowed any of its property or assets to be subjected to any mortgage, deed of trust, pledge, lien, security interest or other encumbrance of any kind; (l) made any capital expenditure or commitment for additions to property, plant or equipment individually in excess of $10,000, or in the aggregate, in excess of $25,000; (m) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets to, or entered into any agreement or arrangement with any of its affiliates, officers, directors or stockholders or any Affiliate of any of the foregoing; (n) made any amendment to or terminated any material agreement; (o) agreed to take any action described in this Section 2.7 or which would constitute a breach of any of the representations contained in this Agreement; (p) any amendments or changes in its charter documents; or (q) granted any powers of attorney. (r) except as disclosed in the Compusul Disclosure Schedule, taken any other action that would have required the consent of McAfee pursuant to Section 4.1 (a) through (n) of this Agreement (and which has not been obtained) had such action occurred after the date of this Agreement and that would be reasonably likely to have a Material Adverse Effect on Compusul. 2.8 Taxes. (a) Compusul has prepared and timely filed all federal, state, local and foreign returns, estimates, information statements and reports required to be filed at or before the date of this Agreement ("Returns") relating to any and all Taxes concerning or attributable to Compusul, or its operations and such Returns are true and correct in all material respects and have been completed in all material respects in accordance with applicable law. "Tax" or, collectively, "Taxes," shall mean any and all material federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes, social contribution, unemployment fund ("FGTS"), social security contributions ("INSS") based upon or measured by gross receipts, income, profits, 7 12 sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. There are no tax liens on any property or assets of Compusul. There have been no audits or examinations of any Returns by any applicable governmental agency. No state of facts exists or has existed which would be reasonably likely to constitute grounds for the assessment of any penalty or of any material Tax liability beyond that shown on the respective Returns. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any Return for any period. For purposes of this Section 2.8, "Material Tax Liability" shall be defined as liability in excess of $10,000 in the aggregate. (b) Compusul, as of the date of this Agreement: (i) has paid all Taxes it is required to pay prior to the Closing and (ii) has withheld with respect to its employees all income taxes and other Taxes required to be withheld, except where any failure to make such payment or withholding would not be reasonably likely to have a Material Adverse Effect on Compusul. (c) Compusul does not have any material liabilities for unpaid local and foreign Taxes that have not been accrued for or reserved on the Compusul Financial Statements, whether asserted or unasserted, contingent or otherwise. (d) Compusul is not a party to any tax-sharing agreement or similar arrangement with any other party. (e) Compusul is not currently under any contractual obligation to pay any Tax obligations of, or with respect to any transaction relating to, any other person or to indemnify any other person with respect to any Tax. (f) Compusul has not declared or paid any dividends from Compusul's profits since January 1, 1997. 2.9 Intellectual Property. (a) Compusul owns, is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, and any applications for such patents, trademarks, trade names, service marks and copyrights, processes, formulae, methods, schematics, technology, know-how, computer software programs or applications and tangible or intangible proprietary information or material (excluding Commercial Software as defined below) that are necessary to (i) conduct the business of Compusul as currently conducted and as proposed to be conducted, (ii) or to distribute new products or versions of existing products planned for distribution (including without limitation all distribution rights), free and clear of all liens, claims or encumbrances (all of which are referred to as the "Compusul Intellectual Property Rights"). The Licensed Intellectual Property, as defined below, grants Compusul such rights as are employed in or necessary to the business of Compusul as conducted and as proposed to be conducted and is valid and enforceable and in full force and effect. The Compusul Disclosure Schedule contains an accurate and complete list of (i) all patents and patent applications and all 8 13 registered trademarks, registered copyrights, registered trade names and service marks used by Compusul in its business as conducted and as proposed to be conducted, including the jurisdictions in which each such item has been issued or registered or in which any such application for such issuance and registration has been filed, (ii) all licenses, sublicenses and other agreements pursuant to which any person is authorized to use any Compusul Intellectual Property Rights, and (iii) all licenses, sublicenses and other agreements as to which Compusul is a party and pursuant to which Compusul is authorized to use any third party technology, trade secret, know-how, process, patents, trademarks or copyrights, including software ("Licensed Intellectual Property"). (b) Compusul is not, nor will it be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any license, sublicense or other agreement relating to the Compusul Intellectual Property Rights or any Licensed Intellectual Property. (c) Compusul (i) has not received notice that it has been sued in any suit, action or proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party; (ii) has no knowledge that the manufacturing, marketing, licensing, sale or other exploitation of Compusul products infringes any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party; and (iii) has no knowledge of any claim challenging or questioning the validity or effectiveness of any of its licenses or agreements relating thereto or to any Compusul Intellectual Property Right. There is no valid basis for any claim of the type specified in the immediately preceding sentence which would be reasonably likely in any material way to relate to or interfere with the continued enhancement and exploitation by Compusul of any Compusul products. The use or exploitation of any patents, trademarks, trade names, copyrights, software, technology, know-how or processes by Compusul in its current business does not infringe on the rights of, or constitutes misappropriation of, any proprietary information or intangible property right of any third person or entity, including without limitation any patent, trade secret, copyright, trademark or trade name. (d) Except with respect to the rights of third parties to the Licensed Intellectual Property, no third party has any right to manufacture, reproduce, distribute, market or exploit any works, products or materials of Compusul. (e) No employee of Compusul is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with Compusul or, to Compusul's knowledge, any other party because of the nature of the business conducted by Compusul or proposed to be conducted by Compusul. (f) Each person presently or previously employed by Compusul (including independent contractors, if any) with access to confidential information has executed a confidentiality and non-disclosure agreement pursuant to the form of agreement previously provided to McAfee or its representatives. Such confidentiality and non-disclosure agreements constitute valid and binding obligations of Compusul and such person, enforceable in accordance with their respective terms. Neither the execution or delivery of such agreements, nor the carrying on of Compusul's business as employees by 9 14 such persons, nor the conduct of Compusul's business as currently anticipated, will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under any contract, covenant or instrument under which any of such persons is obligated. (g) No product liability or warranty claims which individually or in the aggregate which could reasonably be expected to exceed $10,000 have been communicated to or to Compusul's knowledge, threatened against Compusul nor, to Compusul's knowledge, is there any specific situation, set of facts or occurrence that provides a valid basis for such claim. (h) "Commercial Software" means packaged commercially available software programs generally available in a shrink-wrap format through retail channels which have been licensed to Compusul pursuant to end-user licenses and which are used internally in Compusul's business but are in no way a component of or incorporated in or specifically required to develop or support any product of Compusul. 