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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended
March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to __________
Commission file number 0-17431
NETWORK GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0115204
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
4200 Bohannon Drive, Menlo Park, CA 94025
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 415/473-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant on April 30, 1995 was $513,422,843 based on the
closing sales price of the Company's Common Stock as reported on The Nasdaq
National Market. As of April 30, 1995, the registrant had outstanding
21,850,250 shares of Common Stock, par value $0.01.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy statement for Annual Meeting of Stockholders scheduled to
be held August 18, 1995, is incorporated by reference into Part III.
This report including all exhibits and attachments contains 42
pages. The Exhibit Index is located on pages 36-38.
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NETWORK GENERAL CORPORATION
1995 FORM 10-K REPORT
Table of Contents
PART I
ITEM 1. Business 3
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of matters to a vote of security holders 13
PART II
ITEM 5. Market for the registrants common equity and related
stockholder matters 13
ITEM 6. Selected Financial Data 14
ITEM 7. Managements discussion and analysis of financial condition
and results of operations 15
ITEM 8. Financial statements and supplementary data 20
ITEM 9. Changes in and disagreements with accountants on accounting
and financial disclosures 31
PART III
ITEM 10. Directors and executive officers of the registrant 31
ITEM 11. Executive compensation 32
ITEM 12. Security ownership of certain beneficial owners and
management 32
ITEM 13. Certain relationships and related transactions 32
PART IV
ITEM 14. Exhibits, financial statement schedules and reports on
Form 8-K 36
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Network General Corporation ("Network General" or the "Company")
designs, manufactures, markets, and supports software-based fault and
performance (also known as analysis and monitoring) solutions for managing
computer networks. Recognizing the growing diversity of network technologies
and the need to make them work together, Network General-Registered
Trademark- develops products and services that help maximize network
productivity and minimize downtime. The Company's product line consists of
portable tools and centralized systems that use artificial intelligence-based
software to facilitate real-time identification, diagnosis and resolution of
network problems. The Company also provides product support, training, and
network troubleshooting consulting services.
The Company's portable tools are designed to analyze local area
networks and internetwork segments. Network General's flagship portable
product is the Expert Sniffer Network Analyzer-Registered Trademark. All of
the Company's portable network analysis tools consist of software and a choice
of network interface cards that run on a variety of portable and notebook
personal computers.
The Distributed Sniffer System-Registered Trademark- product ("DSS")
is designed for monitoring and troubleshooting distributed enterprise and
client/server networks. DSS consists of centralized console software that
displays information received from distributed hardware-based servers. DSS
facilitates centralized monitoring and analysis of local and remote network
segments. With the Companys acquisition of ProTools, Inc. ("ProTools"), in
January 1994, the Company acquired Products that use standards-based Remote
Monitoring (RMON) technology. ProTools RMON technology (the Foundation
Manager -Registered Trademark-product) enables proactive monitoring and
performance analysis of network segments.
Network General sells its products to domestic end users principally
through its direct sales force. The Company sells its products to
international end users through a combination of distributors, direct sales,
systems integrators, and authorized resellers.
Network General was incorporated in California in May 1986 and was
reincorporated in Delaware in December 1987. Unless the context otherwise
requires, "Network General" and "the Company" refer to Network General
Corporation, a Delaware corporation, and its predecessors and subsidiaries.
THE MARKET FOR NETWORK ANALYSIS SYSTEMS AND TOOLS
NETWORK MANAGEMENT PERSONNEL. Network General's largest group of
customers can be classified as network management personnel who are directly
responsible for supporting the operation of sophisticated data networks.
Generally, these users are charged with the management of an enterprise-wide
network which serves a department, a division of a large organization or the
entire organization. The Company's network products are designed to enable
local area network ("LAN") and wide area network ("WAN") managers to do their
jobs more effectively with the following benefits to the organization:
MINIMIZES NETWORK DOWNTIME. Network General's products provide
monitoring and analysis capabilities to help find and solve problems quickly
and minimize network downtime. The Company's artificial intelligence-based
expert analysis software facilitates the pinpointing of problem origins and
suggests diagnoses to expedite complex problem resolution.
ALLOWS PROACTIVE NETWORK MANAGEMENT. Identifying problems before
they occur is the key to effective network management. The Company's DSS
and Sniffer-Registered Trademark-family of products automatically forewarns
network professionals of symptoms before they become problems. Network
General products help companies understand network activity and detect
changes in network behavior. These Network General products also help
network managers proactively plan network expansion. As a result, employees
continue to perform key business functions on a network without interruption.
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REDUCES OPERATING COSTS. Network General's systems products provide
centralized monitoring and analysis capabilities to help solve remote
problems from a single location. By reducing the time needed to resolve
problems, the Company's products maximize existing network personnel
resources and minimize the need to hire additional network management
professionals. As a result, travel and staffing expenses are reduced.
OPTIMIZES NETWORK INVESTMENTS. To help eliminate unnecessary
purchases of network equipment such as bridges and routers, Network General
products assist network managers with effective bandwidth and configuration
planning.
SYSTEMS INTEGRATORS AND FIELD SERVICE ORGANIZATIONS. Many data
processing and data communications organizations offer systems integration
and service options to their customers. These services include designing,
purchasing, implementing, and servicing the customer's entire data network,
or servicing only the equipment and software which they have supplied. In
either case, determining the cause of network problems is an ongoing issue
for systems integrators and field service organizations. Diagnostic tools,
including network analysis systems and tools like those offered by the
Company, are useful in resolving such issues. Benefits to these organizations
include:
INCREASED CUSTOMER SATISFACTION. The Company's network fault and
performance management products aid integrators and field service
organizations in resolving customer problems more rapidly, enhancing customer
satisfaction.
REDUCED SERVICE EXPENSE. The ability to resolve problems rapidly,
at the location site or from a central office, lowers the cost of service
calls.
GREATER LEVERAGE OF TECHNICAL EXPERTS. Network General's products
allow relatively unskilled field service personnel to capture customer
problems at the source for remote analysis by technical experts. As a
consequence, technical experts do not need to travel or replicate problems,
and their resources can be used more effectively.
TECHNOLOGY AND ARCHITECTURE
Network General's fault and performance management products are
designed to help network professionals effectively manage their growing
networks. The Company's technology is available as a portable tool (the
Expert Sniffer Network Analyzer) and as comprehensive systems (the
Distributed Sniffer System and Foundation Manager). These products are
available in a variety of operating systems and price points so customers can
tailor monitoring and analysis solutions to their specific network and
operating budget.
NETWORK ANALYSIS PRODUCTS. The Company's network analysis products
consist of software and the communications card necessary to run this
software. The analysis software includes specialized code that interprets
over 200 network protocols and utilizes artificial intelligence to diagnose
network problems. Network General's analysis software operates on networks
that utilize a mix of operating systems, protocols and physical connection
technologies.
Different software is written for each physical network connection
technology. This software must manage the capture of packets of data in real
time for display and analysis. It is extremely important that this software
be highly efficient, since Expert Sniffer Analysis products examine data
packets on the network rather than just packets destined for a particular
node.
Since 1992, Network General's analysis software has utilized
artificial intelligence technology, known as "expert analysis". Expert
analysis "learns" network configurations automatically as it captures packets
for analysis. By automating the real time identification and diagnosis of
network problems, expert analysis provides faster problem resolution. The
expert analysis technology engineered in its Sniffer and DSS family of
products provides network managers with a complete set of actionable
information about their networks. Due to the automated recognition of
problems, expert analysis permits less experienced network managers to manage
their networks more effectively. The Company originally engineered expert
analysis for use with portable Expert Sniffer Network Analyzers.
Subsequently, the Company engineered this analysis software for the
Distributed Sniffer
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System. Today, the Distributed Sniffer System with Expert Analysis console
software is compatible with UNIX and Microsoft Windows operating systems.
The Company continues to develop new releases of its portable
Sniffer Network Analyzer software including, additional topology and hardware
platform options. In 1993, the Company introduced the Notebook Sniffer
Analyzer-Trademark- to address the growing demand for lighter-weight,
portable network analysis platforms. The first expert analysis product to
support the Personal Computer Memory Card International Association (PCMCIA)
Type II standard, the Notebook Sniffer Analyzer (comprised of software and a
PCMCIA network interface card) supports a variety of popular, lightweight
486-based notebook computers. In 1994, the Company began shipping Network
General Reporter, an application that allows users to easily generate
management reports from information generated by other Network General
products.
Today, portable Sniffer Network Analyzers and the Distributed
Sniffer System deliver expert analysis solutions that respond in real time,
automatically learn about each network segment, and expedite solutions to
network problems. Portable Expert Sniffer Network Analyzers and the
Distributed Sniffer System examine network segments for symptoms, diagnose
problems, explain diagnoses, and recommend corrective action.
NETWORK MONITORING PRODUCTS. The addition of ProTools, distributed
monitoring technology (Foundation Manager) provides standard-based monitoring
technology which enables proactive monitoring and performance analysis of
network segments. This capability is delivered via a centralized console and
hardware probes and/or software agents distributed throughout the network.
The Foundation Manager remote monitoring, or RMON product, allows
network professionals to monitor network activity on every LAN segment. To
centrally monitor all network configurations, Foundation Manager RMON
products offer expandable options - from single-segment LANs to distributed
client/server networks. Foundation Manager products display statistics and
provide network managers a view into activity along the network.
Using the Internet Engineering Task Force standard for Ethernet and
token ring LANs, the Company's RMON products provide 24-hour monitoring of
remote network segments. In addition to fully complying with the industry
standard, the Company's RMON products use customized software implementations
that enable proactive network planning via baselining, trend graphing, and
reporting mechanisms.
PRODUCTS AND SERVICES
TOOLS
PORTABLE EXPERT SNIFFER ANALYZER PRODUCTS. Network General began
shipping Sniffer Network Analyzer products in September 1986. In order to
address the growing complexity of multivendor, multiprotocol, multitopology
network environments, Network General has designed and tested its software to
run on a variety of computer platforms. The product is intended to be used
as a portable tool, either on a 'portable' or 'notebook' sized computer
platform, but it can also be installed on a 'desktop' computer platform if
the user desires it.
Network General markets its Sniffer Network Analyzer software in a
'module-level' configuration which includes software and a communications
card. Each Sniffer Network Analyzer offers customers a combination of the
following: (i) up to four physical connection technologies, (ii) over 200
protocol interpreter suites, (iii) Expert Analysis technology, and (iv)
software configured for a variety of computer platforms. As a result,
Sniffer Network Analyzers can adapt to customers' specific analysis needs as
their network configurations change.
While the functions performed by the Sniffer family of products are
complex, a great deal of design effort has gone into making the use of each
Sniffer Network Analyzer relatively simple. A unique user interface with an
intuitive menuing system allows customers to become productive quickly.
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Network General offers the ability to capture information from four
different physical connection technologies; Ethernet, 16/4 Mbps token ring,
FDDI, and internetworks. Network General offers the following protocol
interpreter suites with Expert Sniffer Network Analyzers:
TCP/IP, Novell NetWare, DECnet, Sun NFS, X-Window, IBM, AppleTalk,
Banyan VINES, OSI, NetBIOS, OS/2 LAN Manager, 3Com 3+Open,SQL*NET,
XNS/MS-Net, IBM LAN Server, Bridge/Router HDLC, X.25, and Frame Relay.
In addition to the families of protocol interpreters provided by
Network General, network managers can write their own protocol interpreters
using the Company's defined and documented interface for custom protocol
interpreters.
