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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, 1996
OR
/ / EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31,
1996
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 identification no.)
incorporation or organization)
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
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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 May 31, 1996 was $1,042,200,089 based on the
closing sales price of the Company's Common Stock as reported on The NASDAQ
National Market. As of May 31, 1996, the registrant had outstanding 43,882,109
shares of Common Stock, par value $0.01.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy statement for the Annual Meeting of Stockholders scheduled to be
held August 9, 1996 is incorporated by reference into Part III.
This report including all exhibits and attachments contains 54 pages. The
Exhibit Index is located on pages 40-42.
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NETWORK GENERAL CORPORATION
1996 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 14
PART II
ITEM 5. Market for the registrant's common equity and 14
related stockholder matters
ITEM 6. Selected financial data 15
ITEM 7. Management's discussion and analysis of financial 16
condition and results of operations
ITEM 8. Financial statements and supplementary data 22
ITEM 9. Changes in and disagreements with accountants on 36
accounting and financial disclosures
PART III
ITEM 10. Directors and executive officers of the registrant 36
ITEM 11. Executive compensation 36
ITEM 12. Security ownership of certain beneficial owners and 36
management
ITEM 13. Certain relationships and related transactions 36
PART IV
ITEM 14. Exhibits, financial statement schedules and reports 40
on Form 8-K
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This Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect the Company's current
judgment on those issues. Because such statements apply to future events, they
are subject to risks and uncertainties that could cause the actual results to
differ materially. Important factors which could cause actual results to differ
materially are described in the following paragraphs and are particularly noted
under BUSINESS RISKS on pages 21 and 22 and the Company's reports on Forms 10-K
and 10-Q on file with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Network General Corporation ("Network General" or the "Company") was
incorporated in California in May 1986 and reincorporated in Delaware in
December 1987. 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 provides services which help
maximize network productivity and minimize downtime. The Company's product
lines consists of portable tools and centralized systems incorporating a
proprietary technology linking advanced protocol decodes with expert analysis
capabilities to facilitate real-time identification, diagnosis and resolution of
network problems. The Company also provides product support, training and
network trouble-shooting consulting services.
The Company's portable tools are designed to analyze local area networks,
wide area networks, internetwork segments and enterprise network environments.
Network General's flagship portable product is the Expert Sniffer-Registered
Trademark- Network Analyzer. 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.
Network General's Distributed Sniffer System-Registered Trademark- product
("DSS") is designed for monitoring and troubleshooting distributed enterprise
and client/server networks, including Ethernet, Fast Ethernet, token ring, and
FDDI local area networks ("LAN") as well as bridged and routed internetworks.
The DSS product line consists of centralized console software which receives and
displays information received from distributed servers.
In January 1994, through the acquisition of ProTools, Inc. ("ProTools") the
Company acquired products and technology that incorporates standards-based
Remote Monitoring (RMON) technology. The Foundation Manager-TM- product line
enables this standards-based monitoring and performance analysis of network
segments.
In September 1995, Network General completed its acquisition of AIM
Technology, a provider of UNIX-based system performance solutions. The
SharpShooter product is a centrally managed fault and performance management
application for UNIX systems that finds and provides solutions to server
problems.
Network General sells its products and services to domestic end users
principally through its direct sales force, although the Company also maintains
an indirect distribution channel using authorized resellers and systems
integrators. Internationally, the Company sells its products and services
through its direct sales force in several countries, as well as through a
combination of distributors, systems integrators and authorized resellers
worldwide.
Unless the context otherwise requires "Network General" and the "Company"
refer to Network General Corporation and its predecessors and subsidiaries.
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THE MARKET FOR NETWORK FAULT AND PERFORMANCE MANAGEMENT
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 an entire organization. The
Company's products are designed to enable local LAN and wide area network
("WAN") managers to do their jobs more effectively with the following benefits
to the organization:
MINIMIZATION OF NETWORK DOWNTIME. Network General's products provide fault
isolation and performance management capabilities which 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.
PROACTIVE NETWORK MANAGEMENT. Identifying problems before they occur is
the key to effective network management. The Company's Sniffer and DSS 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 which, in turn, assist
network managers in proactively managing network expansion. As a result,
employees continue to perform key business functions on a network without
interruption.
REDUCED 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.
