<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended . . . DECEMBER 31, 1995
-----------------
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission file number 0-17431
NETWORK GENERAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0115204
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4200 BOHANNON DRIVE, MENLO PARK, CALIFORNIA 94025
- -------------------------------------------------------------------------------
(address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (415) 473-2000
--------------
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
As of January 1, 1996, there were outstanding 21,775,314 shares of the
Registrant's Common Stock (par value $0.01 per share).
This report, including exhibits, consists of 16 pages. The exhibit index
begins on page thirteen.
<PAGE>
FORM 10-Q
INDEX
PAGE
----
Cover Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1995 and March 31, 1995 3
Condensed Consolidated Statements of Income -
three months and nine months ended
December 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows -
nine months ended December 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial
Statements - December 31, 1995 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13 - 15
Signatures 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) December 31, 1995 March 31, 1995
----------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $17,168 $18,950
Marketable securities 85,117 73,964
Accounts receivable, net 28,377 18,800
Inventories 3,870 4,226
Prepaid expenses and deferred tax assets 11,883 13,974
----------------- --------------
Total current assets 146,415 129,914
----------------- --------------
Property and Equipment, at cost:
Demonstration and rental equipment 8,860 6,147
Office and development equipment 28,361 20,486
Leasehold improvements 2,964 1,816
----------------- --------------
40,185 28,449
Less accumulated depreciation and amortization (20,818) (15,425)
----------------- --------------
Net property and equipment 19,367 13,024
----------------- --------------
Long-Term Investments 45,272 52,410
----------------- --------------
Other Assets 2,738 842
----------------- --------------
$213,792 $196,190
----------------- --------------
----------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $5,151 $4,186
Accrued liabilities 14,210 9,817
Deferred revenue 19,354 14,375
----------------- --------------
Total current liabilities 38,715 28,378
----------------- --------------
Long-Term Deferred Revenue and Taxes 2,701 2,225
----------------- --------------
Stockholders' Equity:
Common stock -- $.01 par value
Authorized -- 50,000,000 shares
Issued -- 22,820,314 shares at December 31, 1995 and
22,225,207 shares at March 31, 1995 228 222
Additional paid-in-capital 122,047 109,746
Retained earnings 81,450 64,374
Less treasury stock, at cost -- 1,045,000 shares at
December 31, 1995 and
395,000 shares at March 31, 1995 (31,349) (8,755)
----------------- --------------
Total stockholders' equity 172,376 165,587
----------------- --------------
$213,792 $196,190
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
---------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product $41,972 $30,383 $109,238 $80,391
Service 9,618 7,147 25,821 19,564
---------- --------- --------- ---------
Total Revenues 51,590 37,530 135,059 99,955
---------- --------- --------- ---------
Cost of Revenues:
Product 9,200 6,393 23,848 16,692
Service 2,960 2,329 7,507 6,233
---------- --------- --------- ---------
Total Cost of Revenues 12,160 8,722 31,355 22,925
---------- --------- --------- ---------
Gross profit 39,430 28,808 103,704 77,030
---------- --------- --------- ---------
Operating Expenses:
Sales and marketing 16,835 11,956 45,513 34,335
Research and development 7,434 4,902 20,049 14,268
General and administrative 3,104 2,370 8,681 6,786
Acquired in-process research and development -- -- 7,153 --
---------- --------- --------- ---------
Total Operating Expenses 27,373 19,228 81,396 55,389
---------- --------- --------- ---------
Income from operations 12,057 9,580 22,308 21,641
Interest Income, net 1,719 1,230 5,325 3,475
---------- --------- --------- ---------
Income before provision for income taxes 13,776 10,810 27,633 25,116
Provision for Income Taxes 4,202 3,402 10,558 7,911
---------- --------- --------- ---------
Net income $9,574 $7,408 $17,075 $17,205
---------- --------- --------- ---------
---------- --------- --------- ---------
Earnings Per Share $.42 $.33 $.74 $.78
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted Average Common and Common
Equivalent Shares Outstanding 23,027 22,388 22,940 22,112
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) For the Nine Months Ended
December 31,
1995 1994
----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $17,075 $17,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,925 5,004
Acquired in-process research & development 7,153 --
Deferred taxes, net (724) 2,438
Net decrease in certain assets and liabilities 1,262 69
----------- ----------
Net cash provided by operating activities 30,691 24,716