Currently the price range for module-level versions of Expert
Sniffer Network Analyzer products is approximately $9,995 to $18,500 per unit
for initial purchases, depending on the number and type of network topologies
selected. Customers may also purchase the required platform from either the
Company or from suppliers.
PCI LINE OF PRODUCTS. The Company's tool products include the PCI
line of WAN analysis products. A WAN is a data communications network that
spans relatively long distances, typically using a public telephone network or
a public data communications network as its data transmission media. The
recommended price range for Network General's PCI WAN analysis products is
$2,000 to $15,000. The PCI line of WAN analysis products accounted for less than
5% of the Company's revenues in fiscal year 1993, fiscal year 1994 and fiscal
year 1995. The Company believes that its existing channels are no longer the
most efficient method for distributing the PCI line of products. Accordingly,
the Company entered into an agreement with Atelco Ltd., which gave
NexTest, Inc., a wholly owned subsidiary of Atelco Ltd., world wide distribution
rights for the PCI line of products effective April 1, 1994, in exchange for
distribution fees paid to Network General. Network General retains ownership
of, and presently intends to further develop the related technology.
SYSTEMS
DISTRIBUTED SNIFFER SYSTEM. Network General first shipped its
Distributed Sniffer System troubleshooting products in June 1991 and has been
enhancing the product since then, primarily to add additional protocol
decoders and system functionality. DSS allows customers to monitor and
diagnose problems on complex, multisegment networks from centralized
locations. With the addition of expert analysis capabilities, DSS provides
automatic problem diagnosis and recommends solutions which are displayed on a
console to enable network managers to fix problems faster. A Distributed
Sniffer System consists of one or more servers, and consoles.
Distributed Sniffer Systems analysis products are comprised of
SniffMaster consoles and distributed intelligent Sniffer Servers which
analyze, process, and consolidate information from individual network
segments. When placed on distributed segments, Sniffer Servers communicate
through the network to one or more central SniffMaster consoles. Information
from the same Sniffer Server can be viewed by network managers at various
locations concurrently. Sniffer Servers provide continuous 24-hour alarm
functions and analysis of network segments. DSS communicates alarm
information to network management stations to integrate analysis with other
network management functions on a single console. To speed centralized
network analysis and further maximize customers' hardware investments, DSS
monitoring and analysis solutions are also integrated with leading network
management system platforms and operating systems.
Distributed Sniffer System analysis products are available for
Ethernet, 16/4 Mbps token ring, FDDI and internetwork topologies. Network
General offers the following protocol interpreters with the Distributed
Sniffer System:
TCP/IP, Novell NetWare, DECnet, Sun NFS, X-Window, IBM, AppleTalk,
Banyan VINES, OSI, NetBIOS, OS/2 LAN Manager, 3Com 3+Open, XNS/MS-Net,
IBM LAN Server, Bridge/Router HDLC, X.25, and Frame Relay.
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The price range for a Sniffer Server is approximately $7,495 to
$20,495, depending upon the topology selected. The price range for
SniffMaster-Registered Trademark- console software is approximately $3,995 to
$4,995 depending upon the operating system selected.
FOUNDATION MANAGER (MONITORING PRODUCTS). Foundation Manager is
comprised of distributed agents, (Cornerstone Agents) probes (Cornerstone
Probes-Trademark), and consoles which monitor Ethernet and token ring network
communications continuously. Centralized Foundation Manager consoles display
and process information from Cornerstone Agents and Cornerstone Probes on
individual network segments.
Foundation Manager offers standards-based Remote Monitoring (RMON)
technology. These monitoring products allow network managers to baseline
normal network behavior. Foundation Manager provides an early warning system
that detects changes in network activity. Supported by continuous 24-hour
alarm functions, network managers can conduct performance analysis of network
segments using Foundation Manager. To preserve customers' investments in
RMON-compatible products, Foundation Manager fully supports the Internet
Engineering Task Force industry standards for remote monitoring. With
Foundation Manager, network managers have better access to network statistics
such as utilization and communication information to better understand
current network behavior and plan for future growth.
The price for Cornerstone Agent software is approximately $1,200.
The price range for Cornerstone Probes, which combine software and hardware,
is approximately $2,995 to $3,495, depending upon the topology selected. The
price for Foundation Manager console software is approximately $5,995.
SERVICES
Network General supports its products directly domestically and with
the assistance of its distributors internationally. The Company currently
offers a range of services, including product support, training, and network
performance consulting.
Network General's products are sold with a first-year support
agreement included in the price. Network General also offers a range of
extended support services for its products for a fixed fee. Customers whose
products are under first year or extended support agreements are entitled to
receive product support services, which include software upgrades at no
charge, hardware and software support, phone-in technical support, and
bulletin board access. In addition, first year support agreements include a
warranty on all hardware components purchased from the Company. Warranty
costs to date have not been significant.
During fiscal 1994 year and fiscal year 1995, Network General
expanded its sales efforts related to extended software service support
agreements, promoting the purchase of these agreements at the time of
original product order. Because the Company recognizes the revenues from
these agreements over the term of the agreement, sales of these agreements
contributed to a significant increase in deferred revenue related to support
services.
The Company also offers introductory, intermediate and advanced
training courses designed for LAN and WAN technicians and network managers.
During the fiscal year ended March 31, 1995, classes were held at Network
General training facilities in Menlo Park, California, Beaverton, Oregon, and
Atlanta, Georgia. In fiscal year 1995, Network General expanded its sales
efforts related to training courses, since the Company believes that training
creates increased awareness of and demand for the Company's products. This
caused a large growth in sales of training courses in fiscal year 1995. Due
to the large increase in demand for training courses, the Company has opened
new training centers in Chicago, Illinois and Anaheim, California. Training
courses were also held in major cities throughout the United States and
internationally, as well as at customer facilities.
Network General offers consulting services which provide network
monitoring and analysis expertise to customers. These services are offered
at Network General's California facilities and at remote customer locations.
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The Company's revenues from services represented 19%, 16%, and 15% of
the Company's revenues in each of the three fiscal years ended March 31, 1995,
1994 and 1993, respectively.
DISTRIBUTION, MARKETING AND CUSTOMERS
DISTRIBUTION Network General sells its products to end users in the
United States and Canada primarily through its direct sales force and, to a
lesser extent, through resellers and systems integrators. The Company sells
its products internationally through a combination of direct sales,
distributors, resellers, and systems integrators. The Company's
distributors, resellers, and systems integrators do not receive sales
commissions, but are entitled to purchase at a discount (relative to
suggested end-user prices) for the products which they resell.
UNITED STATES AND CANADIAN SALES FORCE. Beginning in 1992, the
Company began a transition away from distribution through independent
manufacturers' representatives to a more comprehensive direct sales force.
Independent manufacturers' representatives sell and represent lines of
products in addition to those of Network General. Further, these
distributors and manufacturers' representatives may not have the resources to
expand their operations to meet increased demand for Network General's
products. Accordingly, the Company decided to create a direct sales force
that would concentrate solely on Network General's products. In addition,
the Company has the ability to add additional sales representatives in areas
where demand for the Company's products has increased, where the independent
manufacturers' representatives may not have been willing to make such an
investment.
In March 1995, the Company reacquired the exclusive right to
distribute its products from Atelco, Limited ("Atelco") through an Asset
Purchase Agreement. In connection with that agreement, the Company's
wholly-owned subsidiary, Network General (Canada) Limited hired a direct
sales force of approximately 10 people from Atelco.
The expansion of the Company's US and Canadian direct sales force
has increased the fixed portion of the Company's sales and marketing
expenses. Independent manufacturers' representatives were paid solely on
commission which varies with revenues, while the Company's US and Canadian
direct sales personnel receive a fixed base salary and a variable commission
based on revenues. Therefore, lower-than-anticipated revenues would have a
greater adverse impact on operating results with an internal domestic sales
force than they would have had if only manufacturers' representatives were
employed.
DOMESTIC DISTRIBUTORS. Although Network General sells its products
to end users in the United States primarily through its direct sales force,
purchase orders to Network General are also solicited by resellers, systems
integrators and manufacturers' representatives for Network General's products
based upon sales leads which are often generated by Network General's
marketing efforts.
INTERNATIONAL DISTRIBUTION. International sales accounted for
approximately $31.0 million, $25.7 million, and $20.7 million in revenues in
fiscal 1995, 1994 and 1993, respectively. Network General believes that
export sales may represent an increasingly significant portion of its product
sales in the future. Accordingly, the Company is expanding its international
sales activities and is incurring additional related costs. As of March 31,
1995, the Company had 28 employees whose responsibilities primarily included
sales outside the United States, as compared to 27 on March 31, 1994 and 16
on March 31, 1993.
The Company established its first direct sales efforts in major
overseas markets in 1993. However, the Company generates most of its
international revenues primarily from sales by distributors, resellers and
system integrators. No single distributor accounted for 10% or more of the
Company's revenues in any one of the three fiscal years ended March 31, 1995,
1994, or 1993. The Company had approximately 56 international distributors
as of March 31, 1995, and had approximately 42 international distributors as
of March 31, 1994 and March 31, 1993. Network General retains the option to
terminate these relationships if sales quotas are not attained.
Network General is subject to the normal risks of conducting
business internationally, including longer payment cycles and greater
difficulty in accounts receivable collection. The Company offers 45 day net
terms internationally as compared to 30 day net terms in the United States.
Also, collection of overdue international receivables generally is more
difficult because it must be carried out under foreign legal systems. Prior
to fiscal 1994, all sales outside of the United States were denominated in
U.S. dollars. However, the Company began to
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make direct sales in foreign currencies in fiscal 1994. The amount of
revenues from direct sales in foreign currencies was not a significant
portion of international revenues in fiscal 1994 or in fiscal 1995, and the
Company has not experienced any material adverse effects due to fluctuating
exchange rates. As the amount of direct sales in foreign currencies to
international markets increases, the Company will consider utilizing hedging
arrangements to reduce its exposure against such risks.
Network General's distributors, systems integrators, and resellers
sell and represent lines of products in addition to those of Network General.
While Network General encourages these distributors, integrators, and
resellers to focus on its products through marketing and support programs,
there is a risk that they may give higher priority to products of other
suppliers, thus reducing their efforts to sell Network General's products.
In addition, these distributors, integrators, and manufacturers'
representatives may not have the resources to expand their operations to meet
increased demand for Network General's products.
MARKETING. Network General's marketing efforts are focused on
assisting in the definition of Network General products and services to meet
customer's changing needs for network fault and performance management.
Network General supports these efforts through market education and demand
generation programs in an effort to increase company awareness and build
brand value. Some of the programs in which the Company is involved include
participation in industry trade shows, advertising in the trade press,
conducting executive seminars and electronic marketing via the Internet.
The Company has established cooperative partnership relationships
with other networking industry leaders in order to be in a position to
support new developments in networking as soon as possible. Network General
believes that these relationships are made possible by the fact that Network
General, unlike its principal competitors, does not offer network products in
competition with many of these industry leaders.
CUSTOMERS. As of March 31, 1995, Network General has shipped over
36,000 units of its portable Sniffer Network Analyzer and Distributed Sniffer
System products. Purchasers of Network General's products include 97 of the
Fortune 100 industrial companies. In addition, Network General has provided
products to many leading education, government, health care, and service
organizations. No single customer accounted for more than 10% of revenues
during fiscal 1995, 1994 or 1993.
Many of Network General's customers have purchased multiple product
components. Since the market for LAN and WAN analysis tools and systems is
relatively new, purchasing patterns of existing and potential customers have
not yet become clear. As a result, it is difficult for Network General to
precisely estimate the requirements of its customers and, therefore, the size
of its potential market.