2.10 Agreements, Contracts and Commitments. Section 2.10 of the Compusul Disclosure Schedule sets forth a list of any of the following written or oral contracts, understandings, agreements, proposed transactions, and other instruments (collectively, "Major Contracts"), copies of each of which written contracts, agreements or instruments have been delivered to McAfee's counsel: (a) licenses of any patent, copyright, trade secret or other proprietary right by Compusul; (b) continuing contracts for the future purchase, sale or manufacture of products, material, supplies, equipment or services requiring payment to or from Compusul in an amount in excess of $25,000 per annum; (c) contracts providing for the development of software for, or license of software to, Compusul, or other Intellectual Property Rights used or incorporated in one or more of Compusul's products; (d) joint venture contracts or other agreements which have involved or are reasonably expected to involve a sharing of profits or losses in excess of $25,000 per annum with any other party; (e) indentures, mortgages, promissory notes, loan agreements, guarantees or other agreements or commitments for the borrowing of money, for a line of credit or for a leasing transaction of a type required to be capitalized; (f) leases or other agreements under which Compusul is lessee of or holds or operates any items of tangible personal property or real property owned by any third party and under which payments to such third party exceed $25,000 per annum; (g) all agreements or arrangements for the sale, distribution or transfer of any assets, properties or rights; (h) agreements which restrict Compusul from engaging in any aspect of its business or competing in any line of business in any geographic area or in any 10 15 functional area or that requires Compusul to distribute or use exclusively a third party technology or product; (i) sales contracts, commitments or proposals (including, without limitation, porting and development projects) of Compusul; (j) written dealer, distributor, sales representative, original equipment manufacturer, value added remarketer or other agreements for the ongoing distribution of Compusul products; (k) contracts or commitments for the employment of any officer, employee or consultant or any other type of contract or understanding with any officer, employee or consultant which is not immediately terminable without cost or other liability (except for limitations on such termination rights as exist under applicable laws); (l) any other loan or credit agreements, notes, bonds, mortgages, indentures, leases or other material agreements which are not otherwise disclosed elsewhere in the Compusul Disclosure Schedule, the breach or termination of which would have a Material Adverse Effect on Compusul; (m) any agreements relating to Compusul Intellectual Property Rights or other material agreements relating to Compusul Products; and (n) obligations or understandings which are material to the financial position of Compusul with respect to the return to Compusul inventory or merchandise in the possession of other wholesalers, distributors, subdistributors, retailers, or other customers. (o) All contracts, agreements and instruments of Compusul are valid, binding, in full force and effect, and enforceable by Compusul in accordance with their respective terms except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. To Compusul's and the Stockholders' knowledge, no party to any contract, agreement or arrangement of Compusul intends to cancel, modify or amend such contract, agreement or arrangement, and neither Compusul nor any party to a contract, agreement or arrangement of Compusul is in breach of such contract, agreement or arrangement and no party to any contract, agreement or arrangement of Compusul will terminate such contract, agreement or arrangement as a result of the Purchase. 2.11 Labor Difficulties; No Discrimination. (a) Compusul is not in material violation of any applicable laws respecting employment and employment practices, terms and conditions of employment, and wages and hours. (b) There is no unfair labor practice complaint against Compusul actually pending or, to Compusul's knowledge, threatened. (c) There is no strike, labor dispute, slowdown, or stoppage actually pending or, to Compusul's knowledge, threatened against Compusul. 11 16 (d) There have been no union representation claims made to Compusul with respect to the employees of Compusul, and to Compusul's knowledge, no union organizing activities are taking place. (e) Compusul has not experienced any material work stoppage or other material labor difficulty. (f) There has been no claim, actual or alleged, against Compusul based on race, age, sex, disability or other harassment or discrimination, or similar tortious conduct, nor, to Compusul's knowledge, is there any valid basis for any such claim. 2.12 Trade Regulation. Compusul has not within the past three years terminated its relationship with or refused to ship products to any dealer, distributor, subdistributor, OEM, third party marketing entity or customer which had theretofore paid or been obligated to pay Compusul in excess of Ten Thousand Dollars ($10,000) over any consecutive twelve (12) month period. All of the prices charged by Compusul in connection with the marketing or sale of any products or services have been in compliance with all applicable laws and regulations. No claims have been communicated or threatened against Compusul with respect to wrongful termination of any dealer, manufacturer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other material violation of any laws or regulations relating to anti-competitive practices or unfair trade practices of any kind, and, to Compusul's knowledge, no specific situation, set of facts, or occurrence provides any valid basis for any such claim. 2.13 Litigation. There is no action, suit or proceeding, claim, arbitration or investigation against Compusul pending or threatened, nor is there any judgment, decree, injunction, rule or order of any governmental entity or arbitrator outstanding against Compusul. 2.14 Employee Benefit Plans. Compusul is not a party to any oral or written (i) union or collective bargaining agreement, (ii) agreement with any officer or other key employee of Compusul, the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving Compusul of the nature contemplated by this Agreement, (iii) agreement with any officer of Compusul providing any term of employment or compensation guarantee extending for a period longer than six months from the date hereof or for the payment of compensation in excess of $50,000 per annum, or (iv) agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. There is no unfunded prior service cost with respect to any bonus, deferred compensation, pension, profit-sharing, retirement, stock purchase, stock option, or other employee benefit or fringe benefit plans, whether formal or informal, maintained by Compusul. Compusul has no bonus, deferred compensation, pension, profit-sharing, retirement, stock purchase, stock option, or other employee benefit or fringe benefit plans, whether formal or informal. 12 17 2.15 Compliance with Laws. Compusul has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation or applicable laws and regulations of foreign governments with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which would not be reasonably likely to have a Material Adverse Effect on Compusul. 2.16 Governmental Authorizations and Regulations. All licenses, franchises, permits and other governmental authorizations held by Compusul are valid and sufficient for the business presently carried on by Compusul. 