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of held-to maturity investments (141,666) (78,003)
Proceeds from maturities of held-to-maturity
investments 137,651 58,614
Cash expenditures for acquisition (6,501) --
Purchase of property and equipment (11,670) (5,808)
----------- ----------
Net cash used in investing activities (22,186) (25,197)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of issuance costs 12,307 9,675
Repurchase of common stock (22,594) (5,933)
----------- ----------
Net cash (used in) provided by financing
activities (10,287) 3,742
----------- ----------
Net (decrease) increase in cash and cash equivalents (1,782) 3,261
Cash and cash equivalents at beginning of period 18,950 4,286
----------- ----------
Cash and cash equivalents at end of period $17,168 $7,547
----------- ----------
----------- ----------
Supplemental Disclosures
Cash paid during the period for:
Income taxes $5,546 $3,166
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Network General Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles of interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. These unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements, and notes thereto, for the year ended
March 31, 1995 included in the Company's 1995 Annual Report on Form 10-K. The
results of operations for the three and nine month periods ended December 31,
1995 are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1996.
Certain prior year interim and year end balances have been reclassified to
conform to the 1996 presentation.
B. ACQUISITION
In September 1995, the Company acquired all of the remaining 90% of voting
interest of AIM Technology, which it did not own for approximately
$6,501,000. The acquisition was accounted for as a purchase. Accordingly,
the results of operations of AIM Technology have been included in the results
of the Company from the date of acquisition. The purchase price, including
$600,000 invested by the Company for 10% of the voting interest of AIM
Technology prior to the acquisition, was allocated to acquired assets and
liabilities assumed based on their estimated fair values at the acquisition
date as follows:
(In thousands)
Cash and cash equivalents $ 309
Accounts receivable, net 347
In-process research and development 7,153
Property and equipment, net 288
Deposits & other assets 441
Accounts payable & accrued liabilities (1,437)
-------
$ 7,101
-------
-------
In September 1995, amounts allocated to in-process research and development were
charged to operations.
6
<PAGE>
C. CASH AND CASH EQUIVALENTS, MARKETABLE DEBT SECURITIES, AND LONG-TERM
INVESTMENTS
For purposes of the condensed consolidated statements of cash flows, the
Company considers certificates of deposits, commercial paper and money market
funds with an original maturity date of three months or less to be cash
equivalents.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" in the first quarter of fiscal year 1995, and the affect
on its financial statements was not significant. In accordance with SFAS No.
115, the Company has classified all marketable debt securities, which consist
of municipal notes and U.S. Treasury notes with average maturities of less
than one year, and long-term debt investments as "Held-to-Maturity". All
investments are carried at amortized cost. Accordingly, no adjustment for
unrealized holding gains or losses have been reflected in the Company's
financial statements.
At December 31, 1995, the amortized cost basis, aggregate fair value and gross
unrealized holding gains/(losses) by security type were as follows:
<TABLE>
<CAPTION>
(In thousands) Amortized Aggregate Unrealized
Cost Fair Value Gains/(Losses)
--------- ---------- -------------
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury and
other U.S. government agencies $38,730 $38,778 $48
Debt securities issued by states of the United
States and political subdivisions of the state 91,659 91,498 (161)
--------- ---------- -------------
$130,389 $130,276 ($113)
--------- ---------- -------------
--------- ---------- -------------
</TABLE>
D. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
include material, labor and related manufacturing overhead. Inventories consist
of:
<TABLE>
<CAPTION>
(In thousands) December 31, 1995 March 31, 1995
----------------- --------------
<S> <C> <C>
Purchased parts $2,168 $1,496
Finished goods 1,702 2,730
------ ------
$3,870 $4,226
------ ------
------ ------
</TABLE>
E. EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Fully
diluted earnings per share are the same as primary earnings per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management Discussion and Analysis of Financial Condition and
Results of Operations may contain forward-looking statements which reflect the
Company's current judgment on those issues. Because such statements apply to
future events, they are subject to risks and uncertainties that could cause the
actual results to differ materially. Important factors which could cause actual
results to differ materially are described in the following paragraphs and are
particularly noted under Business Risks on page 11 and 12.