OPTIMIZATION OF NETWORK INVESTMENTS. Network General products assist
network managers with effective bandwidth planning, helping eliminate
unnecessary purchases of network infrastructure such as bridges and routers.
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 and/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 fault and performance tools and systems such as 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 quickly and enhancing customer satisfaction.
REDUCED SERVICE EXPENSE. The network manager's 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 on portable platforms (the Expert Sniffer
Network Analyzer and the Sniffer Internetwork Analyzer) and as comprehensive
systems (the Distributed Sniffer System and Foundation Manager product lines.
These products are available in a variety of operating systems and prices to
enable customers to tailor monitoring and analysis solutions to their specific
networks and operating budgets.
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NETWORK FAULT AND PERFORMANCE MANAGEMENT PRODUCTS. The Company's network
fault and performance management products consist of software and the
communications cards necessary to run the software. The specialized analysis
software code interprets over 200 network protocols and utilizes artificial
intelligence-based technology to diagnose network problems. Network General's
analysis software operates on networks utilizing 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 Network Analyzer products examine data
packets on the network rather than just packets destined for a particular node.
Since 1992, Network General's analysis software has incorporated artificial
intelligence-based technology, referred to as "Expert Analysis". Expert
Analysis "learns" network configurations automatically as it captures network
data for analysis. By automating the real-time identification and diagnosis of
network problems, Expert Analysis enables faster problem resolution. The Expert
Analysis technology, which is a component of the Sniffer and DSS family of
products, provides network managers with a complete set of actionable
information about their networks. The Expert Analysis automated recognition of
problems allows less experienced network managers to manage their networks more
effectively. Network General originally developed Expert Analysis for the
portable Sniffer Network Analyzers. Subsequently, the Company developed Expert
Analysis capability for the Distributed Sniffer System. Today, the Distributed
Sniffer System with Expert Analysis console software is compatible with UNIX and
Microsoft Windows-Registered Trademark- operating systems.
The Company continues to develop new releases of its portable Expert
Sniffer Network Analyzer software including additional topology and hardware
platform options. In 1993, the Company introduced the Notebook Sniffer Network
Analyzer 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 Type II standard, the Notebook
Sniffer Network Analyzer (composed of software and a PCMCIA network interface
card) supports a variety of popular, lightweight 486- and Pentium-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. In 1995, the Company
expanded its customers' visibility beyond the traditional network with products
that monitor and analyze database client/server applications from Oracle
Corporation.
In 1995, Network General introduced and shipped the Integrated Services
Digital Network ("ISDN") package for the Sniffer Internetwork Analyzer (Primary
Rate), as well as Sniffer Network Analyzer for Fast Ethernet, an emerging high
speed network standard. In 1996, the Company introduced and shipped the Sniffer
Network Analyzer for ATM, another emerging high speed network standard, as well
as the ISDN Package for the Sniffer Internetwork Analyzer (Basic Rate).
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 Distributed
Sniffer Systems examine network segments for symptoms, diagnose problems,
explain diagnoses, and recommend corrective action.
NETWORK MONITORING PRODUCTS. The Company provides standards-based RMON in
its Foundation Manager product line through a centralized console and hardware
probes and/or software agents which are distributed throughout the network.
This technology was acquired in 1994 through the acquisition of ProTools, Inc.
The Foundation Manager remote monitoring products monitor network activity on
any LAN segments, display statistics and provide network managers with a view of
activity along the segments.
Using the Internet Engineering Task Force standard for Ethernet and token
ring LANs, the Company's RMON products enable 24-hour monitoring of remote
network segments. In addition to fully complying with the industry standards,
the Company's RMON products use customized software implementations which allow
proactive network planning through baselining, trend graphing, and reporting
features.
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PRODUCTS AND SERVICES
TOOLS
PORTABLE EXPERT SNIFFER ANALYZER PRODUCTS. Network General began shipping
Sniffer Network Analyzer products in September 1986. To address the growing
complexity of multivendor, multiprotocol, multitopology network environments,
Network General 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 size computer platform, but it can also be installed on a
desktop computer platform.
Network General markets its Expert Sniffer Network Analyzer software in a
module-level configuration which includes software and a communications card.
Each Analyzer offers customers a combination of the following: (i) multiple
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, Expert Sniffer Network Analyzer products 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 significant amount of design effort has gone into making the use of
each Expert Sniffer Network Analyzer relatively simple. A unique user interface
with an intuitive menuing system allows customers to become productive quickly.