COMPETITION
Network General currently experiences substantial competition from
established and emerging computer, communications, intelligent network
wiring, network management and test equipment companies and expects such
competition to increase in the future. The primary competitor for Network
General products is Hewlett-Packard Company ("HP"). HP has greater name
recognition, more extensive engineering, manufacturing and marketing
organizations and substantially greater financial, technological and
personnel resources than those available to Network General.
Network General competes principally on the basis of the Company's
reputation as a market leader in network fault and performance management.
The Company believes that this leadership position is a direct result of
developing products and services that meet customers changing requirements
for network monitoring and analysis.
Network General differentiates itself from the competition with a
wide range of product offerings that deliver multivendor, multitopology,
multiprotocol capabilities and standards-based solutions that work in
conjunction with heterogeneous networks. Network General has been able to
compete successfully due to the functional advantage and multivendor
interoperability of its products versus those of its competitors. Additional
competitive advantages include Network General's product name recognition and
partnerships with other industry vendors to develop products that provide
complementary fault and performance management capabilities.
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The LAN and WAN industries are characterized by rapid technological
advances and can be significantly affected by product introductions and market
activities of industry participants. In addition to its current principal
competitors, Network General expects substantial competition from established
and emerging computer, communications, intelligent network wiring, network
management and test instrument companies. There can be no assurance that
Network General will be able to compete successfully in the future with these
existing or anticipated competitors.
In particular, competitive pressures from existing manufacturers who
offer lower prices or who have introduced new products have in some instances
resulted in delayed or deferred purchasing decisions by potential customers
of Network General. Lower prices or new products introduced by competitors
may result in purchase delays or deferrals of the Company's products or
require Network General to reduce its prices. These competitive scenarios
could adversely affect Network General's revenues and operating margins.
PRODUCT DEVELOPMENT
Network General believes that its future success depends on its
ability to enhance existing products and develop new products that maintain
technological leadership and continue to meet a wider range of customer
needs. Accordingly, Network General intends to focus its product development
efforts on network management applications that enable customers to optimize
the efficiency of their networks.
In order to successfully develop certain of these new products,
Network General is dependent upon timely access to information about new
developments relating to such technology and standards. There can be no
assurance that such information will continue to be available, that Network
General will be able to develop and market new products successfully or that
Network General will be able to respond effectively to technological changes
or new product announcements by others.
Network General continues to develop products that address a variety
of topologies which connect complex and changing network computing
environments. In line with its efforts to maintain broad coverage of all
major physical LAN connection technologies, Network General developed a
Sniffer Network Analyzer product designed for Fiber Distributed Data
Interface ("FDDI") networks. The Company began shipping this product in June
of 1992. Network General believes the FDDI product is important to its
strategy of providing network analysis solutions to managers of multitopology
networks.
In August 1992, Network General entered the UNIX market with a
release of Distributed Sniffer System tailored for the UNIX environment.
Network managers can now access the Distributed Sniffer System capabilities
from Sun workstations, X-Window-based workstations, or X-terminals.
The Company also packages Expert Sniffer Network Analysis products
in various ways to satisfy changing network environments. To make analysis
easier for field service personnel, in 1993 the Company introduced a new
generation of flexible network analysis tools. Utilizing the PCMCIA standard,
Notebook Sniffer Analyzers operate on a variety of light-weight notebook
computer platforms.
In fiscal year 1994, the Company engineered standards-based RMON
monitoring compatibility with popular Integrated Network Management Systems
("INMSs"). Additionally, Network General integrated DSS monitoring and
troubleshooting solutions to facilitate the seamless transition between RMON
and Expert Analysis on the same console. These newest innovations to the
Distributed Sniffer System help customers proactively monitor and maximize
the efficiency of client/server networks from end-to-end. By making
information gathered by Distributed Sniffer System available to INMSs,
Network General helps customers attain a seamless network management
environment.
In January 1994, Network General entered the Microsoft Windows
market with the release of SniffMaster for Windows ("SM/W"). SM/W consoles
make the Company's technology available to users of Windows operating systems
and expand the potential customer base. Network managers can now access the
Distributed Sniffer System from a variety of platforms utilizing the
Microsoft Windows 3.1 operating system.
10
<PAGE>
In fiscal year 1995, the Company shipped Network General
Reporter-Trademark- which displays information from the Sniffer analyzer,
DDS, and Foundation Manager products and prepares reports for the network
manager based upon that data. In addition, in fiscal year 1995 Network
General shipped several new products: (i) a new release of Sniffer analyzer
which included Banyan expert and Novell 4.0 protocol decodes; (ii) an add on
module for the Sniffer Network Analyzer to include Oracle protocol decodes;
and (iii) a Sniffer Server for FDDI.
During fiscal 1995, 1994 and 1993, research and development expenses
were approximately $20.0 million, $15.5 million and $12.2 million,
respectively. To date, all of Network General's research and development
expenses have been charged to operations as incurred.
MANUFACTURING AND SUPPLIERS
Network General's manufacturing operations consist primarily of
final assembly, testing and quality control of materials, components,
subassemblies and systems. Network General believes its quality control
procedures have been instrumental in achieving the high performance and
reliability of its products. To date, Network General has experienced
negligible return of its products by users. Network General's manufacturing
operations do not require any capital expenditures for environmental control
facilities or any special activities for protection of the environment.
Network Generals product series are designed for a variety of
network topologies and computer platforms available from multiple
manufacturers. However, the Company relies on a limited number of suppliers
for certain critical components of its products. Some of Network General's
products are designed around a specific computer platform available only from
a single supplier. In the case of the Company's Expert Sniffer Network
Analyzer products, customers purchase the required platform either from the
Company or from suppliers. As a result of product transitions by its
computer platform vendors, the Company is finding it increasingly necessary
to purchase and inventory computer platforms for resale to customers.
This situation creates the possibility that the Company may not be
able to purchase enough computer platforms to meet customer requirements, or
may end up with excess inventory if the Company purchases platforms that it
is unable to resell to customers. Any significant shortage of computer
platforms or other critical components for the Company's products could lead
to cancellations or delays of purchases of the Company's products, which
would materially and adversely affect the Company's results of operations.
If purchases of computer platforms or other components exceed demand, the
Company could incur expenses for disposing of excess inventory, which may
materially and adversely affect the Company's results of operations.
While the total time elapsed from first contact with a potential
customer to receipt of a valid purchase order can typically consume three to
six months, Network General attempts to ship its products to customers within
two weeks of receipt of a purchase order. Consequently, Network General
typically operates with very little backlog, and most of its revenues in each
quarter result from orders received in that quarter. Backlog of orders
generally represents less than one month's revenues and, as such, is not
considered material.
The Company establishes its expenditure levels based upon its
expectations as to future revenues, and if revenue levels were below
expectations, this could cause expenses to be disproportionately high.
Therefore, a drop in near-term demand would significantly affect revenues,
causing a disproportionate reduction in profits in any quarter.
PROPRIETARY RIGHTS AND LICENSES
As of the end of fiscal year 1995, Network General did not hold any
patents and relies upon copyright, trademark and trade secret laws to establish
its proprietary rights in its products. In May 1995, Network General's
wholly-owned subsidiary Progressive Computing Inc. ("PCI") obtained a patent on
a certain wide area protocol analysis; however, the Company does not consider
such patent to be material to its business. The Company continues to rely on
copyright, trademark and trade secret laws to establish proprietary rights in
its products and may from time to time receive notices of claims with respect to
potential infringement issues, none of which, to date, are believed by the
Company to have a material adverse effect upon the Company's financial position
or results of operations. Because the LAN and LAN/WAN industry is characterized
by rapid technological change,
11
<PAGE>
Network General relies principally upon innovative management, technical
expertise, business partnerships, and marketing skills to develop, enhance
and market its products.
EMPLOYEES
As of March 31, 1995, Network General employed a total of 572
persons, including 287 in sales, marketing and services, 170 in product
development and technical support, 26 in manufacturing, and 89 in management,
administration and finance. During fiscal year 1995, the vast majority of
research and development efforts and sales have been performed by Company
employees rather than outside consultants or resellers. None of Network
General's employees is represented by a labor union. Network General has
experienced no work stoppages and believes that its employee relations are
excellent.
Competition in the recruiting of personnel in the computer and
communications industry is intense. Network General believes that its future
success will depend in part on its continued ability to hire and retain
qualified management, marketing, sales and technical employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Network General and their ages as of June
1, 1995 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Leslie G. Denend 54 President, Chief Executive Officer and Director
James T. Richardson 47 Senior Vice President, Corporate Operations,
Chief Financial Officer and Secretary
Richard H. Lewis 60 Senior Vice President, Worldwide Field Operations
Michael H. Kremer 49 Senior Vice President, Product Development
Jill E. Fishbein 34 General Counsel, Assistant Secretary
</TABLE>
Mr. Denend was elected a director of the Company in June 1993. Mr.
Denend is the President and Chief Executive Officer of the Company and has
held those positions since June 1993. He was also the Company's Senior Vice
President of Products from February 1993 to June 1993. Prior to joining
Network General, he was President of Vitalink, a manufacturer of
internetworking products, from October 1990 to December 1992. From 1989 to
1990, Mr. Denend served in a variety of positions at 3Com Corporation, a data
networking company, most recently as Executive Vice President for Product
Operations. From 1983 to 1989, he was a principal with McKinsey & Company, a
management consulting firm.
Mr. Richardson was named Senior Vice President, Corporate
Operations, Chief Financial Officer and Secretary in April 1994. Prior to
joining Network General, Mr. Richardson was Vice President, Chief Financial
Officer and Secretary for Logic Modeling Corporation, a simulation modeling
software company, from July 1992 to April 1994. From 1989 to July 1992, he
served as Vice President of Finance and Administration, Chief Financial
Officer, Treasurer and Secretary of Advanced Logic Research, a microcomputer
company. From 1977 to 1989, Mr. Richardson held various positions at
Floating Point Systems, Inc., a scientific computer company, the last one of
which was as Vice President of Finance and Administration and Chief Financial
Officer.
Mr. Lewis was named Senior Vice President of Worldwide Field
Operations in December 1993. Mr. Lewis also served as the Company's Vice
President of U.S. Sales from January 1993 until December 1993. He joined
Network General in April 1990 as Regional Sales Manager, and was named
Director of U.S. Sales in
12
<PAGE>
January 1992. Prior to Network General, he spent 29 years at IBM, a computer
products company, where he held various positions, most recently OEM Account
Manager from September 1987 to March 1990.
Mr. Kremer was named Senior Vice President of Product Development in
May 1995. Mr. Kremer also served as Vice President of Engineering from
October 1994 through May 1995 and Director of Engineering Services from
December 1992 to October 1994. Prior to joining Network General, Mr. Kremer
was Director of Technical Services of the Company for Vitalink
Communications, a computer networking company from October 1990 through
December 1992. From March 1979 through October 1990, Mr. Kremer worked for
the Hewlett-Packard Company in various engineering and management positions
related to software development. Mr. Kremer's last position with
Hewlett-Packard was Software Quality Manager for a computer networking
division.
Ms. Fishbein joined the Company as General Counsel in October 1994
and was named Assistant Secretary in January 1995. Prior to her joining
Network General, Ms. Fishbein was Legal Counsel at Electronic Arts Inc., a
multimedia company, from April 1992 to September 1994. From October 1989 to
March 1992, Ms. Fishbein was an associate at the law firm of Fenwick & West.