REVENUES
Revenues for the quarter ended December 31, 1995 were $51,590,000, an increase
of 37% over the $37,530,000 in revenues for the quarter ended December 31, 1994.
Both domestic and international revenues increased in the third quarter of
fiscal 1996 when compared to the third quarter of fiscal 1995. Domestic
revenues increased by 33% for the quarter ended December 31, 1995 compared to
the quarter ended December 31, 1994, growing from $30,184,000 to $40,072,000.
International revenues increased 57% for the third quarter of fiscal 1996
compared to the third quarter of fiscal 1995, growing from $7,346,000 to
$11,518,000, primarily due to sales growth in Asia, although European revenue
growth also contributed to the overall increase in international revenues. The
Company remains in the implementation stage of a revised distribution strategy
in Europe which includes a combination of third party distributors and direct
sales and, as a result, there may be continued weakness in European sales until
the strategy is fully implemented. International revenues represented 22% of
the revenues for the quarter ended December 31, 1995 as compared to 20% for the
quarter ended December 31, 1994.
Revenues for the nine month period ended December 31, 1995 were $135,059,000, an
increase of 35% over the $99,955,000 in revenues for the nine month period ended
December 31, 1994. Both domestic and international revenues increased in the
first nine months of fiscal 1996 when compared to the first nine months of
fiscal 1995. Domestic revenues increased by 36% for the nine month period ended
December 31, 1995 compared to the nine month period ended December 31, 1994,
growing from $79,017,000 to $107,173,000. International revenues increased by
33% for the nine month period ended December 31, 1995 compared to the nine month
period ended December 31, 1994, growing from $20,938,000 to $27,886,000.
International revenues represented 21% of the revenues for the nine month
periods ended December 31, 1995 and December 31, 1994.
The following table presents the Company's revenues for each of its product
lines in absolute dollars and as a percentage of revenues for each of the
periods shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
(Dollars in Thousands) (Dollars in Thousands)
----------------------- -----------------------
SOURCES OF REVENUES 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C>
Tool Products(1) $25,055 $19,364 $66,770 $52,682
System Products(2) 16,917 11,019 42,468 27,709
------- ------- -------- -------
Subtotal Products Revenues 41,972 30,383 109,238 80,391
Services(3) 9,618 7,147 25,821 19,564
------- ------- -------- -------
Total Revenues $51,590 $37,530 $135,059 $99,955
------- ------- -------- -------
------- ------- -------- -------
Percentages of Revenues 1995 1994 1995 1994
---- ---- ---- ----
Tool Products 48% 52% 49% 52%
System Products 33% 29% 32% 28%
---- ---- ---- ----
Subtotal Products Revenues 81% 81% 81% 80%
Services 19% 19% 19% 20%
---- ---- ---- ----
Total Revenues 100% 100% 100% 100%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
- ---------------
(1) Tool Products include revenues from the Sniffer -Registered Trademark-
Network Analyzer products, the PCI line of Wide Area Network (WAN) Analysis
products, the Watchdog-TM- Network monitor products, product rentals, and
royalties from license agreements.
(2) System Products consist of revenues from the Distributed Sniffer System
- -Registered Trademark- analysis products, performance measurement analysis
products, the Distributed Sniffer System monitoring products (formerly
ProTools Network Control Series) and the Sharpshooter monitoring products.
(3) Services revenues include first-year warranty revenues as defined by
Statement of Position ("SOP") 91-1 and revenues from software support
and maintenance contracts, training, and consulting services.
8
<PAGE>
The Company's tool products revenues increased 29% to $25,055,000 in the
quarter ended December 31, 1995 as compared to $19,364,000 in the quarter
ended December 31, 1994. Revenues from the Company's tool products were
$66,770,000 in the nine month period ended December 31, 1995, a 27% increase
from the $52,682,000 of tool products revenues in the nine month period ended
December 31, 1994. Sniffer Network Analyzer products accounted for
substantially all of the Company's tool products revenues in each of the
periods shown. Tool products revenues represented approximately 48% of
Network General's revenues for the third fiscal quarter ended December 31,
1995, as compared to 52% for the same period in fiscal 1995. Tool products
revenues declined as a percentage of total revenues due to faster growth in
system products and services revenues during this period.