Network General offers the ability to capture information from a number of
different physical connection technologies; ATM, Ethernet and Fast Ethernet,
16/4 Mbps token ring, FDDI, and internetworks (including T-1, ISDN and Frame
Relay). 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.
WAN PRODUCTS. The Sniffer Internetwork Analyzers are the Company's wide
area network (WAN) line of products (previously know as the Company's "PCI" line
of products.). A WAN is a data communications network spanning relatively long
distances, typically using a public telephone network or a public data
communications network as its data transmission media. WANs must be monitored,
maintained, corrected and expanded to optimize the amount and speed of data
transmitted on the networks. The Company's line of protocol and internetwork
analyzers allow a user to test a data communications path and monitor and
analyze the data traveling over the path for a variety of purposes, including
configuring a network, monitoring the health of a network and analyzing a
network when it malfunctions.
On March 28, 1996, Network General sold certain assets of PCI, a wholly
owned subsidiary of Network General, to NexTest Limited, a Canadian corporation,
with whom PCI previously had a reseller arrangement for PCI's WAN line of
products. PCI received a license to use, modify and distribute the assets it
sold to NexTest Limited. On March 29, 1996, PCI was merged into ProTools,
another wholly-owned subsidiary of the Company. ProTools now holds all rights
which PCI previously held after the sale of assets to NexTest Limited was
completed.
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SYSTEMS
DISTRIBUTED SNIFFER SYSTEM. Network General first shipped its Distributed
Sniffer System product in June 1991 and has been enhancing the product since,
primarily by adding 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. A Distributed Sniffer System solution
consists of one or more servers and consoles.
Distributed Sniffer Systems solutions are composed of
SniffMaster-Registered Trademark- 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 enhance centralized
network analysis and further maximize customers' hardware investments, DSS
monitoring and analysis solutions are 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 (including T-1 and Frame
Relay). 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, ISDN and Frame Relay.
MONITORING PRODUCTS. The Foundation Manager product line is composed of
distributed agents, probes, and consoles which monitor Ethernet, token ring
network and UNIX communications continuously. Centralized Foundation Manager
consoles display and process information from the agents and probes located on
individual network segments.
Foundation Manager products offer standards-based 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 products. To preserve customers' investments in RMON-compatible
products, Foundation Manager fully supports the Internet Engineering Task Force
industry standards for remote monitoring (RMON v.1). With the Foundation
Manager product line, 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.
NETWORK GENERAL REPORTER-TM- AND REPORTER FOR UNIX. The Company's reporter
applications use information provided by DSS, Foundation Manager and the Sniffer
Network Analyzer to document network performance with a range of reports
including network usage over time, error summaries, baseline comparisons and
other important network data. These products save the end user time by
providing a wide selection of preformatted reports; improve the end user's
network knowledge by supplying reports on network status; and facilitate trend
analyses by providing reports on historical information.
SHARPSHOOTER. The SharpShooter line of products are used for monitoring,
troubleshooting and reporting of UNIX-based Sun Microsystems, Hewlett-Packard,
Silicon Graphic and Auspex servers.
SERVICES
Network General supports its products domestically on a direct basis and
internationally through a combination of direct support and with the assistance
of distributors. The Company offers a range of services, including product
support, education and network consulting.
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Network General's products are sold with a first-year support agreement
included in the sales price, with the exception of the AIM Technology line of
products (SharpShooter) for which there is an additional charge for support.
Network General also offers support services for its products beyond the first
year, for a fixed fee, through its PrimeSupport-TM- program. Customers whose
systems and tools are covered under support agreements receive software updates,
phone-in technical support, and bulletin board access. Support agreements also
include repair coverage on all hardware components purchased from the Company.
Warranty costs to date have not been significant.
From fiscal year 1994 through fiscal year 1996, Network General expanded
its sales efforts related to extended software service support agreements by
promoting the purchase of these agreements at the time of the 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 a wide range of education services for its
products, known as Sniffer University. The Company believes education creates
increased awareness of and demand for the Company's products. In fiscal year
1996, Network General expanded its Sniffer University education program with new
training centers in Chicago, Illinois and Anaheim, California. In April of
1996, the Company authorized its distributor in Japan, Toyo Corporation, to open
an education center. Education courses are also conducted in major cities
throughout the United States and internationally, as well as at customer
facilities.