ITEM 2. PROPERTIES
Network General's principal administrative, marketing, manufacturing
and product development facilities consist of approximately 100,000 square
feet in buildings in Menlo Park, California. Network General occupies this
space under lease agreements that expire in June 1997 (with a five year
extension option) and March 2000. In addition, Network General leases
development facilities in Oak Brook, Illinois and Beaverton, Oregon. The
Company also maintains sales offices in the United States, Canada and
Germany, and one sales office in each of Belgium, Switzerland, Italy, France,
the United Kingdom, Singapore and Japan. Total rent expense was approximately
$4,115,000, $3,854,000 and $2,676,000 in fiscal 1995, 1994 and 1993,
respectively.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company has been, or may become, involved in
litigation proceedings incidental to the conduct of its business. The
Company does not believe that any such proceedings presently pending will
have a material adverse effect upon the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK LISTING
Network Generals common stock is traded on the National Market under
the symbol NETG. As of May 30, 1995 there were 21,875,398 shares of common
stock outstanding held by 435 stockholders of record.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
---------------------- ----------------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter $20.50 $14.25 $11.50 $ 8.25
Second Quarter 20.00 14.50 14.38 10.13
Third Quarter 25.69 18.63 18.00 12.38
Fourth Quarter 30.00 23.50 22.75 16.63
</TABLE>
DIVIDEND INFORMATION
Network General has never declared cash dividends and presently
intends to continue this policy.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME DATA(1, 2)
(In thousands, except per share amounts) Year ended March 31,
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $139,755 $114,900 $86,483 $64,065 $47,945
Income from operations 31,768 13,915 10,415 7,386 8,205
Income before cumulative effect of
change in accounting method 25,411 11,276 8,645 4,274 6,287
Net income 25,411 11,276 8,645 4,274 5,465
Earnings per share before cumulative
effect of change in accounting
method 1.14 .53 .44 .26 .40
Earnings per share $ 1.14 $ .53 $ .44 $ .26 $ .35
Weighted average common and
common equivalent shares
outstanding 22,313 21,173 19,807 16,437 15,558
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA(1, 2)
(In thousands) As of March 31,
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $101,536 $ 65,457 $ 41,014 $45,065 $37,791
Total assets 196,190 160,846 132,033 66,883 49,601
Long-term obligations 2,225 2,134 1,555 1,026 222
Total stockholders equity $165,587 $132,283 $109,562 $51,011 $42,235
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA(1, 2)
(UNAUDITED)
(In thousands, except per share and
stock price amounts) Three months ended
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
'95 '94 '94 '94 '94 '93 '93 '93
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $39,800 $37,530 $32,375 $30,050 $33,950 $30,831 $26,399 $23,720
Gross profit 30,926 28,808 24,927 23,295 25,568 23,441 19,703 17,152
Income from operations 10,127 9,580 6,489 5,572 2,933 5,724 2,911 2,347
Income before provision
for income taxes 11,980 10,810 7,641 6,665 3,918 6,654 3,796 2,885
Net income 8,206 7,408 5,231 4,566 2,156 4,249 3,124 1,747
Earnings per share $ .36 $ .33 $ .24 $ .21 $ .10 $ .20 $ .15 $ .09
Price range of $ 30.00- $ 25.69- $ 20.00- $ 20.50- $ 22.75- $ 18.00- $ 14.38- $ 11.50-
common stock $ 23.50 $ 18.63 $ 14.50 $ 14.25 $ 16.63 $ 12.38 $ 10.13 $ 8.25
<FN>
1) Amounts for fiscal year 1993, fiscal year 1992 and fiscal year 1991 have
been restated in order to comply with Statement of Position 91-1. The
cumulative effect of the change in accounting method for the years prior to
fiscal year 1991 was an $822,000 reduction to net income. This is reflected in
fiscal year 1991.
2) All periods reflect combined results for Network General Corporation and
ProTools, Inc. ("ProTools"), a wholly owned subsidiary of Network General
Corporation. ProTools was acquired in January 1994 and the merger was
accounted for as a pooling of interests. Accordingly, the financial statements
for prior periods have been restated to include the results of ProTools.
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INCOME STATEMENT HIGHLIGHTS
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $139,755 22% $114,900 33% $86,483
Gross Profit 107,956 26% 85,864 29% 66,426
Percentage of revenues 77% 75% 77%
Operating Expenses 76,188 6% 71,949 28% 56,011
Percentage of revenues 55% 63% 65%
Net Income 25,411 125% 11,276 30% 8,645
Earnings per share $ 1.14 115% $ .53* 20% $ .44
<FN>
*Exclusive of restructuring and merger-related expenses, earnings per share
for the year ended 3/31/94 would have been $.74.
</TABLE>
REVENUES
The increasing complexity of computer networks has caused greater
demand for products that assist network administrators in
managing their networks. In general, sales have increased in
each geographic territory and across all product segments due to
increased demand for the Company's products and services.
<TABLE>
<CAPTION>
Sources of Revenues 1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic $108,773 22% $ 89,216 36% $ 65,769
International 30,982 21% 25,684 24% 20,714
-------- --------- --------
Total Revenues $139,755 22% $114,900 33% $ 86,483
-------- --------- --------
-------- --------- --------
</TABLE>
Revenues for the fiscal year ended March 31, 1995 were $139,755,000, an
increase of 22% over revenues of $114,900,000 reported for fiscal year 1994.
Fiscal year 1994 revenues increased 33% over revenues of $86,483,000 reported
for fiscal year 1993. Domestic revenues increased 22% to $108,773,000 for
fiscal year 1995, compared to $89,216,000 for fiscal year 1994. Fiscal year
1994 domestic revenues increased 36% compared to $65,769,000 for the year
ended March 31, 1993. International revenues increased 21% to $30,982,00 for
the year ended March 31, 1995, compared to $25,684,000 in the year ended
March 31, 1994. For fiscal year 1994, international revenues increased by 24%
compared to $20,714,000 for fiscal year 1993. International revenues
represented 22% of total revenues for the years ended March 31, 1995 and
March 31, 1994, compared to 24% for the year ended March 31, 1993.
<TABLE>
<CAPTION>
Sources of Revenues 1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tool Products $ 73,114 15% $ 63,714 20% $53,091
Percentage of total revenues 52% 55% 61%
System Products 39,872 20% 33,259 62% 20,497
Percentage of total revenues 29% 29% 24%
Subtotal Product Revenues 112,986 17% 96,973 32% 73,588
Percentage of total revenues 81% 84% 85%
Services 26,769 49% 17,927 39% 12,895
Percentage of total revenues 19% 16% 15%
Total Revenues $139,755 22% $114,900 33% $86,483
-------- -------- -------
-------- -------- -------
<FN>
Tool products include revenues from the Sniffer Network Analyzer products,
the PCI line of Wide Area Network (WAN) analysis products, product rentals
and royalties from license agreements. System products consist of revenues
from the Distributed Sniffer System analysis products and from the
Distributed Sniffer System Monitoring products (formerly ProTools Network
Control Series). Service revenues include first-year warranty revenues as
defined by SOP 91-1 and revenues from software support and maintenance
contracts, training and consulting services.
</TABLE>
The Company's tool products revenues increased 15% in the year ended March 31,
1995 to $73,114,000 from $63,714,000 in the year ended March 31 1994. Fiscal
year 1994 tool products revenues increased 20% from $53,091,000 reported for
the year ended March 31, 1993. Increased sales of the Company's Sniffer
Network Analyzer products were responsible for most of the increase in tool
products revenues in both years. Tool products revenues represented 52% of
total revenues in fiscal year 1995 compared to 55% in fiscal year 1994 and
61% in fiscal year 1993. Tool products revenues declined as a percentage of
total revenues due to faster
15
<PAGE>
growth in both system products revenues and service revenues during fiscal
year 1994 and due to faster growth in service revenues in fiscal year 1995.
System products revenues in fiscal year 1995 increased 20% to $39,872,000
from $33,259,000 in fiscal year 1994. Fiscal year 1994 system products
revenues increased 62% from $20,497,000 reported in fiscal year 1993. System
products revenues represented 29% of total revenues for the years ended March
31, 1995 and March 31, 1994, and 24% for the year ended March 31, 1993. The
increase in system products revenues in both years was a result of increased
Distributed Sniffer System analysis products sales, partially offset by a
decrease in monitoring product revenues.
For the year ended March 31, 1995, service revenues totaled $26,769,000, an
increase of 49% from $17,927,000 in the year ended March 31, 1994. Fiscal
year 1994 service revenues increased 39% from $12,895,000 in fiscal year
1993. The increase in service revenues in both years related to increased
demand for all categories of services. Service revenues represented 19%, 16%
and 15% of total revenues in fiscal years 1995, 1994 and 1993, respectively.
GROSS PROFIT
<TABLE>
<CAPTION>
(As a percentage of related revenues) 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Products 79% 76% 76%
Services 69% 69% 80%
Total 77% 75% 77%
</TABLE>
Cost of revenues consists of manufacturing costs, cost of services and
warranty expenses. Gross profit as a percent of total revenues was 77%, 75%
and 77% for the years ended March 31, 1995, 1994 and 1993, respectively. The
increase in gross profit as a percent of revenues in fiscal year 1995
compared to fiscal year 1994 was primarily due to decreased tool product
platform shipments, which have lower gross margins, and improved margins in
system products due to product cost decreases. Service margins decreased in
fiscal year 1994 from fiscal year 1993, primarily due to increases in
staffing and other expenses in support of increased service revenues.
In addition, gross profit for the year ended March 31, 1995 was favorably
affected by 1% as a result of the Company's recognition of an initial fee
received pursuant to a distribution agreement with Atelco Ltd. The agreement
gives NexTest, Inc., a wholly owned subsidiary of Atelco Ltd., worldwide
distribution rights for the Company's PCI line of products in exchange for
distribution fees paid to Network General. The Company does not anticipate
that future payments pursuant to this distribution agreement will have as
significant an impact on gross profit as the initial fee.
Gross profit and gross profit percent may vary as a result of a number of
factors, including product mix between tool products, system products and
services, third-party computer platforms sales which have lower margins than
the Company's own products, and the mix of international and domestic sales.
SALES AND MARKETING EXPENSES
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and Marketing Expenses $47,049 10% $42,906 16% $36,867
Percentage of Revenues 34% 37% 43%
</TABLE>
Sales and marketing expenses increased 10% in fiscal year 1995 to $47,049,000
compared to $42,906,000 in fiscal year 1994. Fiscal year 1994 expenses
increased 16% compared to $36,867,000 in fiscal year 1993. The increase each
year was primarily due to increased domestic sales expense for increased
staffing, commission expense and promotional activity needed to support
increased sales. As a percent of total revenues, sales and marketing
expenses were 34%, 37% and 43% for the periods ended March 31, 1995, 1994 and
1993, respectively. Sales and marketing expenses have decreased as a percent
of total revenues as a result of increased productivity.
16
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and Development Expenses $19,968 29% $15,534 28% $12,178
Percentage of Revenues 14% 14% 14%
</TABLE>
Research and development expenses increased 29% in fiscal year 1995 to
$19,968,000 compared to $15,534,000 in fiscal year 1994. Fiscal year 1994
research and development expenses increased 28% over fiscal year 1993 levels
of $12,178,000. Increased expenses in both fiscal years 1995 and 1994 were
due to increased staffing in support of development efforts. Research and
development expenses as a percent of revenues was 14% in all three years. The
Company believes that continued commitment to research and development is
required to remain competitive.