2.17 Corporate Documents. Compusul has furnished to McAfee, or its representatives, for its examination: (i) its minute books containing all records of all proceedings, consents, actions, and meetings of the stockholders, the board of directors and any committees thereof and (ii) all permits, orders and consents issued by any regulatory agency with respect to Compusul, or any securities of Compusul, and all applications for such permits, orders and consents. The corporate minute books and other corporate records of Compusul are complete and accurate in all material respects, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in material compliance with the laws of the applicable jurisdiction. 2.18 No Misrepresentation. No representation or warranty by Compusul in this Agreement, any other Transaction Document, nor any certificate or schedule furnished or to be furnished by or on behalf of Compusul pursuant to this Agreement, when taken together with the foregoing, contains or shall contain any untrue statement of material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading. Compusul has delivered true and complete copies of all documents requested by McAfee and which are referred to in this Article II or in any Schedule delivered by Compusul to McAfee. Compusul and the Stockholders make and have made no representations or warranties to McAfee other than those specifically expressed in this Article II. Compusul and the Stockholders make and have made no representations and warranties as to the accuracy or completeness of any information, whether in written, oral, magnetic or other form, that has been disclosed to or made available to McAfee, other than the representations or warranties specifically expressed in this Article II. 2.19 Restrictions on Business Activities. There is no judgment, injunction, order or decree binding on Compusul which has or reasonably would be expected to have the effect of prohibiting or materially impairing any current business practice of Compusul or any acquisition of material property by Compusul. 2.20 No Brokers. Compusul has not and will not incur any brokerage, finder's, financial advisory, investment banking or similar fee in connection with the transactions contemplated by this Agreement. 2.21 Insurance. Compusul maintains and has maintained adequate insurance coverage with respect to its business, the failure of which would not have a Material Adverse Effect on Compusul. Section 2.21 of the Compusul Disclosure Schedule 13 18 contains a list of all insurance policies presently in effect, and correct and complete copies of all such policies along with a history of claims made under such policies have been provided to McAfee or McAfee's counsel. 2.22 Interested Party Transactions. No officer, director, employee or consultant of Compusul nor any member of such person's immediate family currently has or has had, either directly or indirectly, a material interest in: (i) any person or entity which purchases from or sells, licenses or furnishes to Compusul any goods, property, technology or intellectual or other property rights or services; or (ii) any contract or agreement to which Compusul is a party or by which it may be bound or affected. 2.23 Books and Records. The books, records and accounts of Compusul (a) have been maintained at Compusul's principal place of business in accordance with good business practices on a basis consistent with prior years, (b) are stated in reasonable detail and accurately and fairly reflect the transactions and dispositions of the assets of Compusul, and (c) accurately and fairly reflect the basis for the Compusul Financial Statements. Compusul has devised and maintains a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization, and (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with Brazil GAAP, US GAAP or any other criteria applicable to such statements and (ii) to maintain accountability for assets. 2.24 Government Contracts. All representations, certifications and disclosures made by Compusul to any Government Contract Party (as defined below) have been in all material respects current, complete and accurate at the times they were made. Compusul has no knowledge of, and has no reason to know of, any acts, omissions or noncompliance with regard to any applicable public contracting statute, regulation or contract requirement (whether express or incorporated by reference) relating to any of Compusul's contracts with any Government Contract Party (as defined below) in either case that have led to or could lead to, either before or after the Closing, (a) any claim or dispute involving Compusul and/or McAfee as successor in interest to Compusul and any Government Contract Party, or (b) any suspension, debarment or contract termination, or proceeding related thereto. Compusul has no knowledge of, and has no reason to know of, any act or omission that relates to the marketing, licensing or selling to any Government Contract Party of any of Compusul technical data and computer software and that has led to or could lead to, either before or after the Closing, any Material Adverse Effect on any of Compusul's rights in and to its technical data and computer software. Except for (i) Brazilian or provincial government incentives for certain nonmaterial employees, and (ii) research tax credits, all of Compusul's development of technical data and computer software was developed exclusively at private expense. For purposes of this Agreement, the term "Government Contract Party" means any independent or executive agency, division, subdivision, audit group or procuring office of Brazilian federal or provincial, or United States federal government, including any prime contractor of either such federal government and any higher level subcontractor of a prime contractor of either such federal government, and including any employees or agents thereof, in each case acting in such capacity. 2.25 Severance Arrangements. Except as required by applicable law, Compusul has not entered into any severance or similar arrangement in respect of any 14 19 employees that provides for any obligation (absolute or contingent) of Compusul or any other person to make any payment to any such employee following termination of employment. 2.26 Banking Relationships. The Compusul Disclosure Schedule sets forth a complete and accurate description of all arrangements that Compusul has with any banks, savings and loan associations or other financial institutions providing for checking accounts, safe deposit boxes, borrowing arrangements, and certificates of deposit or otherwise, indicating in each case account numbers, if applicable, and the person or persons authorized to act or sign on behalf of Compusul in respect of any of the foregoing. 2.27 Distribution Agreements. Section 2.27 of the Compusul Disclosure Schedule lists any and all distribution contracts, agreements or arrangements to which Compusul is a party and those parties for which Compusul distributes products. Such agreements are valid, binding and in full force and effect. Compusul is not in breach of any such agreement nor is Compusul aware that any other party to such agreement is in breach. No such agreement shall be breached or terminated as a result of the Purchase. 2.28. Unauthorized Use of Compusul's Name. Compusul is aware that third parties have used the name "Compusul" and/or Compusul's address upon issuing invoices to such third party customers without authorization from Compusul nor with Compusul's knowledge. Compusul and the Stockholders further represent that Compusul has taken the proper legal remedies to prevent any responsibility arising out of this fact that could have a material adverse impact on Compusul's assets or ability to carry out its business. ARTICLE III REPRESENTATIONS AND WARRANTIES OF McAFEE AND SUB McAfee and Sub represent and warrant to Compusul that the statements contained in this Article III are true and correct. 3.1 Organization and Good Standing. McAfee and Sub are corporations duly organized, validly existing and in good standing under the laws of the jurisdiction of their incorporation, have all requisite corporate power to own, lease and operate their respective properties and to carry on their respective businesses as now being conducted and as proposed to be conducted, and are duly qualified to do business and are in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on McAfee. 