Network General offers consulting services which provide both proactive and
reactive network services to customers. These services assist customers in
deploying the Company's products throughout their networks, in integrating
products with other network management systems, and in performing fault and
performance analysis.
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 to end users directly in several countries and through
a combination of authorized distributors, resellers, and systems integrators
worldwide. 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 DIRECT SALES. In the United States and Canada
approximately 91% of fiscal year 1996 revenues from this territory were derived
from the Company's direct sales force. In an effort to expand its direct sales
force in North America, 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.
UNITED STATES AND CANADIAN INDIRECT SALES. Network General also sells its
products, to a lesser extent, to end users in the United States and Canada
through authorized distributors, resellers and systems integrators. In fiscal
year 1996, approximately 9% of domestic orders were generated through indirect
channels and the Company intends to continue to leverage its North American
indirect channels to contribute to order generation.
INTERNATIONAL DISTRIBUTION. International sales accounted for
approximately $44.7 million, $31.0 million, and $25.7 million in revenues in
fiscal 1996, 1995 and 1994, respectively. As of March 31, 1996, the Company had
50 employees whose responsibilities primarily included sales outside the United
States, compared to 28 on March 31, 1995.
The Company reestablished its direct sales efforts in France, Germany and
Switzerland during fiscal year 1996. However, the Company generates most of
its international revenues 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, 1996, March 31,
1995 or March 31, 1994. The Company had approximately 46 international
distributors as of March 31, 1996, approximately 56 as of March 31, 1995
and 42 international distributors as of March 31, 1994. Network General
retains the option to terminate these relationships if sales quotas are not
attained.
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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 generally offers 30 day net terms
in the United States, Canada and Europe and 45 day net terms in other
international regions. Collection of overdue international receivables
generally is more difficult. Prior to fiscal 1994, all sales outside of the
United States were denominated in U.S. dollars. However, the Company began to
make direct sales in foreign currencies during fiscal year 1994. The amount of
revenues from direct sales in foreign currencies was not a significant portion
of international revenues in fiscal years 1994 through 1996, 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 risk they
may give higher priority to products of other suppliers, thus reducing their
efforts to sell Network General's products. In addition, these distributors,
systems integrators and resellers may not have the resources to expand their
operations to meet increased demand for Network General's products.
MARKETING. Network General's marketing efforts focus on defining Network
General products and services to meet customers' 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
through the Internet.
The Company has established cooperative 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, 1996, Network General has shipped over
57,000 units of its portable Sniffer Network Analyzer and Distributed Sniffer
System products. Network General products are purchased by 80% of the Fortune
500 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 years 1996, 1995 or 1994.
Many of Network General's customers have purchased multiple product
components. Since the market for LAN and WAN fault and performance management
tools and systems is subject to changing competitive forces and new
functionality in products, 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. Other competitors include Azure Technologies Incorporated, Frontier
Software Development, Inc., Wandel & Goltermann, Inc., Shomiti Systems, Inc.
and embedded systems companies.
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 this leadership position is a direct result of developing
products and services that meet customers' changing requirements for network
fault and performance management.
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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 for these
heterogeneous network environments. 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 relationships with other
industry vendors to develop products that provide complementary fault and
performance management capabilities.
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, embedded systems and test instrument companies. There can be no
assurance that Network General will be able to compete successfully in the
future with existing or anticipated competitors.
Competitive pressures from existing manufacturers who offer lower prices or
introduce new products have, in some instances, resulted in delayed or deferred
purchasing decisions by potential customers of Network General. Purchase delays
or deferrals by potential customers of the Company's products may require
Network General to reduce its prices. These competitive scenarios could
materially adversely affect Network General's revenues and operating margins.
PRODUCT DEVELOPMENT
Network General believes 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 complete
solutions for network fault and performance management, enabling network
managers to enhance performance of client/server applications, manage the
deployment of high-bandwidth technologies, leverage staff resources and optimize
overall network performance.
In order to successfully develop 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 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 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 the popular Integrated Network Management Systems ("INMSs").
Additionally, Network General integrated DSS monitoring and trouble-shooting
solutions to facilitate the seamless transition between RMON and Expert Analysis
on the same console. These enhancements to the Distributed Sniffer System help
customers proactively monitor distributed network segments, baseline performance
and automatically identify potential network problems. By making information
gathered by Distributed Sniffer System available to INMSs, Network General helps
customers attain a seamless network management environment.