Revenues for the quarter ended December 31, 1995 included $16,917,000 in
system products revenues, a 54% increase as compared to the $11,019,000 of
system products revenues for the same period in fiscal 1995. Revenues for
the nine months ended December 31, 1995 included $42,468,000 of system
products revenues, a 53% increase as compared to the $27,709,000 of system
products revenues for the nine month period ended December 31, 1994. The
Distributed Sniffer System (DSS) analysis products accounted for the majority
of the Company's system products revenues in each of the periods shown above.
System products revenues represented approximately 33% of Network General's
revenues for the quarter ended December 31, 1995, as compared to 29% for the
quarter ended December 31, 1994.
Services revenues include revenues from software support and maintenance
contracts, training, and consulting services, as well as those revenues from
the first year warranty period of customer support which have been deferred
in accordance with SOP 91-1, "Software Revenue Recognition". For the
third fiscal quarter ended December 31, 1995, services revenues increased 35%
to $9,618,000, from $7,147,000 for the same quarter in fiscal 1995. Services
revenues for the nine months ended December 31, 1995 totaled $25,821,000, an
increase of 32% from the $19,564,000 of services revenues for the nine month
period ended December 31, 1994. The increase in services revenues was due to
increases in all categories of services revenues. As a percentage of total
revenues, services revenues remained constant at 19% of total revenues for
the third quarters ended December 31, 1995 and 1994. As a percentage of
total revenues, services revenues decreased slightly from 20% of total
revenues in the first nine months of fiscal 1995 to 19% of total revenues in
the first nine months of fiscal 1996.
GROSS PROFIT
Cost of revenues consists of manufacturing costs, cost of services and
warranty expenses. Gross profit as a percentage of revenues decreased
slightly to 76% for the quarter ended December 31, 1995 from 77% for the
quarter ended December 31, 1994. For the nine months ended December 31, 1995
and 1994, gross profit remains flat at 77% of revenues. Gross profit and
gross profit percent may vary as a result of a number of factors, including
the mix between tool products (which include sales of third party platforms
which have lower margins than the Company's own products), system products
and services, and the mix of international and domestic sales.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $16,835,000 in the third quarter of fiscal
1996, an increase of 41% compared to $11,956,000 of sales and marketing
expenses in the third quarter of fiscal 1995. The increase was primarily due
to increased staffing, commission expense and promotional activity required
to support increased sales volumes. As a percent of revenues, sales and
marketing expenses were 33% and 32% for the quarters ended December 31, 1995
and 1994, respectively. Sales and marketing expenses were $45,513,000 in the
nine month period ended December 31, 1995, an increase of 33% compared to
$34,335,000 of sales and marketing expenses in the same period of fiscal
1995. As a percent of revenues, sales and marketing expenses were 34% for
the nine month periods ended December 31, 1995 and 1994.
9
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $7,434,000 in the third quarter of
fiscal 1996, as compared to $4,902,000 in the third quarter of fiscal 1995.
As a percent of revenues, research and development expenses were 14% for the
quarter ended December 31, 1995 and 13% for the quarter ended December 31,
1994. Research and development expenses were $20,049,000 in the first nine
months of fiscal 1996, as compared to $14,268,000 in the first nine months of
fiscal 1995. Research and development expenses as a percent of revenues were
15% and 14% for the nine months ended December 31, 1995 and 1994,
respectively. The increases for the three and nine month periods ended
December 31, 1995 as compared to the same periods in fiscal 1995 were due to
increased staffing to support accelerated development efforts for high speed
network technology. The Company believes continued commitment to research
and development is required to remain competitive.