3.2 Authority; No Conflict; Required Filings and Consents. (a) McAfee and Sub have or will have, prior to Closing, all requisite corporate power and authority to enter into this Agreement and the other Transaction Documents to which they are a party and to carry out their obligations and consummate the transactions contemplated hereunder and thereunder. The execution and delivery of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby have or will have, prior to Closing, been duly authorized by all necessary corporate action on the part of McAfee. This Agreement has been duly executed and delivered by McAfee and Sub and constitutes the valid and binding 15 20 obligation of McAfee and Sub, enforceable against each of them in accordance with its terms, except as such terms may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights and remedies generally and except as the indemnification provisions of Article IX hereto may be limited by principles of public policy. The other Transaction Documents, when duly executed and delivered by McAfee and Sub, will constitute valid and binding obligations of McAfee and Sub, enforceable in accordance with their respective terms, except as such terms may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights and remedies generally and except as the indemnification provisions of Article IX hereto may be limited by principles of public policy. (b) The execution and delivery of this Agreement and the other Transaction Documents by McAfee and Sub, do not, and the consummation of the transactions contemplated by this Agreement and the other Transaction Documents will not (i) conflict with or result in any violation or breach of any provision of the Certificate of Incorporation or Bylaws of McAfee or the Articles of Association of Sub, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which McAfee or Sub is a party or by which their respective properties or assets may be bound, or (iii) conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to McAfee or Sub or any of their respective properties or assets, except in the case of (ii) and (iii) for any such breaches, conflicts, violations, defaults, terminations, cancellations, accelerations or losses of benefits which would not be reasonably likely to have a Material Adverse Effect on McAfee or Sub, taken as a whole. No consent of any person who is a party to a contract that is material to McAfee's and Sub's business, taken as a whole, is required to be obtained on the part of McAfee to permit the transactions contemplated herein, except where the failure to obtain such consent would not have a Material Adverse Effect on McAfee and Sub, taken as a whole. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to McAfee or Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby except for consents, authorizations, filings, approvals and registrations which, if not obtained or made, would be reasonably likely to have a Material Adverse Effect on McAfee or Sub, taken as a whole. 3.3 Litigation. There is no action, suit or proceeding, claim, arbitration or investigation against McAfee or Sub pending, or to McAfee's or Sub's knowledge, threatened, which would be reasonably likely to have a Material Adverse Effect on the ability of McAfee or Sub to consummate the transactions contemplated by this Agreement or the other Transaction Documents. 3.4. Independent Appraisal. McAfee hereby states that it has conducted its own independent appraisal of Compusul, having received or had access to all required information and records of Compusul prior to establishing the Purchase Price and agreeing to the terms and conditions of this Agreement. McAfee has also verified all the 16 21 disclosures of Compusul and the Stockholders with the full collaboration of Compusul and the Stockholders. This statement, however, does not relieve the Stockholders from any liability and does not represent a waiver of McAfee in relation with any of the representations and warranties made by Compusul and the Stockholders under this Agreement. ARTICLE IV CONDUCT OF BUSINESS 4.1 Covenants of Compusul. During the period from the date of this Agreement and continuing until the earlier of the termination of the Agreement or the Closing, Compusul agrees (except to the extent that McAfee shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and taxes when due, subject to good faith disputes over such debts or taxes, to pay or perform other obligations when due, subject to good faith disputes over such obligations, and, to the extent consistent with such business, use all reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it, to the end that its goodwill and ongoing businesses shall not be impaired in any material respect at the Closing. Compusul shall promptly notify McAfee of any event or occurrence not in the ordinary course of business of Compusul. Except as expressly contemplated by this Agreement, neither Compusul nor the Stockholders shall, without the prior written consent of McAfee: (a) Transfer or license to any person or entity or otherwise extend, amend or modify any rights to the Compusul Intellectual Property Rights other than in the ordinary course of business consistent with past practices. Compusul shall not take any action to modify or that may cause a material adverse effect on the Compusul Intellectual Property Rights or on the ability of continuous use of such Compusul Intellectual Property Rights; (b) Enter into or amend any agreement which grants distribution rights to Compusul; (c) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for quotas of its capital stock, or purchase or otherwise acquire, directly or indirectly, any quotas of its capital stock; (d) Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any quotas of its capital stock or securities convertible into quotas of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such quotas or other convertible securities; (e) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business 17 22 organization or division, or otherwise acquire or agree to acquire, other than in the ordinary course of business, any assets which are material, individually or in the aggregate, to the business of Compusul; (f) Take any of the following actions: (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of non-officer employees in the ordinary course of business and in accordance with past practices, (ii) grant any additional severance or termination pay to, or enter into any employment or severance agreements with, officers, (iii) grant any severance or termination pay to, or enter into any employment or severance agreement, with any employee, (iv) enter into any collective bargaining agreement, or (v) establish, adopt, enter into or amend in any material respect any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) Incur any additional indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of Compusul or guarantee any debt securities of others, other than indebtedness incurred under outstanding lines of credit consistent with past practice; (h) Amend or propose to amend its Articles of Association, except as contemplated by this Agreement; (i) Incur or commit to incur any capital expenditures (other than for non-equipment related research and development expenses) in excess of $25,000 in the aggregate; (j) Dispose of any material portion of its assets, except inventory in the ordinary course of business; (k) Enter into any lease or contract for the purchase or sale of any assets or other material portion of its property, real or personal, except in the ordinary course of business and for lease agreements involving amounts in excess of US$ 10,000, except with the prior written consent of McAfee; (l) Amend or terminate any Material Contract; (m) Waive or release any material right or claim; (n) Initiate any litigation or arbitration proceeding; or (o) Take, or agree in writing or otherwise to take, any of the actions described in Sections (a) through (n) above, or any action which is reasonably likely to make any of Compusul's representations or warranties contained in this Agreement untrue or incorrect in any respect on the date made or as of the Closing. 