Research and development expenses are accounted for in accordance with
Statement of Financial Accounting Standards No. 86, under which the Company
is required to capitalize software development costs after technological
feasibility is established. Capitalizable software development costs incurred
to date have not been significant and, thus, the Company has charged all
software development costs to research and development expenses in the
consolidated statements of income.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General and Administrative Expenses $ 9,171 17% $ 7,847 13% $ 6,966
Percentage of Revenues 7% 7% 8%
</TABLE>
General and administrative expenses for the fiscal year ended March 31, 1995
increased 17% to $9,171,000 compared to $7,847,000 for the fiscal year ended
March 31, 1994. Fiscal year 1994 expenses increased 13% compared to expenses
of $6,966,000 for the fiscal year ended March 31, 1993. As a percent of
revenues, general and administrative expenses were 7% for the years ended
March 31, 1995 and March 31, 1994, and 8% for the year ended March 31, 1993.
Increased staffing and, to a lesser extent, increased use of outside services
to support the growth of the Company accounted for the increased spending in
both fiscal years 1995 and 1994.
RESTRUCTURING AND OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring and Other Operating Expenses $-- n/a $5,662 n/a $--
Percentage of Revenues 5%
</TABLE>
Restructuring and other operating expenses were $5,662,000 in fiscal year
1994. The majority of these expenses occurred in the fourth fiscal quarter
which ended March 31, 1994, and were associated with the acquisition of
ProTools, Inc. Total charges associated with the acquisition were
approximately $4,903,000. All of these costs were charged against income of
the combined company in the fourth quarter of fiscal year 1994. Other
expenses of $759,000 in fiscal year 1994 were primarily severance expenses
associated with changes in senior management which were effective in the
second fiscal quarter ended September 30, 1993. There were no restructuring
and other operating expenses for the fiscal years ended March 31, 1995 or
March 31, 1993.
INTEREST INCOME, NET
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income, net $ 5,328 60% $ 3,338 5% $ 3,183
Percentage of Revenues 4% 3% 4%
</TABLE>
Interest income, net increased to $5,328,000 in fiscal year 1995 compared to
$3,338,000 in fiscal year 1994 and $3,183,000 in fiscal 1993. The increase
in interest income is primarily a reflection of increased balances of cash,
cash equivalents and marketable securities available for investment during
each year.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for Income Taxes $11,685 95% $ 5,977 21% $ 4,953
Effective Tax Rate 31.5% 34.6% 36.4%
</TABLE>
17
<PAGE>
The provision for income taxes was 31.5% of pretax income for the fiscal year
ended March 31, 1995, compared to 34.6% for the fiscal year ended March 31,
1994 and 36.4% for the fiscal year ended March 31, 1993. The decrease in the
effective tax rate in fiscal year 1995 compared to fiscal year 1994 was
primarily due to ProTools' operating losses which were not realized for tax
purposes in fiscal year 1994. In addition, the tax effect of the expenses
associated with the acquisition of ProTools in the fourth quarter of fiscal
year 1994 increased the provision rate in fiscal year 1994, since a portion
of those expenses were not tax deductible.
The decrease in the effective tax rate in fiscal year 1994 compared to fiscal
year 1993 reflects the benefits derived from the Company's Foreign Sales
Corporation, research and development tax credits and investment in
tax-exempt instruments. In addition, a non recurring reduction to the
provision of $650,000 was the result of Federal tax legislation which became
effective in the second quarter of fiscal year 1994. The new legislation
provides for the tax deductibility of intangible assets which were acquired
in prior periods and were previously held to be not tax deductible. The new
legislation also reinstated the tax credit for research and development
retroactive to the third quarter of fiscal year 1993.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings per share $1.14 115% $.53* 20% $.44
<FN>
*Exclusive of restructuring and merger-related costs, earnings per share for
the year ended 3/31/94 would have been $.74.
</TABLE>
Earnings per share for the year ended March 31, 1995 were $1.14, an increase
in earnings per share of 115% compared to $.53 per share earned in fiscal
year 1994. Earnings per share in fiscal year 1994 increased 20% compared to
earnings per share of $.44 in fiscal year 1993. Earnings per share in fiscal
year 1994 were affected by two non recurring transactions: 1) earnings were
reduced by approximately $.02 per share in the second quarter of fiscal year
1994 as a result of expenses associated with changes in senior management,
and 2) earnings were reduced by approximately $.17 per share in the fourth
quarter of fiscal year 1994 as a result of expenses associated with the
acquisition of ProTools.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash, Cash Equivalents and
Marketable Securities $ 92,914 $55,559 $31,108
Long-Term Investments $ 52,410 $57,480 $59,800
Working Capital $101,536 $65,457 $41,014
</TABLE>
Cash, cash equivalents and marketable securities increased $37,355,000 and
$24,451,000 in fiscal years 1995 and 1994, respectively. The primary source
of these funds was cash provided by operating activities, as well as proceeds
from the issuance of common stock.
Net cash generated from operations in fiscal year 1995 was $33,144,000
compared to $20,244,000 for fiscal year 1994, and $10,856,000 for fiscal year
1993. The primary source of these funds was net income before depreciation
and amortization for all periods shown. The net increase in fiscal year 1995
also reflects increases in deferred revenue and reductions in deferred taxes
and accounts receivable, partially offset by an increase in inventories and
prepaid expenses. Cash provided by operating activities in fiscal year 1994
reflects increases in deferred revenue and a reduction in inventories,
partially offset by an increase in deferred taxes and accounts receivable.
Net cash used in investing activities was $26,373,000 and $33,036,000 during
fiscal years 1995 and 1994, respectively. The Company used $17,621,000 and
$25,544,000, in fiscal years 1995 and 1994, respectively, primarily to
increase investments in marketable securities. In fiscal year 1993, the
Company used $61,790,000 in cash for investing activities primarily to
increase long-term investments, of which approximately $46,000,000 was
proceeds from the Company's public stock offering in April 1992.
Net cash provided by financing activities was $7,893,000 and $8,806,000 for
fiscal years 1995 and 1994, respectively. The primary source of those funds
was the exercise of employee stock options. During fiscal year 1995 the
Company repurchased 395,000 shares of its common stock at an average price of
$22.16 for a total
18
<PAGE>
cash outlay of $8,755,000. As of March 31, 1995, the Company was authorized
to repurchase an additional 605,000 of its shares on the open market. The
Company anticipates that it will continue its systematic share repurchase
program.
As of March 31, 1995 the Company's principal sources of liquidity included,
cash, cash investments, marketable securities and long-term investments
totaling $145,324,000, including $52,410,000 in long-term investments.
Included in marketable securities at March 31, 1995 are approximately
$2,000,000 of Orange County, California Tax and Revenue Anticipation Notes.
The Company currently has no information which indicates that the principal
and accrued interest will not be repaid and has made no provision for a loss
on the investment.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", on a prospective basis in the first quarter of fiscal year
1995. In accordance with SFAS No. 115, the Company has classified all
marketable debt securities and long-term debt investments as held-to-maturity
and has accounted for these investments at amortized cost. Accordingly, no
adjustment for unrealized holding gains or losses have been reflected in the
Company's financial statements.
The Company currently has no outstanding bank borrowings and has no
established lines of credit. The Company believes that cash generated from
operations, together with existing cash and investment balances will be
sufficient to satisfy operating cash and capital expenditure requirements
through at least the next twelve months.
BUSINESS RISKS
The Company's future operating results may be affected by certain factors and
trends of its market which are beyond its control. The market for Network
Generals products is characterized by rapidly changing technology and
evolving industry standards. Included in such changes is the development of
asynchronous transfer mode ("ATM") for the transmission of data along local
area and wide area networks, as well as other switching technologies.
Network General believes that its future success will depend, in part, on its
ability to continue to develop, introduce and sell new products. The Company
is committed to continuing investments in research and development; however,
there is no assurance that these efforts will result in the development,
timely release or market acceptance of new products.
In addition, the Company's results may be adversely affected by the actions of
existing or future competitors including established and emerging computer,
communications, intelligent network wiring, network management and test
instrument companies. There can be no assurance that Network General will be
able to compete successfully in the future with existing or future
competitors.
Network General does not carry a significant level of backlog. The majority
of the Company's revenues in each quarter are a result of orders booked in
that quarter. Expense levels are based on expectations of future revenues.
Expense levels would be disproportionately high in the event of a decrease in
near-term demand for the Company's products and would therefore have an
adverse affect on the Company's operating results.
For certain critical components of its products, Network General relies on a
limited number of suppliers. In addition, some of the Company's products are
designed around specific computer platforms which are only available from
certain manufacturers. As a result of product transitions by these computer
platform manufacturers, the Company has found it increasingly necessary to
purchase and inventory computer platforms for resale to its customers. Any
significant shortage of computer platforms or other critical components for
the Company's products could lead to cancellations or delays of purchases of
the Company's products which would materially and adversely affect the
Company's operating results. If purchases of computer platforms or other
components exceed demand, the Company would incur expenses for disposing of
the excess inventory, which would also adversely affect the Company's
operating results.
Network General products may be considered by certain customers to be capital
purchases. An adverse change in general economic conditions could cause
certain of the Company's customers to reduce their capital spending, which may
adversely affect the Company's revenues.
19
<PAGE>
In January 1994, the Company acquired all of the outstanding stock of
ProTools, in part, to acquire ProTools remote monitoring ("RMON") technology.