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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
operating system.
In 1995, the Company shipped Network General Reporter-TM- which collects
information gathered by the Sniffer, DSS, and Foundation Manager products and
generates reports for the end user. The Company also introduced in 1995 an add-
on module for the Sniffer Network Analyzer to include Oracle protocol decodes.
In September 1995 the Company began shipping the Fast Ethernet 10/100 Sniffer
Network Analyzer, a fault and performance tool which monitors and analyzes both
10 and 100 MB/s Ethernet networks. This product is the first analysis tool to
provide visibility into new 100 MB/s Fast Ethernet networks, as well as 10 MB/s
legacy Ethernet LANs.
The Company also shipped in 1996 the ATM Sniffer Network Analyzer which
monitors and analyzes 155 MB/s ATM networks. The Company's development efforts
in 1995 and 1996 led to the release of the ISDN Packages for the Sniffer
Internetwork Analyzers. The ISDN Packages are available for both Basic Rate
Interface and Primary Rate Interface and provide protocol decodes for National
ISDN 1 and 2 (United States) and EuroISDN (Europe), AT&T Custom, Northern
Telecom and NTT ISNet (Japan) to support the various ISDN switch standards.
Other products released by the Company in 1995 include the Sniffer Server for
FDDI and Sniffer Reporter for use in Windows applications. In September 1995,
Network General added to its product spectrum, through its corporate acquisition
of AIM Technology, SharpShooter, the UNIX-based troubleshooting tool.
In April 1996, Network General announced a new release of Sniffer Network
Analyzer, version 5.0, which includes Banyan expert and Novell 4.0 protocol
decodes. The Sniffer Network Analyzer 5.0 incorporates enhancements which
optimize Expert Analysis of high speed technologies such as FDDI and Fast
Ethernet.
During fiscal 1996, 1995 and 1994, research and development expenses were
approximately $27.4 million, $20.0 million, and $15.5 million, respectively.
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 minimal 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 General's product line is designed to work with a variety of
network topologies and computer platforms available from multiple manufacturers.
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 certain manufacturers.
In the case of the Company's 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 has found it necessary
to purchase and inventory computer platforms for resale 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 would also 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 significant.
11
<PAGE>
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 decrease in near-
term demand would adversely affect the Company's results of operations.
PROPRIETARY RIGHTS AND LICENSES
As of the end of fiscal year 1996, Network General held one patent in the
WAN protocol analysis field (which the Company believes is not material to its
business) and relies primarily upon copyright, trademark and trade secret laws
to establish its proprietary rights in its products. Because the LAN and WAN
industry is characterized by rapid technological change, 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, 1996, Network General employed a total of 721 persons,
including 376 in sales, marketing and services, 211 in product development and
technical support, 27 in manufacturing, and 107 in management, administration
and finance. During fiscal year 1996, 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 its employee relations are good.
Competition in the recruiting of personnel in the computer and
communications industry is intense particularly in the research and development
and sales arenas. Network General believes 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, 1996
are as follows:
NAME AGE POSITION
- - ---- --- --------
Leslie G. Denend 55 President, Chief Executive Officer and Director
James T. Richardson 48 Senior Vice President, Corporate Operations,
Chief Financial Officer and Assistant Secretary
Richard H. Lewis 61 Senior Vice President, Worldwide Field Operations
Michael H. Kremer 50 Senior Vice President, Product Development
Jill E. Fishbein 35 Vice President and General Counsel, Secretary
David M. Carver 49 Vice President, Services
John R. Stringer 49 Vice President, North American Sales
Bernard J. Whitney 39 Vice President and Controller
Mr. Denend was promoted to President and Chief Executive Officer of the
Company and was elected a director of the Company in June 1993. He served as
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.
12
<PAGE>
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 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 Vitalink Communications, a computer networking company,
from October 1990 through December 1992. From March 1979 through October 1990,
Mr. Kremer worked for 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 of Hewlett-Packard.
Ms. Fishbein was named Vice President and General Counsel, and Secretary in
May 1996. Ms. Fishbein joined the Company as General Counsel in October 1994,
was named Assistant Secretary in January 1995. Prior to 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.