Research and development expenses are accounted for in accordance with
Statement of Financial Accounting Standards No. 86, under which the Company
is required to capitalize software development costs after technological
feasibility is established. Capitalizable software development costs
incurred to date have not been significant and the Company has charged all
software development costs to research and development expenses in the
consolidated statements of income.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $3,104,000 for the quarter ended
December 31, 1995 and $2,370,000 for the quarter ended December 31, 1994.
For the nine months ended December 31, 1995, general and administrative
expenses were $8,681,000 as compared to $6,786,000 for the nine months ended
December 31, 1994. Increases to general and administrative expenses were
primarily due to increases in staffing to support operations. General and
administrative expenses as a percent of revenues were 6% for both quarters
ended December 31, 1995 and 1994 and 6% and 7% for the nine months ended
December 31, 1995 and 1994, respectively.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired in-process research and development of $7,153,000 for the nine
months ended December 31, 1995 reflects the value of development projects in
process at the time of the acquisition of AIM Technology which was charged to
operations in September 1995.
INTEREST INCOME, NET
Interest income, net, increased 40% to $1,719,000 in the third quarter of
fiscal year 1996 as compared to $1,230,000 in the third quarter of fiscal
year 1995. For the nine months ended December 31, 1995, interest income,
net, was $5,325,000 as compared to $3,475,000 for the nine months ended
December 31, 1994. The increase in interest income earned in both the three
and nine month periods ended December 31, 1995 compared to the same periods
in fiscal 1995 reflects a combination of higher balances of cash, cash
equivalents and marketable securities available for investment, as well as a
shift from tax-free municipal to taxable US debt securities investments
yielding higher returns during the first nine months of fiscal year 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three and nine month periods ended
December 31, 1995 was 30.5 % and 38.2% of pretax income, respectively, as
compared to 31.5% for the same periods in fiscal 1995. Excluding the impact
of the AIM Technology acquisition, the provision for income taxes would have
been 30.5% of pretax income for the nine month periods ended December 31,
1995. The decrease in the provision rate, exclusive of the AIM Technology
acquisition, from fiscal 1995 to fiscal 1996 was primarily due to increased
utilization of ProTools' operating losses and, to a lesser extent, a lower
effective state tax rate between fiscal years.
10
<PAGE>
EARNINGS PER SHARE
Earnings per share for the quarter ended December 31, 1995 increased to $0.42
as compared to $0.33 per share earned in the quarter ended December 31, 1994.
Earnings per share were reduced by approximately $0.02 in the third quarter
of fiscal year 1996 as a result of the operations of AIM Technology.
Earnings per share for the nine months ended December 31, 1995 were $0.74 as
compared to $0.78 per share earned in the same period in fiscal 1995. The
decrease was due to the $7,153,000 one-time charge to operations in the
second quarter of fiscal year 1996 to write off acquired in-process research
and development related to the acquisition of AIM Technology and the results
of AIM Technology operations. The number of common share equivalents
increased 3% from 22,388,000 in the third quarter of fiscal 1995 to
23,027,000 in the third quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $30,691,000 for the nine months
ended December 31, 1995 and $24,716,000 for the nine months ended December
31, 1994. The primary source of these funds was net income as well as
increases to accounts payable, accrued liabilities and deferred revenue for
both periods. The net increase for the first nine months of fiscal 1996 was
partially offset by increases to accounts receivable. Net cash provided by
operating activities in the first nine months of fiscal 1995 reflects net
income as well as increases to income taxes payable, partially offset by
increases in prepaid expenses.
Net cash used in investing activities was $22,186,000 for the nine months
ended December 31, 1995 as compared to net cash used in investing activities
of $25,197,000 for the nine months ended December 31, 1994. Net cash used in
investing activities in the first nine months of fiscal 1996 reflects
increased investment in marketable securities, cash used to acquire AIM
Technology and purchases of property and equipment. Net cash used in investing
activities in the first nine months of fiscal 1995 consists principally of
increased investment in marketable securities and purchases of property and
equipment.
The Company used $10,287,000 of net cash in the nine month period ended
December 31, 1995 relating to financing activities. Repurchase of common
stock totaling $22,594,000 was partially offset by proceeds from the issuance
of common stock. Net cash provided by financing activities was $3,742,000 in
the nine months ended December 31, 1994, resulting from proceeds from the
issuance of common stock net of repurchase activity.