The RMON market is characterized by rapid technological changes and intense
competition. There can be no assurance that Network Generals offering of
RMON products will be successful or that any specific level of sales will be
achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page number
-----------
Consolidated Balance Sheets 21
Consolidated Statements of Income 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25
Report of Independent Public Accountants 31
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) As of March 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 18,950 $ 4,286
Marketable securities 73,964 51,273
Accounts receivable, net of allowance for doubtful
accounts of $1,285 in 1995 and $716 in 1994 18,800 20,438
Inventories 4,226 2,032
Prepaid expenses and deferred tax assets 13,974 13,857
-------- --------
Total current assets 129,914 91,886
-------- --------
Property and Equipment, at cost:
Demonstration and rental equipment 6,147 5,453
Office and development equipment 20,486 14,634
Leasehold improvements 1,816 1,700
-------- --------
28,449 21,787
Less - accumulated depreciation and amortization (15,425) (10,678)
-------- --------
Net property and equipment 13,024 11,109
-------- --------
Long-Term Investments 52,410 57,480
-------- --------
Other Assets 842 371
-------- --------
$196,190 $160,846
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,186 $ 3,586
Accrued liabilities 9,817 10,215
Deferred revenue 14,375 12,628
-------- --------
Total current liabilities 28,378 26,429
-------- --------
Long-Term Deferred Revenue and Taxes 2,225 2,134
-------- --------
Stockholders' Equity:
Preferred stock - $.01 par value
Authorized - 2,000,000 shares
Outstanding - none -- --
Common stock - $.01 par value
Authorized - 50,000,000 shares
Issued - 22,225,207 shares in 1995 and
20,959,765 shares in 1994 222 210
Additional paid-in capital 109,746 93,110
Retained earnings 64,374 38,963
Less treasury stock, at cost-395,000 shares at March 31, 1995 (8,755) --
-------- --------
Total stockholders' equity 165,587 132,283
-------- --------
$196,190 $160,846
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share amounts) For the three years ended March 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product $112,986 $ 96,973 $ 73,588
Service 26,769 17,927 12,895
-------- -------- --------
Total Revenues 139,755 114,900 86,483
-------- -------- --------
Cost of Revenues:
Product 23,437 23,546 17,531
Service 8,362 5,490 2,526
-------- -------- --------
Total Cost of Revenues 31,799 29,036 20,057
-------- -------- --------
Gross Profit 107,956 85,864 66,426
-------- -------- --------
Operating Expenses:
Sales and marketing 47,049 42,906 36,867
Research and development 19,968 15,534 12,178
General and administrative 9,171 7,847 6,966
Restructuring and other operating expenses -- 5,662 --
-------- -------- --------
Total Operating Expenses 76,188 71,949 56,011
-------- -------- --------
Income from Operations 31,768 13,915 10,415
Interest Income, net 5,328 3,338 3,183
-------- -------- --------
Income Before Provision for Income Taxes 37,096 17,253 13,598
Provision for Income Taxes 11,685 5,977 4,953
-------- -------- --------
Net Income $ 25,411 $ 11,276 $ 8,645
-------- -------- --------
-------- -------- --------
Earnings Per Share $ 1.14 $ .53 $ .44
-------- -------- --------
-------- -------- --------
Weighted Average Common and Common
Equivalent Shares Outstanding 22,313 21,173 19,807
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the three years ended March 31,
(Dollars in thousands, except per share amounts)
Common Stock Additional
------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1992 16,181,923 $162 $ 31,900 $18,949 $ -- $ 51,011
Public offering of common stock
at $19.50 per share, net of
issuance costs of $2,948 2,500,000 25 45,777 -- -- 45,802
Issuance of common stock under
the Employee Stock Purchase
Plan at $8.29 - $16.15 per share 80,542 1 804 -- -- 805
Exercise of stock options
at $2.03 - $13.38 per share 225,676 2 1,183 -- -- 1,185
Tax benefit of stock options -- -- 903 -- -- 903
Lower of cost or market adjustment
on long-term investments -- -- (573) -- -- (573)
Sale of common stock and
conversion of notes payable
into common stock 483,291 5 1,779 -- -- 1,784
Net income -- -- -- 8,645 -- 8,645
---------- ------- -------- ------- ------- --------
BALANCE, MARCH 31, 1993 19,471,432 195 81,773 27,594 -- 109,562
Adjustment to conform year end
of pooled Company (Note 2) -- -- -- 93 -- 93
Issuance of common stock under
the Employee Stock Purchase
Plan at $9.56 - $9.67 per share 128,175 1 1,231 -- -- 1,232
Exercise of stock options
at $.01 - $15.50 per share 687,222 7 4,255 -- -- 4,262
Tax benefit of stock options -- -- 3,079 -- -- 3,079
Lower of cost or market adjustment
on long-term investments -- -- 573 -- -- 573
Sale of common stock and
conversion of notes payable
into common stock 672,936 7 2,199 -- -- 2,206
Net income -- -- -- 11,276 -- 11,276
---------- ------- -------- ------- ------- --------
BALANCE, MARCH 31, 1994 20,959,765 210 93,110 38,963 -- 132,283
ISSUANCE OF COMMON STOCK UNDER
THE EMPLOYEE STOCK PURCHASE
PLAN AT $13.60 - $13.71 PER SHARE 119,889 1 1,636 -- -- 1,637
EXERCISE OF STOCK OPTIONS
AT $.01 - $20.50 PER SHARE 1,145,553 11 10,118 -- -- 10,129
TAX BENEFIT OF STOCK OPTIONS -- -- 4,882 -- -- 4,882
REPURCHASE OF COMMON STOCK
AT $16.75 - $28.88 PER SHARE -- -- -- -- (8,755) (8,755)
NET INCOME -- -- -- 25,411 -- 25,411
---------- ------- -------- ------- ------- --------
BALANCE, MARCH 31, 1995 22,225,207 $222 $109,746 $64,374 $(8,755) $165,587
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) For the three years ended March 31,
-----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,411 $ 11,276 $ 8,645
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment to conform year-end of pooled company -- 93 --
Depreciation and amortization 6,837 6,174 2,907
Deferred taxes, net 2,599 (5,473) (3,354)
(Increase) decrease in assets:
Accounts receivable 1,638 (2,171) (4,073)
Inventories (2,194) 2,927 (933)
Prepaid expenses (2,934) (416) 2,143
Other assets (471) 252 184
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (944) 2,892 1,424
Income taxes payable 1,146 (906) 1,687
Deferred revenue 2,056 5,596 2,226
-------- -------- --------
Net cash provided by operating activities 33,144 20,244 10,856
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of held-to-maturity investments (114,264) -- --
Proceeds from maturities of held-to-maturity investments 96,643 -- --
(Increase) decrease in marketable securities -- (28,437) 4,882
(Increase) decrease in long-term investments -- 2,893 (60,291)
Purchase of property and equipment (8,752) (7,492) (6,381)
-------- -------- --------
Net cash used in investing activities (26,373) (33,036) (61,790)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of issuance costs 16,648 8,868 49,629
Repurchase of common stock (8,755) -- --
Principal payments on notes and capital lease obligations -- (271) (32)
Proceeds from issuance of notes payable -- 209 1,800
-------- -------- --------
Net cash provided by financing activities 7,893 8,806 51,397
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 14,664 (3,986) 463
Cash and cash equivalents at beginning of period 4,286 8,272 7,809
-------- -------- --------
Cash and cash equivalents at end of period $ 18,950 $ 4,286 $ 8,272
-------- -------- --------
-------- -------- --------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred pursuant to the $ -- $ -- $ 123
purchase of capital equipment
Notes payable and accrued interest converted $ -- $ 1,940 $ 850
into common stock
Repurchase of common stock in exchange $ -- $ 29 $ --
for note payable
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ -- $ 18 $ 37
Income taxes $ 5,368 $ 9,866 $ 3,935
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. Prior years have not been restated to conform to current year
presentations.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Network General Corporation (the "Company" or "Network General") designs,
manufactures, markets and supports software-based fault and performance
solutions for managing computer networks. The Company was incorporated in 1986
as a California corporation and changed its state of incorporation to Delaware
in fiscal year 1988.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, after elimination of intercompany
accounts and transactions.
ACQUISITION. In January 1994, the Company acquired all of the outstanding
common stock and convertible preferred stock and assumed the outstanding stock
options of ProTools, Inc. ("ProTools") in exchange for 2,000,000 shares of the
Company's common stock. The merger was accounted for as a pooling of interests
and, accordingly, the financial statements for prior periods have been restated
to include the results of ProTools.
Network General operates and reports on a March 31 fiscal year basis. ProTools
operated and reported on a December 31 calendar year basis. The combined
statement of income for the fiscal year ended March 31, 1993 combined the
statement of income of Network General for the twelve months ended March 31,
1993 with the statement of income of ProTools for the twelve months ended
December 31, 1992. Revenues of $1,477,000 and net income of $93,000 of ProTools
for the three months ended March 31, 1993 have been excluded from the combined
statement of income. The net income of $93,000 of ProTools for the three months
ended March 31, 1993 is reflected as an adjustment to retained earnings for
fiscal year 1994. Effective April 1, 1993, ProTools' results are reported on a
March 31 fiscal year basis along with the results of the Company.
Total charges associated with the merger were approximately $4,903,000. All of
these costs were charged against income of the combined Company in the fourth
quarter ended March 31, 1994.
REVENUES. The Company recognizes product revenues upon shipment of the
systems or software. Revenues on rental units under operating leases and
service agreements are recognized ratably over the term of the rental or service
period. Revenues for training courses are recognized once the course has been
completed by the customer. Payments received in advance under such contracts
are recorded as deferred revenues. Royalty income is recognized based on the
number of copies of software sold by the licensees of the software products. No
single customer accounted for more than 10% of revenues in fiscal years 1995,
1994 or 1993.
Export revenues as a percentage of revenues consist of:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Europe 12% 12% 14%
Asia/Americas 10% 10% 10%
---- ---- ----
Total Export Revenues 22% 22% 24%
---- ---- ----
---- ---- ----
</TABLE>
STATEMENT OF CASH FLOWS. For purposes of the consolidated statements of cash
flows, the Company considers certificates of deposits, commercial paper and
money market funds with an original maturity date of three months or less to be
cash equivalents. Marketable securities consist of municipal notes and U.S.
Treasury notes with average maturities of less than one year. Long-term
investments have maturities ranging from one to six years. Long-term debt
investments that will be held to maturity are carried at cost.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. In May 1993 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The Company has adopted the provisions of this statement on
a prospective basis in the first quarter of fiscal year 1995, and the effect on
its financial statements was not significant. In accordance with SFAS No. 115,
the Company has classified all marketable debt securities and long-term debt
investments as held-to-maturity, and has accounted for these investments at
amortized cost. Accordingly, no adjustment for unrealized holding gains or
losses has been reflected in the Company's financial statements.
25
<PAGE>
At March 31, 1995 the amortized cost basis, aggregate fair value and gross
unrealized holding losses by major security type were as follows:
<TABLE>
<CAPTION>
(In thousands) Amortized Aggregate Unrealized
Cost Fair Value Losses
--------- ---------- ----------
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury and
other U.S. government agencies $ 23,146 $ 23,146 $ --
Debt securities issued by states of the United States
and political subdivisions of the state 103,228 102,414 (814)
-------- -------- -------
$126,374 $125,560 $ (814)
-------- -------- -------
-------- -------- -------
</TABLE>
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-
out) or market and include material, labor and related manufacturing overhead.
As of March 31, inventories consist of:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Purchased parts $1,496 $1,751
Finished goods 2,730 281
------ ------
$4,226 $2,032
------ ------
------ ------
</TABLE>
PROPERTY AND EQUIPMENT. Property and equipment are depreciated and/or
amortized using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
Life
----
<S> <C>
Demonstration and rental equipment 2 years
Office and development equipment 3 to 5 years
Leasehold improvements Lease term
</TABLE>
SOFTWARE DEVELOPMENT COSTS. The Company anticipates capitalizing eligible
computer software development costs upon the establishment of technological
feasibility, which the Company has defined as completion of a working model. As
of March 31, 1995, costs which were eligible for capitalization were
insignificant and, thus, the Company has charged all software development costs
to research and development expense in the accompanying consolidated statements
of income.
EARNINGS PER SHARE. Earnings per share is computed using the weighted average
number of shares of common and common equivalent shares resulting from
outstanding options. Fully diluted earnings per share is the same as primary
earnings per share.
3. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of both short- and long-term marketable debt
security investments and trade receivables. The Company has investment policies
that limit the amount of credit exposure to any one issuer and restrict
placement of these investments to issuers evaluated as creditworthy.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across many different industries and geographies.
4. ACCRUED LIABILITIES
As of March 31, accrued liabilities consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Accrued compensation and related taxes $4,378 $ 3,784
Accrued acquisition and merger costs 353 2,294
Accrued commissions 912 1,186
Accrued income taxes 1,812 666
Accrued sales and use taxes 47 349
Other accrued expenses 2,315 1,936
------ -------
$9,817 $10,215
------ -------
------ -------
</TABLE>
26
<PAGE>
5. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements. As of March 31, 1995, the minimum future lease
payments under these leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year (In thousands)
<S> <C>
1996 $ 3,673
1997 3,418
1998 1,880
1999 1,491
2000 1,357
Thereafter 10
-------
$11,829
-------
-------
</TABLE>
Total rent expense was approximately $4,115,000, $3,854,000 and $2,676,000 in
fiscal years 1995, 1994 and 1993, respectively.