Mr. Carver joined the Company as Vice President of Services in November
1995. Prior to joining Network General, Mr. Carver was an independent
consultant affiliated with Institutional Venture Partners, from April 1994 to
October 1995. From 1974 to March 1994, Mr. Carver held various positions in
marketing and general management functions at Hewlett Packard Company, most
recently as Software Business Manager responsible for Hewlett Packard Customer
Support business unit.
Mr. Stringer was named Vice President, North American Sales in January
1995. Prior to joining Network General, Mr. Stringer served from July 1992 to
December 1994 as Vice President and General Manager, Worldwide Marketing and
Sales, for IT Corporation of America, a provider of computer outsourcing
services to financial institutions in South America. From November 1990 to June
1992, Mr. Stringer was a consultant advising with respect to alternative sales
channels of distribution, new business development and acquisitions.
Mr. Whitney was named Vice President and Controller in May 1996. He joined
Network General in June 1995 as Corporate Controller. Prior to joining Network
General, he worked for Conner Peripherals, Inc., a hard disk drive and storage
solutions manufacturer, serving in a variety of positions in corporate finance
from February 1987 to June 1995, most recently as Assistant Corporate
Controller.
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 and Canada and one sales office in each of Belgium,
France, Germany, Italy, Switzerland, the United Kingdom and Singapore. Total
rent expense was approximately $4,785,000, $4,115,000 and $3,854,000 in fiscal
years 1996, 1995 and 1994, 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 condition or results of
operations.
13
<PAGE>
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 General's common stock is traded on the NASDAQ National Market
under the symbol NETG. As of May 31, 1996, there were 43,882,109 shares of
common stock outstanding held by 409 stockholders of record. The approximate
number of beneficial holders is estimated to be 5,800 as of May 31, 1996.
PRICE RANGE OF COMMON STOCK
Fiscal 1996 Fiscal 1995
----------- -----------
HIGH LOW High Low
---- --- ---- ---
First Quarter $14.28 $11.53 $10.25 $7.12
Second Quarter 21.87 12.81 10.00 7.25
Third Quarter 22.12 16.31 12.84 9.31
Fourth Quarter 22.00 15.06 15.00 11.75
DIVIDEND INFORMATION
Network General has never declared cash dividends and presently intends to
continue this policy.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF INCOME DATA
(In thousands, except per share amounts) Year ended March 31,
1996 1995 1994 1993 1992
- - --------------------------------------------------------------------------------
Revenues $188,845 $139,755 $114,900 $ 86,483 $64,065
Income from operations 35,438 31,768 13,915 10,415 7,386
Net income 27,425 25,411 11,276 8,645 4,274
Earnings per share $ 0.60 $ 0.57 $ 0.27 $ 0.22 $ 0.13
Weighted average common 45,822 44,626 42,346 39,614 32,874
and common equivalent
shares outstanding
CONSOLIDATED BALANCE SHEET DATA
(In thousands) As of March 31,
1996 1995 1994 1993 1992
- - --------------------------------------------------------------------------------
Working capital $125,841 $ 101,536 $ 65,457 $ 41,014 $45,065
Total assets 223,330 196,190 160,846 132,033 66,883
Long-term obligations 3,248 2,225 2,134 1,555 1,026
Total stockholders' equity $180,117 $165,587 $132,283 $109,562 $51,011
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (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,
'96 '95 '95 '95 '95 '94 '94 '94
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $53,786 $51,590 $43,729 $39,740 $39,800 $37,530 $32,375 $30,050
Gross profit 41,220 39,430 33,655 30,619 30,926 28,808 24,927 23,295
Income from operations 13,130 12,057 1,650 8,601 10,127 9,580 6,489 5,572
Income before provision
for income taxes 14,891 13,776 3,510 10,347 11,980 10,810 7,641 6,665
Net income 10,350 9,574 310 7,191 8,206 7,408 5,231 4,566
Earnings per share $ 0.22 $ 0.21 $ 0.01 $ 0.16 $ 0.18 $ 0.16 $ 0.12 $ 0.11
Price range of $22.00- $22.12- $21.87- $14.28- $15.00- $12.84- $10.00- $10.25-
common stock $ 15.06 $ 16.31 $ 12.81 $ 11.53 $ 11.75 $ 9.31 $ 7.25 $ 7.12
</TABLE>
1) Amounts for fiscal year 1993 and fiscal year 1992 have been restated in
order to comply with Statement of Position 91-1.
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. Total charges related to the merger were approximately
$4,903,000, or $0.09 per share, and were recorded in the fourth quarter
of fiscal year 1994.