As of December 31, 1995, the Company's principal sources of liquidity
included cash, cash equivalents, marketable securities and long-term
investments totaling $147,557,000, including $45,272,000 of long-term
investments. The Company currently has no outstanding bank borrowings and
has no established lines of credit. The Company believes cash generated from
operations, together with existing cash and investment balances, will be
sufficient to satisfy operating cash and capital expenditure requirements
through at least the next twelve months.
BUSINESS RISKS
The Company's future operating results may be affected by certain factors and
trends of its market which are beyond its control. The market for Network
General's products is characterized by rapidly changing technology and
evolving industry standards. Included in such 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 continued investments in research and development; however,
there is no assurance 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 Network General will be
able to compete successfully in the future with existing or future
competitors.
11
<PAGE>
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.
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
would adversely affect the Company's operating results.
In September 1995, the Company acquired the remaining 90% of outstanding
common stock of AIM Technology. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in
other industries. There can be no assurance that Network General will be
successful in developing products based on AIM Technology engineering
expertise or technology, that Network General will be successful in
integrating its own distribution channels with those of AIM Technology, that
Network General will be successful in penetrating AIM Technology's customer
base, that Network General will be successful in selling AIM Technology's
products to its own customer base, that the combined companies will retain
their key personnel or that Network General will realize any of the benefits
anticipated at the time of the merger.
There has been substantial litigation regarding patent and other intellectual
property rights in the software industry. As is typical in the software
industry, the Company has received from time to time notices from third
parties alleging infringement claims. Although there are currently no
pending lawsuits against Network General regarding any possible infringement
claims, there can be no assurance infringement claims will not be asserted in
the future or that such assertions will not materially adversely affect the
Company's business, financial condition and results of operations. If any
such claims are asserted against Network General, the Company may need to
seek to obtain a license under the third party's intellectual property
rights. There can be no assurance a license will be available on reasonable
terms or at all. Failure to obtain a necessary license on commercially
reasonable terms would materially adversely affect the Company's business,
financial condition and results of operations. Network General could decide,
in the alternative, to resort to litigation to challenge such claims. Such
litigation could be expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations.
For certain critical components of its products, Network General relies on a
limited number of suppliers. In addition, some of the Company's products are
designed around specific computer platforms which are only available from
certain manufacturers. As a result of product transitions by these computer
platform manufacturers, the Company has found it increasingly necessary to
purchase and inventory computer platforms for resale to its customers. Any
significant shortage of computer platforms or other critical components for
the Company's products could lead to cancellations or delays of purchases of
the Company's products which would materially adversely affect the Company's
operating results. If purchases of computer platforms or other components
exceed demand, the Company would incur expenses for disposing of the excess
inventory, which would also adversely affect the Company's operating results.
TRADEMARKS
Sniffer and Distributed Sniffer Systems are registered trademarks
of Network General and/or its wholly owned subsidiaries.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
From time to time the Company has been, or may become,
involved in litigation proceedings incidental to the
conduct of its business. The Company does not believe
that any such proceedings presently pending will have a
material adverse affect on the Company's financial
position or its results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
1) Exhibits
Exhibit
Number Exhibit Title
- -------- -------------
3.1 Second restated certificate of Incorporation of Network General
Corporation, a Delaware corporation.
3.2 Amended and Restated Bylaws of Network General Corporation.
4.1 Registration Rights Agreement between the Company and certain
investors dated December 31, 1987, which is incorporated by
reference to Exhibit 4.2 of the Company's Registration Statement
No. 33-26107 on Form S-1, which became effective February 2, 1989
("Form S-1").
4.2 Rights Agreement between the Company and Chemical Trust Company
of California dated June 26, 1992, as amended, which is
incorporated by reference to Exhibit 4.2 of the Company's
Annual Report on Form 10-K for the year ended March 31, 1993.
10.1 Standard Business Lease (Net) for the Company's principal
facility dated June 18, 1991, between the Company and Menlo Oaks
Partners L.P., which is incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-K for the year
ended March 31, 1991.