6. EMPLOYEE SAVINGS PLAN
In September 1988, the Board of Directors approved an Employee Savings Plan (the
"Plan") which is intended to be qualified and exempt from tax under section
401(k) of the Internal Revenue Code. Under the Plan, employees may elect to
contribute up to 15% of their gross compensation. The Company contributes to
the Plan in amounts determined at the discretion of the Board of Directors. All
contributions by the Company are funded currently and vest ratably over three
years. All employee contributions are fully vested. Amounts provided by the
Company under the plan to date have not been material.
7. COMMON STOCK
SHARE REPURCHASE PROGRAM. In July 1993, the Company's Board of Directors
authorized the Company to repurchase up to 1,000,000 shares of its common stock
on the open market to satisfy commitments under its stock option and stock
purchase plans. As of March 31, 1995, the Company has repurchased 395,000
shares at an aggregate cost of approximately $8,755,000.
EMPLOYEE STOCK OPTION PLAN. Under the Company's 1989 Employee Stock Option
Plan, key employees, employee directors and consultants may be granted either
incentive or non-qualified options to purchase common stock at the discretion of
the Board of Directors. The Company currently has authorized a total of
7,000,000 shares for issuance under this plan. The exercise price of the stock
options may not be less than the fair market value of the common stock on the
date of the grant for incentive options or less than 85% of the fair market
value of the common stock on the date of the grant for non-qualified options.
Employees can receive an 'initial' option grant upon joining the Company, and
employees may also be granted 'subsequent' options based upon performance.
Prior to July 19, 1993, 'initial' option grants vested ratably each year over a
three-year period from the grant date, while 'subsequent' option grants
generally vested in a lump sum amount three years after the date on which each
'subsequent' option was granted. In fiscal year 1994, the vesting schedules
were amended for any options granted on or after July 19, 1993. Generally,
initial option grants vest 25% at the end of the first year and then ratably
each month for an additional three years, while subsequent option grants vest
ratably each month beginning one month after the grant date for four years.
Options issued prior to July 19, 1993 that were not submitted for repricing in
fiscal year 1994 continue to vest according to their original schedule.
27
<PAGE>
Option activity under the 1989 Employee Stock Option Plan is summarized as
follows:
<TABLE>
<CAPTION>
Available
for Grant Outstanding Price Per Share
--------- ----------- ---------------
<S> <C> <C> <C>
Balance as of March 31, 1992 1,294,280 1,891,276 $ 4.00 -$ 22.75
Granted (1,735,543) 1,735,543 $ 8.75 -$ 19.00
Cancelled 625,341 (625,341) $ 4.375-$ 22.75
Exercised -- (185,364) $ 4.00-$13.375
---------- ---------- ---------------
Balance as of March 31, 1993 184,078 2,816,114 $ 4.00 -$ 19.00
Authorization Increase 1,000,000 -- --
Granted (2,048,847) 2,048,847 $8.625-$19.875
Cancelled 1,072,269 (1,072,269) $4.375-$ 19.00
Exercised -- (548,845) $ 4.00-$ 15.50
---------- ---------- ---------------
Balance as of March 31, 1994 207,500 3,243,847 $4.375-$19.875
Authorization Increase 2,500,000 -- --
Granted (1,677,538) 1,677,538 $14.25-$ 28.44
Cancelled 789,263 (789,263) $ 7.50-$ 20.50
Exercised -- (939,792) $4.375-$ 20.50
---------- ---------- ---------------
Balance as of March 31, 1995 1,819,225 3,192,330 $4.375-$ 28.44
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
Of the outstanding options, 353,669 were exercisable as of March 31, 1995.
During fiscal year 1994, the Company cancelled 692,232 options at $9.75 to
$19.00 per share and reissued the same number of options at the then current
fair market value of $9.125 per share with vesting restarting on the new grant
date. In addition, some of the option grants that were submitted for repricing
in fiscal year 1994 had their vesting schedules amended. Non-officer employees
who submitted their initial option grant for repricing had no changes made to
the original vesting schedule. Non-officer employees who submitted their
subsequent option grants for repricing had their vesting schedules changed so
that they now vest in a lump sum at the end of four years, where they had
previously vested in a lump sum at the end of three years. Officers who
submitted initial option grants for repricing had their vesting schedule changed
so that they now vest ratably each year over a four-year period, where they
previously vested ratably each year over a three-year period. Officers who
submitted subsequent option grants for repricing had their vesting schedules
changed so that they now vest in a lump sum at the end of four years, where they
previously had vested in a lump sum at the end of three years.
During fiscal year 1993, the Company cancelled 464,097 options at $12.88 to
$22.75 per share and reissued the same number of options at the then current
fair market value of $10.25 per share. No change to the vesting schedules of
participants was made, other than that vesting restarted on the new grant date.
Officers of the Company were excluded from participation in the fiscal year 1993
option repricing.
OUTSIDE DIRECTORS STOCK OPTION PLAN. In April 1989, the Company established
the 1989 Outside Directors Stock Option Plan, whereby outside directors may be
granted non-qualified options to purchase common stock. The number of shares of
common stock authorized for issuance under this plan is 460,000. The exercise
price of the stock option may not be less than the fair market value of the
common stock on the date of the grant. Each outside director is granted an
initial option grant of 20,000 shares upon election to the Board and an option
grant of 5,000 shares each subsequent year. Prior to July 19, 1993, initial
option grants vested ratably each year over a three-year period from the grant
date, while subsequent option grants generally vested in a lump sum amount three
years after the date on which each subsequent option was granted. In fiscal
year 1994, the vesting schedules were amended for any options granted on or
after July 19, 1993. Generally, initial option grants now vest 25% at the end
of the first year and then ratably each month for an additional three years,
while subsequent option grants now vest ratably each month between the third and
fourth year after the grant date. Directors were excluded from participating in
both the fiscal year 1994 and the fiscal year 1993 option repricing. As of
March 31, 1995, 105,000 options are available for future grants and 185,000
options are outstanding, of which 90,000 shares were exercisable at an average
price of $12.86 per share. Options issued
28
<PAGE>
prior to July 19, 1993 continue to vest either ratably over a three-year period
or in a lump sum amount at the end of three years.
EMPLOYEE STOCK PURCHASE PLAN. The Company has authorized 700,000 shares of
common stock for issuance under the 1989 Employee Stock Purchase Plan.
Employees may elect to withhold up to 10% of their compensation for the purchase
of the Company's common stock. The amounts withheld are used to purchase the
Company's common stock at a price equal to 85% of the fair market value of the
stock on the first or last day of a six-month offering period, whichever is
lower. The Company issued 119,889 shares at an average price of $13.65 per
share in 1995, 128,175 shares at an average price of $9.61 per share in 1994 and
80,542 shares at an average price of $9.99 per share in 1993.
COMMON STOCK AWARD PLAN. In June 1989, the Board of Directors approved the
1989 Common Stock Award Plan and reserved 120,000 shares for issuance
thereunder. Under this plan, awards are made to independent sales
representatives and consultants based upon individual sales performance
criteria. The shares are issued at fair market value and the related value of
the shares are charged to sales and marketing expense over the vesting period.
The shares generally vest over three years and the Company can reacquire any
unvested shares upon termination of the individual's relationship with the
Company. No shares of common stock were awarded under this plan in fiscal year
1995. As of March 31, 1995, the number of shares that have been awarded under
this plan is 29,468, all of which are fully vested.
PROTOOLS, INC. STOCK OPTION PLAN. In connection with the acquisition of
ProTools in January 1994, the Company assumed the outstanding stock options of
ProTools. At the time of the merger, 272,830 equivalent ProTools incentive
stock options were outstanding. As of March 31, 1995, 5,731 incentive stock
options were outstanding, all of which are fully vested and exercisable at $.67
per share. The Company does not intend to grant any additional incentive stock
options under this plan.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE.
<TABLE>
<CAPTION>
As of March 31, 1995:
<S> <C>
1989 Employee Stock Option Plan 5,011,555
1989 Outside Directors Stock Option Plan 290,000
1989 Employee Stock Purchase Plan 261,150
1989 Common Stock Award Plan 90,532
1990 ProTools, Inc. Stock Option Plan 5,731
---------
5,658,968
---------
---------
</TABLE>
8. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". The
Company has adopted the provisions of this Statement on a prospective basis in
the first quarter of fiscal year 1993 and the effect on its financial
statements, upon adoption, was not significant.
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income before provision for income taxes:
Domestic $36,535 $17,038 $13,360
Foreign 561 215 238
------- ------- -------
$37,096 $17,253 $13,598
------- ------- -------
------- ------- -------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes:
Federal
Current payable $11,311 $ 6,868 $ 5,336
Deferred tax asset (605) (2,270) (1,476)
Non-current deferred (1,673) (554) (221)
------- ------- -------
Total Federal 9,033 4,044 3,639
------- ------- -------
State
Current payable 2,876 2,092 1,380
Non-current deferred (489) (328) (163)
------- ------- -------
Total State 2,387 1,764 1,217
------- ------- -------
Foreign 265 169 97
------- ------- -------
Total Provision $11,685 $ 5,977 $ 4,953
------- ------- -------
------- ------- -------
</TABLE>
The sources of deferred tax assets as of March 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---- ----
<S> <C> <C>
Deferred revenue currently recognized for tax purposes $ 1,163 $ 3,920
Reserves and accruals not currently deductible for tax purposes 3,532 2,963
State taxes, not currently deductible for Federal tax purposes 310 675
Depreciation 2,702 2,966
Operating loss carryover of ProTools 2,042 2,189
------- -------
Total deferred tax asset 9,749 12,713
Valuation allowance (2,042) (2,189)
------- -------
Net deferred tax asset $ 7,707 $10,524
------- -------
------- -------
</TABLE>
The valuation allowance consists of the operating losses of ProTools, a wholly
owned subsidiary acquired in January 1994, in a transaction accounted for as a
pooling of interests. The operating losses are subject to certain annual
limitations as a result of the acquisition and may expire before the Company can
utilize them. The Company believes sufficient uncertainty exists regarding the
realizability of these losses on a separate entity basis, and accordingly, a
valuation allowance has been established.
The provision for income taxes differs from the amounts obtained by applying the
Federal statutory rate to income before taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 34.0%
State income taxes, net of Federal benefit 5.1 5.7 5.7
Permanent differences (8.6) (10.6) (7.2)
Reduction due to tax law changes -- (3.8) --
Operating losses of ProTools not realized -- 4.5 3.9
Merger and acquisition costs -- 3.8 --
---- ---- ----
31.5% 34.6% 36.4%
---- ---- ----
---- ---- ----
</TABLE>
9. NOTES PAYABLE
In June, July and October 1992, ProTools borrowed $300,000, $500,000 and
$1,000,000, respectively, in aggregate principal from certain of its then
current stockholders. ProTools issued promissory notes bearing interest at 9%
due and payable within 179 days from issuance or upon conversion into shares of
common stock. In July 1993, the notes were converted into common stock.
10. RELATED PARTY TRANSACTION
In connection with the acquisition of ProTools, Network General assumed certain
royalty obligations to a company whose principal stockholder was also an officer
of Network General. The royalty obligation called for royalty payments through
December 31, 1999 or until $920,000 in aggregate royalties had been paid. In
fiscal 1995, Network General negotiated a lump sum payment of approximately
$572,000 to this company in full settlement of all royalties owed under this
agreement. The prepaid royalty is being expensed as a cost of goods sold as
related revenues are recognized.