4.2 Cooperation. Subject to compliance with applicable law, from the date hereof until the Closing, each of McAfee and Compusul shall confer on a regular and frequent basis with one or more representatives of the other party to report operational 18 23 matters of materiality and the general status of ongoing operations and shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Purchase and the transactions contemplated hereby. 4.3 Notice of Breach. Each party shall promptly give written notice to the other party upon becoming aware of the occurrence or, to its knowledge, impending or threatened occurrence, of any event which would cause any of its representations or warranties to be untrue on the Closing or cause a breach of any covenant contained or referenced in this Agreement and will use all reasonable commercial efforts to prevent or promptly remedy the same. Any such notification shall not be deemed an amendment of the Compusul Disclosure Schedule. ARTICLE V ADDITIONAL AGREEMENTS 5.1 No Solicitation. (a) From and after the date of this Agreement until the Closing, Compusul shall not, directly or indirectly, through any officer, director, employee, representative or agent of Compusul, (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of all or substantially all of the assets, sale of quotas of capital stock (including without limitation by way of a tender offer) or similar transactions involving Compusul, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Acquisition Proposal, or (iii) agree to, approve or recommend any Acquisition Proposal. (b) Compusul shall notify McAfee immediately (and no later than 24 hours) after receipt by Compusul (or its advisors) of any Acquisition Proposal or any request for information in connection with an Acquisition Proposal or for access to the properties, books or records of Compusul by any person or entity that informs Compusul that it is considering making, or has made, an Acquisition Proposal. Such notice shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. 5.2 Compusul Consents. Compusul shall use its best efforts to obtain all necessary consents, waivers and approvals under the Compusul Material Contracts in connection with the Purchase. 5.3 Access to Information. Upon reasonable notice, Compusul shall afford to the officers, employees, accountants, counsel and other representatives of McAfee, access, during normal business hours during the period prior to the Closing, to all its properties, books, contracts, commitments and records and, during such period, all other information concerning its business, properties and personnel as McAfee may reasonably request. 19 24 5.4 Legal Conditions to Purchase. Each of McAfee and Compusul will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on it with respect to the Purchase (which actions shall include, without limitation, furnishing all information required in connection with approvals of or filings with any Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon either of them in connection with the Purchase. 5.5 Public Disclosure. Compusul and McAfee shall consult with each other before issuing any press release or otherwise making any public statement with respect to the Purchase or this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except in the case of McAfee if such press release is required to comply with McAfee's disclosure obligations under U.S. securities laws, Securities and Exchange Commission and Nasdaq National Market rules and regulations. 5.6 No payments of Dividends. Compusul shall not declare or pay any dividends from Compusul's profits. 5.7 Additional Agreements; Reasonable Efforts. Each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the other Transaction Documents, including cooperating fully with the other party and providing information. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall take all such necessary action. The parties shall execute the Amendment to the Articles of Association of Compusul so as to reflect the alterations in the stockholding agreed hereby. ARTICLE VI CONDITIONS TO PURCHASE 6.1 Conditions to Each Party's Obligation to Effect the Purchase. The respective obligations of each party to this Agreement to effect the Purchase shall be subject to the satisfaction prior to the Closing of the following conditions: (a) Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity, the failure of which to obtain would be reasonably likely to have a Material Adverse Effect on McAfee or Compusul, shall have been filed, occurred or been obtained. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Purchase or limiting or restricting McAfee's or Compusul's conduct or operation of the business of McAfee or Compusul after the Purchase shall have been issued, nor shall any proceeding brought by a domestic administrative agency or commission or other 20 25 domestic Governmental Entity, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Purchase which makes the consummation of the Purchase illegal. (c) Escrow Agreement. McAfee, the Escrow Agent and the Former Compusul Stockholder Agent shall have entered into an escrow agreement (the "Escrow Agreement") in the forms attached hereto as Exhibit 6.1(c). (d) Employment Agreement. Each of the Stockholders and Compusul shall have entered into an Employment Agreement ("Employment Agreement") in the form attached hereto as Exhibit 6.1(d). 6.2 Additional Conditions to Obligations of McAfee. The obligation of McAfee to effect the Purchase is subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by McAfee in accordance with Section 10.11 hereof: (a) Representations and Warranties. The representations and warranties of Compusul and the Stockholders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, and McAfee shall have received a certificate signed on behalf of Compusul by the chief executive officer and the chief financial officer of Compusul to such effect. (b) No Material Adverse Change. There shall have been no Material Adverse Change in Compusul since the date of this Agreement. (c) Performance of Obligations of Compusul. Compusul shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date; and McAfee shall have received a certificate signed on behalf of Compusul by the chief executive officer and the chief financial officer of Compusul to such effect. (d) Consents. Compusul shall have received all written consents, waivers and approvals and taken such other actions necessary or appropriate to allow the consummation of the transactions contemplated hereby and to allow Compusul to carry on its business after the Purchase in the same manner immediately prior to the Purchase, including any consents, waivers and approvals under Compusul Material Contracts. (e) Amendment to the Articles of Association. The Stockholders shall sign or cause to be signed on their behalf the proper Amendments to the Articles of Association of Compusul so as to reflect the transfer Compusul Stock from each of the Stockholders to Sub. (f) Due Diligence. McAfee and its legal counsel shall have completed their due diligence investigation of Compusul to their sole satisfaction and shall not have become aware, to their sole discretion, of any facts or circumstances which could have an adverse effect on Compusul or McAfee. 21 26 (g) Noncompetition Agreement. Each of the Stockholders and McAfee shall have executed and delivered a Noncompetition Agreement in the form attached hereto as Exhibit 6.2(g) (the "Noncompetition Agreement"). (h) Regulatory Compliance And Approval. All permits, consents, approvals and waivers from governmental authorities necessary to the consummation of this Agreement and the transactions contemplated hereby and for the operation of the business of Compusul after the consummation of the Purchase and the ownership of the Compusul Intellectual Property Rights and distribution rights after the consummation of the Purchase shall have been obtained. (i) Resignations of Directors. McAfee shall receive upon the Closing originals of the resignations from office of each of the Directors of Compusul. (j) Legal Opinion. An opinion from Stroeter, Hallack, Apocalypse - - Advogados, legal counsel to Compusul and the Stockholders, in the form attached hereto as Exhibit 6.2(j). 