10.2 First Amendment to Lease dated June 10, 1992, between the
Company and Menlo Oaks Partners, L.P., which is incorporated
by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the year ended March 31, 1992
("1992 Form 10-K").
10.3 Standard Business Lease (Net) for the Company's principal
facility dated March 11, 1992, between the Company and Menlo
Oaks Partners, L.P., which is incorporated by reference to
Exhibit 10.4 of the 1992 Form 10-K.
10.4 First Amendment to Lease dated June 18, 1992, between the
Company and Menlo Oaks Partners, L.P., which is
incorporated by reference to Exhibit 10.5 of the 1992
Form 10-K.
10.5 Lease dated March 31, 1992, between the Company and Equitable
Life Assurance Society of the United States, which is
incorporated by reference to Exhibit 10.4 of the 1992
Form 10-K.
10.6 Description of Company's Cash Bonus Plan, which is
incorporated by reference to Exhibit 10.6 of the Form S-1.
10.7 Form of Director and Officer Indemnification Agreement,
which is incorporated by reference to Exhibit 10.7 of the
Form S-1.
13
<PAGE>
10.8 Amended and Restated 1989 Outside Directors Stock Option Plan,
which is incorporated by reference to Exhibit 10.12 of the 1992
Form 10-K.
10.9 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 Annual Report on Form 10-K for the year ended
March 31, 1989.
10.10 OEM Agreement dated August 3, 1991 between the Company
and NCR Corporation which is incorporated by reference to
Exhibit 10.18 of the Company's Registration Statement No.
33-45580 on Form S-3 which became effective on April 6,
1992.
10.11 Standard Business lease (Net) for the Company's
Beaverton, Oregon facility dated February 4, 1994 between
the Company and Hartford Underwriters Insurance Company
which is incorporated by reference to Exhibit 10.18 of
the Company's Annual Report on Form 10-K for the year
ended March 31, 1994 ("1994 10-K").
10.12 Agreement dated April 8, 1994 between the Company and PNJ
Engineering providing for a lump sum settlement of a
royalty obligation between the Company and PNJ
engineering which is incorporated by reference to Exhibit
10.19 of the 1994 Form 10-K.
10.13 Employment agreement dated April 6, 1994 between the
Company and Leslie Denend, which is incorporated by
reference to Exhibit 10.21 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994
("June 1994 Form 10-Q").
10.14 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.
10.15 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.
10.16 Second Amendment to Lease dated February 1, 1995 between
the Company and Menlo Oaks Partners, L.P., which is
incorporated by reference to Exhibit 10.2of the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994 ("December 1994 Form 10-Q").
10.17 Third Amendment to Lease dated February 1, 1995 between
the Company and Menlo Oaks Partners, L.P., which is
incorporated by reference to Exhibit 10.23 of the December
1994 Form 10-Q.
10.18 Fourth Amendment to Lease dated May 31, 1995 between the
Company and Menlo Oaks Partners, L.P which is
incorporated by reference to Exhibit 10.27 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995 10-Q ("June 1995 Form 10-Q").
14
<PAGE>
10.19 Fifth Amendment to Lease dated June 13, 1995 between the
Company and Menlo Oaks Partners, L.P which is
incorporated by reference to Exhibit 10.28 of the June
1995 Form 10-Q.
10.20 Network General Corporation 1989 Stock Option Plan, as amended
June 20, 1994 and related documentation, which is incorporated
by reference to Exhibit 10.21 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995
("September 1995 Form 10-Q").
10.21 Network General Corporation 1989 Employee Stock Purchase Plan,
as amended June 20, 1994, and related documentation, which is
incorporated by reference to Exhibit 10.22 of the September
1995 Form 10-Q.
2) Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended December 31, 1995.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORK GENERAL CORPORATION
(Registrant)
Date: February 13, 1996 by S/JAMES T. RICHARDSON
------------------ ------------------------
James T. Richardson
Senior Vice President, Corporate
Operations and Chief Financial Officer
(authorized officer)
Date: February 13, 1996 by S/BERNARD J. WHITNEY
------------------ ------------------------
Bernard J. Whitney
Controller and Chief Accounting Officer
(authorized officer)
16
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