3) Second quarter fiscal year 1996 results of operations include charges of
$7,153,000, or $0.17 per share related to acquired in-process research
and development in connection with the acquisition of AIM Technology
("AIM"), in a transaction in September 1995 accounted for as a purchase.
Accordingly, the results of operations of AIM have been included in the
results of the Company from the date of acquisition.
4) All periods reflect the 2-for-1 stock split in the form of a stock dividend
approved by the Company's Board of Directors which was effective May
1996.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME STATEMENT HIGHLIGHTS
(in thousands, except per share amounts)
1996 Change 1995 Change 1994
- - --------------------------------------------------------------------------------
Revenues $188,845 35% $139,755 22% $114,900
Gross Profit 144,924 34% 107,956 26% 85,864
Percentage of revenues 77% 77% 75%
Operating Expenses 109,486(1) 44% 76,188 6% 71,949(1)
Percentage of revenues 58% 55% 63%
Net Income 27,425 8% 25,411 125% 11,276
Earnings per share(2) $ 0.60(3) 5% $ 0.57 111% $ 0.27(4)
(1) Exclusive of acquisition and other non-recurring costs, operating expenses
would have been $102,333,000 for 1996 and $66,287,000 for 1994.
(2) All periods reflect the 2-for-1 stock split in the form of a stock dividend
approved by the Company's Board of Directors which was effective May 1996.
(3) Exclusive of the costs associated with the acquisition of AIM Technology in
the second quarter, earnings per share for the year ended 3/31/96 would
have been $0.77.
(4) Exclusive of restructuring and merger-related expenses, earnings per share
for the year ended 3/31/94 would have been $0.37.
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.
Sources of Revenues (in thousands)
1996 Change 1995 Change 1994
- - --------------------------------------------------------------------------------
Domestic $144,144 33% $108,773 22% $ 89,216
International 44,701 44% 30,982 21% 25,684
Total Revenues $188,845 35% $139,755 22% $114,900
Revenues for the fiscal year ended March 31, 1996 were $188,845,000, an
increase of 35% over revenues of $139,755,000 reported for fiscal year 1995, due
to increased sales volume of both the Company's products and services. Fiscal
year 1995 revenues increased 22% over revenues of $114,900,000 reported for
fiscal year 1994. Domestic revenues increased 33% to $144,144,000 for fiscal
year 1996, compared to $108,773,000 for fiscal year 1995. Fiscal year 1995
domestic revenues increased 22% compared to $89,216,000 for the year ended March
31, 1994. International revenues increased 44% to $44,701,000 for the year
ended March 31, 1996, compared to $30,982,000 for the year ended March 31, 1995,
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. For fiscal year 1995, international revenues
increased 21% compared to $25,684,000 for fiscal year 1994. International
revenues increased to 24% of total revenues for the year ended March 31, 1996,
compared to 22% for the years ended March 31, 1995 and March 31, 1994.
16
<PAGE>
<TABLE>
<CAPTION>
Sources of Revenues (in thousands) 1996 Change 1995 Change 1994
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tool Products(1) $ 95,310 30% $ 73,114 15% $ 63,714
Percentage of total revenues 51% 52% 55%
System Products(2) 57,346 44% 39,872 20% 33,259
Percentage of total revenues 30% 29% 29%
Subtotal Product Revenues 152,656 35% 112,986 17% 96,973
Percentage of total revenues 81% 81% 84%
Services(3) 36,189 35% 26,769 49% 17,927
Percentage of total revenues 19% 19% 16%
Total Revenues $188,845 35% $139,755 22% $114,900
</TABLE>
(1) Tool products include revenues from the Sniffer Network Analyzer-TM-
products, the Progressive Computing, Inc. ("PCI") line of Wide Area Network
(WAN) analysis products, product rentals and royalties from license agreements.
(2) System products consist of revenues from the Distributed Sniffer System
analysis products, performance measurement analysis products, the Distributed
Sniffer System 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.
The Company's tool products revenues increased 30% for the year ended March
31, 1996 to $95,310,000 from $73,114,000 for the year ended March 31, 1995.