6.3 Additional Conditions to Obligations of Compusul. The obligation of Compusul to effect the Purchase is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by Compusul in accordance with Section 10.11 hereof. (a) Representations and Warranties. The representations and warranties of McAfee set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, and Compusul shall have received a certificate signed on behalf of McAfee to such effect. (b) Performance of Obligations of McAfee. McAfee shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date and Compusul shall have received a certificate signed on behalf of McAfee to such effect. (c) Noncompetition Agreement. McAfee and each of the Stockholders shall have executed and delivered the Noncompetition Agreement. (d) Payment of Purchase Price. Stockholders shall have received payment in full of Two Million Three Hundred Forty Thousand Dollars($2,340,000), payable by check or wire transfer, in accordance with Section 1.1(a) and 1.5 hereof. ARTICLE VII TERMINATION AND AMENDMENT 7.1 Termination. This Agreement may be terminated at any time prior to the Closing, whether before or after approval of the matters presented in connection with the Purchase by the stockholders of Compusul: (a) by mutual written consent of McAfee and Compusul; or 22 27 (b) by either McAfee or Compusul if the Purchase shall not have been consummated by April 30, 1997 (provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any material obligation under this Agreement has been the cause of or resulted in the failure of the Purchase to occur on or before such date); or (c) by either McAfee or Compusul, if a court of competent jurisdiction or other Governmental Entity shall have issued a nonappealable final order, decree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Purchase, except, if the party relying on such order, decree or ruling or other action has not materially complied with its obligations under Section 5.4 of this Agreement; or (d) by McAfee if any of the conditions to McAfee's obligations to effect the Purchase which are specified in Section 6.1 or Section 6.2 have not been met or waived by McAfee at such time as such condition is no longer reasonably capable of satisfaction (provided McAfee is not otherwise in material breach of its representations, warranties covenants or agreements under this Agreement); or (e) by Compusul or the Stockholders if any of the conditions to Compusul's obligation to effect the Purchase which are specified in Section 6.1 or Section 6.3 have not been met or waived by Compusul or the Stockholders at such time as such condition is no longer reasonably capable of satisfaction (provided Compusul is not otherwise in material breach of its representations, warranties, covenants or agreements under this Agreement); or (f) by McAfee or Compusul, if there has been a material breach of any representation, warranty, covenant or agreement on the part of the other party set forth in this Agreement, which breach shall not have been cured, in the case of a representation or warranty, prior to the Closing or, in the case of a covenant or agreement, within 10 business days following receipt by the breaching party of written notice of such breach from the other party. 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of McAfee, Compusul, or their respective officers, directors or stockholders, as the case may be, and further except to the extent that such termination results from the intentional breach by a party of any of its representations, warranties or covenants set forth in this Agreement. ARTICLE VIII SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS 8.1 Survival. Notwithstanding any investigation conducted before or after Closing, and notwithstanding any actual or implied knowledge or notice of any facts or circumstances which McAfee, the Stockholders or Compusul may have as a result of such investigation or otherwise, McAfee, the Stockholders and Compusul will be entitled to rely upon the other party's representations, warranties and covenants set forth in this Agreement. 23 28 The obligations of Compusul and the Stockholders with respect to their respective representations, warranties, agreements and covenants will survive the Closing and continue in full force and effect following the Closing Date. ARTICLE IX ESCROW AND INDEMNIFICATION 9.1 Indemnity. From and after the Closing, and subject to the provisions of Section 8.1, McAfee shall be indemnified and held harmless by Compusul and the Stockholders against, and reimbursed for, any actual liability, damage, loss, obligation, demand, judgment, fine, penalty, cost or expense (excluding any indirect or consequential damages to McAfee (such as lost profits), other than any such damages resulting from injunctive relief granted as to an intellectual property claim), but including reasonable attorneys' fees (excluding costs relating to in-house attorneys) and expenses, and the costs of investigation (excluding in-house costs of investigation) incurred in defending against or settling such liability, damage, loss, cost or expense or claim therefor and any amounts paid in settlement thereof) imposed on or reasonably incurred by McAfee as a result of any breach of (i) any representation, warranty, agreement or covenant on the part of Compusul and the Stockholders under this Agreement and (ii) any tax or other liability imposed on McAfee or Sub as a result of Compusul paying commissions or other compensation in the form of dividends (collectively the "Damages"). Damages in each case shall be net of the amount of any insurance proceeds, indemnity and contribution actually recovered by McAfee. "Damages" as used herein is not limited to matters asserted by third parties, but includes Damages incurred or sustained by McAfee in the absence of claims by a third party, excluding where McAfee has taken the initiative to provoke the relevant authority to make their claims. 9.2 Escrow Fund. As security for the indemnity provided for in Section 9.1 hereof, an aggregate of Two Hundred Sixty Thousand Dollars ($260,000), subject to Section 1.5., shall be deposited by McAfee in an escrow account with Banco BBA- Creditanstalt S.A. (or other mutually acceptable institution) as Escrow Agent (the "Escrow Agent"), as of the Closing Date, such deposit to constitute an escrow fund (the "Escrow Fund") to be governed by the terms set forth in this Agreement and the provisions of an Escrow Agreement to be executed and delivered pursuant to Section 6.1(c). The Escrow Fund shall be allocated among the Stockholders on a pro-rata basis in accordance with the number of quotas of Compusul Stock held at Closing. Upon compliance with the terms hereof and subject to the provisions of this Article IX, McAfee shall be entitled to obtain indemnity from the Escrow Fund for Damages covered by the indemnity provided for in Section 9.1 of this Agreement. McAfee shall compensate the Escrow Agent for its services in maintaining the Escrow Fund. 9.3 Escrow Period. The Escrow Fund shall remain in existence during the period of time (the "Escrow Period") between Closing and the date ending twelve (12) months following the Closing Date ("the Termination Date"); provided, however, that thereafter the Escrow Fund shall remain subject to any indemnity claim set forth in an Officer's Certificate (as defined below) on or before the Termination Date, and until such time as such indemnity claim has been finally decided, settled or adjudicated. 24 29 9.4 Protection of Escrow Fund. The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period, in accordance with the terms of this Agreement and not as the property of McAfee, and shall hold and dispose of the Escrow Fund only in accordance with the terms hereof. 