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network General Corporation:
We have audited the accompanying consolidated balance sheets of Network
General Corporation (a Delaware corporation) and subsidiaries as of March 31,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Network General Corporation
and subsidiaries as of March 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1995 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 26, 1995
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
Certain information required by Part III is omitted from this report. The
Company will file its definitive proxy statement (the "Proxy Statement")
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report, and certain information included therein is
incorporated by reference in this report, as indicated below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company will be set forth
under the caption "Information about Network General - Management" in the
Company's definitive Proxy Statement in connection with the Annual Meeting of
Stockholders to be held August 18, 1995. Such information is incorporated
herein by reference. Information relating to the executive officers of the
Company is set forth in Part I of this report under the caption "Executive
Officers of the Registrant."
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and persons who beneficially own more than 10% of the Company's Common
Stock were complied with, except as set forth under the caption "Executive
Compensation and Other Matters" in the Company's definitive Proxy Statement in
connection with the Annual Meeting of Stockholders to be held August 18, 1995.
Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation will be set forth under the
caption "Executive Compensation and Other Matters" in the Company's definitive
Proxy Statement in connection with the Annual Meeting of Stockholders to be held
August 18, 1995. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of equity securities of the Company by
certain beneficial owners and management will be set forth under the caption
"Information about Network General - Stock Ownership of Certain Beneficial
Owners and Management" in the Company's definitive Proxy Statement in connection
with the Annual Meeting of Stockholders to be held August 18, 1995. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions will
be set forth under the caption "Information about Network General Management -
Certain Transactions with Management" in the Company's definitive Proxy
Statement in connection with the Annual Meeting of Stockholders to be held
August 18, 1995. Such information is incorporated herein by reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page Number(s)
--------------
(a)(1) Financial Statements:
Consolidated Balance Sheets:
March 31, 1995 and 1994 21
Consolidated Statements of Income:
Years ended March 31, 1995, 1994 and 1993 22
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1995, 1994 and 1993 23
Consolidated Statements of Cash Flows
Years ended March 31, 1995, 1994 and 1993 24
Notes to Consolidated Financial Statements 25-30
Report of Independent Public Accountants 31
(a)(2) Financial Statement Schedules: Information required in financial
statement schedules has been included in the accompanying
financial statements or is in amounts not sufficient to require
submission of schedules, except as follows:
Schedules Page Number(s)
--------- --------------
II Valuation and Qualifying Accounts 34
(a)(3) Exhibits: See Index to Exhibits on Pages 36
through 39 herein. 36-39
Exhibits 10.9 - 10.14,10.16 and 10.19-10.24 are
management contracts or compensatory plans or
arrangements.
(b) Reports on Form 8-K: The Company did not file
any reports on Form 8-K during the quarter ended
March 31, 1995.
33
<PAGE>
NETWORK GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(In thousands)
Balance at Charged to Deductions Balance at
Beginning Costs (Write End
Description of Period and Expenses Offs) of Period
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts
Period ended -
March 31, 1993 $462 $1,071 ($911) $622
March 31, 1994 $622 $590 ($496) $716
March 31, 1995 $716 $1,086 ($517) $1,285
</TABLE>
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Network General Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
June 26, 1995.
NETWORK GENERAL CORPORATION
by s/Leslie G. Denend
--------------------------------
Leslie G. Denend, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
NAME/TITLE DATE
---------- ----
CHIEF EXECUTIVE OFFICER
by s/Leslie G. Denend
-------------------
Leslie G. Denend June 26, 1995
CHIEF FINANCIAL OFFICER
by s/James T. Richardson
----------------------
James T. Richardson June 26, 1995
DIRECTORS
by s/Harry J. Saal
----------------
Harry J. Saal June 26, 1995
by s/Leonard J. Shustek
---------------------
Leonard J. Shustek June 26, 1995
by s/Leslie G. Denend
-------------------
Leslie G. Denend June 26, 1995
by s/Gregory M. Gallo
-------------------
Gregory M. Gallo June 26, 1995
by s/Laurence R. Hootnick
-----------------------
Laurence R. Hootnick June 26, 1995
by s/Howard Frank
---------------
Howard Frank June 26, 1995
by s/Charles J. Abbe
------------------
Charles J. Abbe June 26, 1995
by s/Janet L. Hyland
------------------
Janet L. Hyland June 26, 1995
35
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------ ------------- ----
3.1 Certificate of Incorporation, as amended and
restated, of Network General Corporation, a Delaware
corporation, which is incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement
No. 33-26107 on Form S-1, which became effective
February 2, 1989 (the "Form S-1").
3.2 Certificate of Amendment of Certificate of
Incorporation of Network General Corporation, which
is incorporated by reference to Exhibit 3.1 to the
Form 8-K filed with the Securities and Exchange
Commission on January 4, 1991.
3.3 Amended and Restated Bylaws of Network General
Corporation, which are incorporated by reference to
Exhibit 3.3 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 1994 ("June
1994 Form 10-Q").
4.1 Registration Rights Agreement between the Company
and certain investors dated December 31, 1987, which
is incorporated by reference to Exhibit 4.2 of the
Form S-1.
4.2 Rights Agreement between the Company and Chemical
Trust Company of California dated June 26, 1992, as
amended, which is incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on
Form 10-K for the year ended March 31, 1993.
10.1 Standard Business Lease (Net) for the Company's
principal facility dated June 18, 1991, between the
Company and Menlo Oaks Partners, L.P., which is
incorporated by reference to Exhibit 10.3 of the
1991 Form 10-K.
10.2 First Amendment to Lease dated June 10, 1992,
between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to Exhibit 10.3
of the Company's Annual Report on Form 10-K for the
year ended March 31, 1992 ("1992 Form 10-K").
10.3 Standard Business Lease (Net) for the Company's
principal facility dated March 11, 1992, between the
Company and Menlo Oaks Partners, L.P., which is
incorporated by reference to Exhibit 10.4 of the
1992 Form 10-K.
36
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------ ------------- ----
10.4 First Amendment to Lease dated June 18, 1992,
between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to Exhibit 10.5
of the 1992 Form 10-K.
10.5 Lease dated March 31, 1992, between the Company and
Equitable Life Assurance Society of the United
States, which is incorporated by reference to
Exhibit 10.4 of the 1992 Form 10-K.
10.6 Lease dated March 31, 1992, between the Company and
Equitable Life Assurance Society of the United
States, which is incorporated by reference to
Exhibit 10.4 of the 1992 Form 10-K.
10.7 Description of Company's Cash Bonus Plan, which is
incorporated by reference to Exhibit 10.6 of the
Form S-1.
10.8 Form of Director and Officer Indemnification
Agreement, which is incorporated by reference to
Exhibit 10.7 of the Form S-1.
10.9 1989 Employee Stock Purchase Plan, which is
incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the year
ended March 31, 1989 ("1989 Form 10-K").
10.10 Form of Stock Purchase Agreement used in conjunction
with the 1989 Employee Stock Purchase Plan, which is
incorporated by reference to Exhibit 10.11 to the
Company's 1989 Form 10-K.
10.11 Amended and Restated 1989 Employee Stock Option
Plan, which is incorporated by reference to
Exhibit 10.12 of the 1992 Form 10-K.
10.12 Forms of Stock Option Agreement used in conjunction
with the 1989 Employee Stock Option Plan, which are
incorporated by reference to Exhibit 10.13 of the
Company's 1989 Form 10-K.
10.13 Amended and Restated 1989 Outside Directors Stock
Option Plan, which is incorporated by reference to
Exhibit 10.12 of the 1992 Form 10-K.
10.14 Forms of Stock Option Agreement used in conjunction
with the 1989 Outside Directors Stock Option Plan,
which are incorporated by reference to Exhibit 10.15
of the Company's 1989 Form 10-K.
37
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------ ------------- ----
10.15 OEM Agreement dated August 3, 1990 between the
Company and NCR Corporation which is incorporated by
reference to Exhibit 10.18 of the Company's
Registration Statement No. 33-45580 on Form S-3
which became effective on April 6, 1992.
10.16 Resignation Agreement between the Company and Roger
Ferguson dated June 21, 1993 which is incorporated
by reference to Exhibit 10.17 of the Company's
Annual Report on Form 10-K for the year ended
March 31, 1993.
10.17 Standard Business lease (Net) for the Company's
Beaverton, Oregon facility dated February 4, 1994
between the Company and Hartford Underwriters
Insurance Company.
10.18 Agreement dated April 8, 1994 between the Company
and PNJ Engineering providing for a lump sum
settlement of a royalty obligation between the
Company and PNJ engineering.
10.19 Non-competition agreement dated January 6, 1994
between the Company and J. Edward Snyder.
10.20 Employment agreement dated April 6, 1994 between the
Company and Leslie Denend which is incorporated by
reference to Exhibit 10.21 of the June 1994 Form
10-Q.
10.21 Employment agreement dated April 6, 1994 between the
Company and James T. Richardson, which is
incorporated by reference to Exhibit 10.22 of the
June 1994 Form 10-Q.
10.22 Employment agreement dated April 6, 1994 between the
Company and Richard Lewis, which is incorporated by
reference to Exhibit 10.23 of the June 1994
Form 10-Q.
10.23 Resignation Agreement between the Company and Riley
Wilcox dated March 31, 1994, which is incorporated
by reference to Exhibit 10.24 of the June 1994
Form 10-Q.
10.24 Resignation Agreement between the Company and James
Pante dated April 30, 1994, which is incorporated by
reference to Exhibit 10.25 of the June 1994
Form 10-Q.
10.25 Second Amendment to Lease dated February 1, 1995
between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1994 ("December 1994
Form 10-Q").
38
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------ ------------- ----
10.26 Third Amendment to Lease dated February 1, 1995
between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to Exhibit 10.23
of the December 1994 Form 10-Q.
21.1 Subsidiaries of Network General Corporation. 40
23.1 Consent of Independent Public Accountants. 41
27.0 Financial Data Schedule 42
39
<PAGE>
EXHIBIT 21.1
Subsidiaries of Network General Corporation
The Registrant's twelve subsidiaries are Progressive Computing, Inc., an
Illinois corporation, ProTools, Inc. a Delaware corporation, Network General
Technology Corporation, a Delaware corporation, Network General Australia Pty.
Ltd., an Australian corporation, Network General Europe N.V., a Belgium
corporation, Network General (Canada) Ltd., a Canadian corporation, Network
General France S.A.R.L., a French corporation, Network General (Deutschland)
GmbH, a German corporation, Network General/NGC AG, a Swiss corporation, Network
General Japan K.K., a Japanese corporation, Network General Singapore Pte. Ltd.,
a Singapore corporation, and Network General Europe B.V., a Dutch corporation,
all of which are wholly owned by the Registrant.
40
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement No.'s 33-53570, 33-53558, 33-45232, 33-28567, 33-70780,
33-70782 and 33-74356 on Form S-8.
ARTHUR ANDERSEN LLP
San Jose, California
June 26, 1995
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 18,950
<SECURITIES> 73,964
<RECEIVABLES> 20,085
<ALLOWANCES> (1,285)
<INVENTORY> 4,226
<CURRENT-ASSETS> 129,914
<PP&E> 28,449
<DEPRECIATION> (15,425)
<TOTAL-ASSETS> 196,190
<CURRENT-LIABILITIES> 23,378
<BONDS> 0
<COMMON> 222
0
0
<OTHER-SE> 165,365
<TOTAL-LIABILITY-AND-EQUITY> 196,190
<SALES> 112,986
<TOTAL-REVENUES> 139,755
<CGS> 23,437
<TOTAL-COSTS> 31,799
<OTHER-EXPENSES> 75,558
<LOSS-PROVISION> 630
<INTEREST-EXPENSE> (5,328)
<INCOME-PRETAX> 37,096
<INCOME-TAX> 11,685
<INCOME-CONTINUING> 25,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,411
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