9.5 Claims Upon Escrow Fund. (a) Upon receipt by the Escrow Agent on or before the Termination Date of a certificate signed by the chief financial officer or chief executive officer of McAfee (an "Officer's Certificate"): (i) stating that McAfee or Sub has incurred, paid or properly accrued or knows of facts that may give rise to a reasonable probability that it will have to incur, pay or accrue Damages in an aggregate stated amount with respect to which McAfee is entitled to payment from the Escrow Fund pursuant to this Agreement; and (ii) specifying in reasonable detail the individual items of Damages included in the amount so stated, the date each such item was incurred, paid or properly accrued, or the basis for such anticipated liability, provided that these claims be certified in advance by accredited auditors as possible/anticipated liabilities that would be treated as deductible expenses by the Company pursuant to Brazilian GAAP when and if paid, the specific nature of the breach to which such item is related, the Escrow Agent shall, subject to the provisions of Section 9.6 of this Agreement, deliver to McAfee funds in an amount necessary to indemnify McAfee for the Damages claimed. 9.6 Objections to Claims. At the time of delivery of any Officer's Certificate to the Escrow Agent, a duplicate copy of such certificate shall be delivered to Mr. Aldir Clementi, (the "Former Compusul Stockholder Agent") and for a period of thirty (30) days after such delivery, the Escrow Agent shall not deliver any funds pursuant to Article IX unless the Escrow Agent shall have received written authorization from the Former Compusul Stockholder Agent to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent shall make delivery of the funds in accordance with Section 9.5, provided that no such payment may be made if the Former Compusul Stockholder Agent shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to the Escrow Agent prior to the expiration of such thirty (30) day period. 9.7 Resolution of Conflicts. (a) Memorandum of Agreement. In case the Former Compusul Stockholder Agent shall so object in writing to the indemnity of McAfee in respect of any claim or claims made in any Officer's Certificate, the Former Compusul Stockholder Agent and McAfee shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims. If the Former Compusul Stockholder Agent and McAfee should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and distribute funds from the Escrow Fund in accordance with the terms thereof. 25 30 (b) Arbitration. If no such agreement can be reached after good faith negotiation, either McAfee or the Former Compusul Stockholder Agent may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both McAfee and the Former Compusul Stockholder Agent agree to arbitration; and in such event the matter shall be settled by arbitration conducted by a single arbitrator. McAfee and the Former Compusul Stockholder Agent shall jointly select an arbitrator. If McAfee or the Former Compusul Stockholder Agent fail to agree upon an arbitrator within thirty (30) days, an arbitrator shall be selected for them by the American Arbitration Association ("AAA"). The decision of the arbitrator so selected as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and, notwithstanding anything in Section 9.6, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments or distributions out of the Escrow Fund in accordance with such decision. (c) Judgment. Any such arbitration shall be held in San Jose, California under the commercial rules then in effect of the AAA. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. For the purposes of this Section 9.7(c), in any arbitration hereunder in which any claim or the amount thereof stated in the Officer's Certificate is at issue, McAfee shall be deemed to be the non-prevailing party unless the arbitrators award McAfee more than 50% of the amount in dispute otherwise, the Stockholders shall be deemed to be the non-prevailing party. The non-prevailing party to an arbitration hereunder shall pay its own expenses, the fees of each arbitrator, the administrative fee of the AAA, and the expenses (including, without limitation, attorneys' fees and costs) incurred by the other party to the arbitration. To the extent that at the completion of the arbitration there are funds remaining in the Escrow Fund which are not subject to ongoing claims for Damages, such funds may be used by the Former Compusul Stockholder Agent to pay any expenses of the Stockholders under this Section 9.7. 9.8 Distribution Upon Termination of Escrow Period. Within five (5) business days following the Termination Date, the Escrow Agent shall deliver to the Stockholders all of the funds in the Escrow Fund (including any interest accrued on such funds) in excess of any amount of such funds reasonably necessary to satisfy any unsatisfied or disputed claims for Damages specified in any Officer's Certificate delivered to the Escrow Agent on or before the Termination Date and any unsatisfied or disputed claims by the Former Compusul Stockholder Agent under Section 9.9(b). As soon as all such claims have been resolved, the Escrow Agent shall deliver to the Stockholders all funds remaining in the Escrow Fund and not required to satisfy such claims. Deliveries of funds to the Stockholders pursuant to this section shall be made in proportion to their original contributions to the Escrow Fund. 9.9 Former Compusul Stockholder Agent. (a) The Former Compusul Stockholder Agent shall be appointed and constituted agent by the Stockholders for and on behalf of the Stockholders: to enter into and perform in accordance with the terms and conditions of the Escrow Agreement; to give and receive notices and communications; to authorize delivery to McAfee of funds from the Escrow Fund in satisfaction of claims by McAfee; to object to such deliveries; to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply 26 31 with orders of courts and awards of arbitrators with respect to such claims; and to take all actions necessary or appropriate in the judgment of the Former Compusul Stockholder Agent for the accomplishment of the foregoing and this Article IX. The Former Compusul Stockholder Agent may resign upon thirty (30) days notice to the parties to this Agreement. The Former Compusul Stockholder Agent may be replaced by the Stockholders with a right to a majority of the Escrow Fund from time to time upon not less than five (5) days prior written notice to McAfee. No bond shall be required of the Former Compusul Stockholder Agent, and the Former Compusul Stockholder Agent shall receive no compensation for his services except as provided in Section 9.9(b). Notices or communications to or from the Former Compusul Stockholder Agent shall constitute notice to or from each of the Stockholders. (b) The Former Compusul Stockholder Agent shall not be personally liable to McAfee or the Stockholders for any act done or omitted hereunder as Former Compusul Stockholder Agent while acting in good faith, and any act performed or omitted pursuant to the advice of counsel shall be conclusive evidence of good faith. The Stockholders shall indemnify the Former Compusul Stockholder Agent and hold the Former Compusul Stockholder Agent harmless for their respective pro rata share against, any loss, liability or expense (including but not limited to the fees and expenses of legal counsel) that is incurred without bad faith on the part of the Former Compusul Stockholder Agent and arises out of or in connection with the acceptance or administration of the Former Compusul Stockholder Agent's duties hereunder. The Former Compusul Stockholder Agent shall have reasonable access to information about Compusul and McAfee, and the reasonable assistance of Stockholder's and McAfee's officers and employees for the purpose of performing his duties and exercising his rights hereunder; provided, however, that the Former Compusul Stockholder Agent shall treat as confidential and not disclose any nonpublic information from or about Stockholder or McAfee to anyone (except on a need to know basis to his legal counsel and other individuals who agree in writing with McAfee to treat such information as confidential). The Former Compusul Stockholder Agent shall be entitled to a distribution from the Escrow Fund equal to any such indemnity claim which has not been satisfied; provided, however, that no such distribution shall be made until all claims of McAfee set forth in any Officer's Certificate delivered to the Escrow Agent on or prior to the Termination Date have been resolved. 9.10 Actions of the Former Compusul Stockholder Agent. A decision, act, consent or instruction of the Former Compusul Stockholder Agent shall constitute a decision of all the Stockholders, and shall be final, binding and conclusive upon each of the Stockholders, and the Escrow Agent and McAfee may rely upon any decision, act, consent or instruction of the Former Compusul Stockholder Agent as being the decision, act, consent or instruction of each and all of the Stockholders. The Escrow Agent and McAfee are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Former Compusul Stockholder Agent. 9.11 Third-Party Claims. In the event McAfee becomes aware of a third-party claim which McAfee believes may result in a demand against the Escrow Fund, McAfee shall promptly notify the Former Compusul Stockholder Agent of such claim. McAfee shall have the right to settle any such claim with the written consent of the Former Compusul Stockholder Agent, which consent shall not be unreasonably withheld. In the 27 32 event that the Former Compusul Stockholder Agent has consented to any such settlement, neither the Stockholders nor the Former Compusul Stockholder Agent shall have any power or authority to object under Section 9.6 or any other provision of this Agreement to the amount of any claim by McAfee against the Escrow Fund for indemnity with respect to such settlement. If any proceeding is commenced, or if any claim, demand or assessment is asserted, in respect of which a claim for indemnification is or might be made against the Escrow Fund based on matters other than (i) the intellectual property of Stockholder or (ii) claims made by customers of McAfee or Compusul, the Former Compusul Stockholder Agent may, at his option, contest or defend any such action, proceeding, claim, demand or assessment, with counsel selected by the Former Compusul Stockholder Agent who is reasonably acceptable to McAfee; provided, however, that if McAfee shall reasonably object to such control, then the Former Compusul Stockholder Agent and McAfee shall cooperate in the defense of such matter; provided further, that the Former Compusul Stockholder Agent shall not admit any liability with respect thereto or settle, compromise, pay or discharge the same without the prior written consent of McAfee, which consent shall not be unreasonably withheld. With respect to any claim for indemnification based on matters relating to the intellectual property of Compusul, or customers of Compusul or McAfee, McAfee shall have the option to defend any such proceeding; provided, however, that McAfee shall not admit any liability with respect thereto or settle, compromise, pay or discharge the same without the prior written consent of the Former Compusul Stockholder Agent, which consent shall not be unreasonably withheld. The Former Compusul Stockholder Agent or McAfee, whichever is not controlling the defense of any matter, shall be entitled, at their expense, to participate in such defense. ARTICLE X MISCELLANEOUS 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to McAfee, to McAfee Associates, Inc. 2710 Walsh Avenue Santa Clara, CA 95051-0963 Attention: William L. Larson, President and Chief Executive Officer 28 33 if to Sub, to McAfee do Brasil Ltda., Rua Boa Vista, 254, 7th floor, suite 710 01014-907 Sao Paulo, S.P. with a copy to: Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 155 Constitution Drive Menlo Park, California 94025 Attention: Carla S. Newell and Pinheiro Neto Advogados Rua Boa Vista, 254, 9th Floor 01014-907 Sao Paulo, S.P. Attention: Raphael de Cunto (b) if to Compusul, to Compusul R. Unapitinga, 81 04613-070 Sao Paulo, S.P. Attention: Chief Executive Officer (c) if to the Stockholders, to Joao Sau Miret Rua Pedro Gomes Cardim, 128, apt. 11-A 05617-000 Sao Paulo, S.P. Andre Pitkowski Av. Dr. Silva Melo, 106, apt. 113-Bl. 4 04675-010 Sao Paulo, S.P. Aldir Clementi Rua Domingos Fernandes, 700, Apt. 111 04509-010 Sao Paulo, S.P. with a copy to Stroeter, Hallack, Apocalypse Av. Indianopolis, 867 04063-001 Sao Paulo, S.P. 29 34 All notices shall be effective on receipt. 10.2 Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrases "the date of this Agreement," "the date hereof," and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date first set forth in this Agreement. 10.3 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 10.4 Entire Agreement; No Third Party Beneficiaries. This Agreement, the other Transaction Documents (including the documents and the instruments referred to herein) (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder other than the rights of the Stockholders to receive the consideration specified in Article I of this Agreement. 10.5 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of California, U.S.A., without regard to any applicable conflicts of law. 10.6 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns. 10.7 Attachments and Schedules. All attachments and schedules attached hereto, together with the Compusul Disclosure Schedule, are incorporated herein by reference. 10.8 Severability. In the event that any provision contained herein shall be held to be invalid, illegal or unenforceable for any reason, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 10.9 Fees and Expenses. All costs and expenses, including professional fees, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. The Stockholders shall be responsible for any expenses incurred by the Stockholders and Compusul. 30 35 10.10 Amendment. This Agreement may not be amended except by an instrument in writing signed by McAfee, Compusul, and Stockholders holding a majority of the quotas of Compusul Stock. 10.11 Extension; Waiver. At any time prior to the Closing, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 10.12 Remedies of McAfee. Compusul and the Stockholders acknowledge that, in addition to all other remedies to which McAfee is entitled, McAfee shall have the right to enforce the terms of this Agreement by a decree of specific performance, provided McAfee is not in material default hereunder. The parties also agree that the rights and remedies of each party to this Agreement set forth in this Agreement and in all of the exhibits and schedules attached hereto and documents referred to herein shall be cumulative and share inure to the benefit of each such party. 10.13 Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or to protect the rights obtained hereunder the prevailing party shall be entitled to its reasonable attorneys' fees, including attorneys' fees on appeal, costs, and disbursements in addition to any other relief to which it may be entitled. 31 36 IN WITNESS WHEREOF, McAfee, Sub, Compusul and the Stockholders have caused this Stock Purchase Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. McAFEE ASSOCIATES, INC. By: /s/ TERRY DUREA ----------------------------------- Title: VICE PRESIDENT ----------------------------------- McAFEE DO BRASIL LTDA. By: /s/ RAPHAEL DE CUNTO ----------------------------------- Title: FALSNER, PINHIGLO NETO, AVOGADOS ----------------------------------- COMPUSUL - CONSULTORIA E COMERCIO DE INFORMATICA LTDA. By: /s/ JOAO SAU MIRET ----------------------------------- By: /s/ ANDRE PITKOWSKI ----------------------------------- By: /s/ ALDIR CLEMENTI ----------------------------------- Title: ----------------------------------- STOCKHOLDERS: /s/ JOAO SAU MIRET ------------------------------------------ Joao Sau Miret /s/ ANDRE PITKOWSKI ------------------------------------------ Andre Pitkowski /s/ ALDIR CLEMENTI ------------------------------------------ Aldir Clementi EX-11.1 5 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 MCAFEE ASSOCIATES, INC. COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share amounts)
Three months ended March 31 --------------------------- 1997 1996 ------- ------- Primary and Fully Diluted Weighted average common shares outstanding 49,600 46,568 for the period Dilutive effect of options, net 4,010 5,227 ------- ------- Shares used in per share calculation 53,610 51,795 ======= ======= Net income $19,696 $ 1,083 ======= ======= Net income per share $ 0.37 $ 0.02 ======= =======
32 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 MAR-31-1997 95,338 76,668 36,344 0 0 194,607 18,022 (7,369) 242,063 49,404 0 0 0 495 187,995 242,063 73,357 73,357 5,918 43,222 0 0 (1,632) 31,767 0 31,767 0 0 0 19,696 0.37 0.37
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