Fiscal year 1995 tool products revenues increased 15% from $63,714,000 reported
for the year ended March 31, 1994. Increased sales of the Company's Sniffer
Network Analyzer products accounted for substantially all of the increase in
tool products revenues in both years. Tool products revenues represented 51% of
total revenues in fiscal year 1996 compared to 52% in fiscal year 1995 and 55%
in fiscal year 1994. Tool products revenues declined as a percentage of total
revenues due to faster growth in both system products revenues and services
revenues during both fiscal years 1996 and 1995.
In fiscal year 1996, system products revenues increased 44% to $57,346,000
from $39,872,000 in fiscal year 1995. Fiscal year 1995 system products revenues
increased 20% from $33,259,000 reported in fiscal year 1994. System products
revenues represented 30% of total revenues for the year ended March 31, 1996,
and 29% for the years ended March 31, 1995 and March 31, 1994. The increase in
system product revenues in fiscal year 1996 was primarily attributable to
increased sales of Distributed Sniffer System analysis products. Additionally,
sales of products acquired in the AIM Technology acquisition partially offset
decreased sales of system monitoring products. The increase in system products
revenues in fiscal year 1995 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, 1996, services revenues totaled $36,189,000,
an increase of 35% from $26,769,000 for the year ended March 31, 1995. Fiscal
year 1995 services revenues increased 49% from $17,927,000 in fiscal year 1994.
The increase in services revenues in both years was a result of increased demand
for all categories of services. Services revenues represented 19% of total
revenues in fiscal years 1996 and 1995 and 16% of total revenues in fiscal year
1994.
GROSS PROFIT
Cost of revenues consists of manufacturing costs, cost of services,
royalties and warranty expenses. Gross profit as a percentage of total revenues
was 77% for the years ended March 31, 1996 and 1995 and 75% for the year ended
March 31, 1994. The increase in gross profit as a percentage of revenues in
fiscal year 1995 compared to fiscal year 1994 was primarily due to decreased
tool products platform shipments, which have lower gross margins, and improved
margins in system products due to product cost decreases.
17
<PAGE>
In addition, gross profit for the years ended March 31, 1996 and 1995 was
favorably affected by approximately 1% as a result of the Company's recognition
of fees received pursuant to a distribution agreement with Atelco Ltd. The
agreement provided NexTest, Inc. ("NexTest"), a wholly owned subsidiary of
Atelco Ltd., worldwide distribution rights for the Company's Progressive
Computing, Inc. ("PCI") line of products in exchange for distribution fees paid
to Network General. As of March 31, 1996, the Company's distribution agreement
with NexTest was discontinued and no further distribution agreement has been
entered into with NexTest. On March 28, 1996, the Company transferred certain
assets of PCI to NexTest Limited (the Canadian parent company of NexTest) and on
March 29, 1996, the Company merged PCI into its wholly owned subsidiary,
ProTools, Inc. ("ProTools").
Gross profit and gross profit percent may vary as a result of a number of
factors, including product 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 increased 33% in fiscal year 1996 to
$62,533,000 compared to $47,049,000 in fiscal year 1995. Fiscal year 1995
expenses increased 10% compared to $42,906,000 in fiscal year 1994. The increase
in fiscal years 1996 and 1995 was primarily due to increased staffing,
commission expense and promotional activity needed to support increased sales
volumes. As a percentage of total revenues, sales and marketing expenses were
33%, 34% and 37% for the periods ended March 31, 1996, 1995 and 1994,
respectively. Sales and marketing expenses have decreased as a percentage of
total revenues due to increased productivity.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 37% in fiscal year 1996 to
$27,417,000 compared to $19,968,000 in fiscal year 1995. Fiscal year 1995
research and development expenses increased 29% over fiscal year 1994 levels of
$15,534,000. Increased expenses in fiscal years 1996 and 1995 were due to
increased staffing to support accelerated development efforts for high speed
network technology. Research and development expenses as a percentage of
revenues were 15% in fiscal year 1996, and 14% in fiscal years 1995 and 1994.
The Company believes continued commitment to research and development is
required to remain competitive.
Research and development expenses are accounted for in accordance with
Statement of Financial Accounting Standards No. 86, under which the Company is
required to capitalize software development costs after technological
feasibility is established. Capitalizable software development costs incurred to
date have not been significant and, thus, the Company has charged all software
development costs to research and development expenses in the consolidated
statements of income.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the fiscal year ended March 31,
1996 increased 35% to $12,383,000 compared to $9,171,000 for the fiscal year
ended March 31, 1995. Fiscal year 1995 expenses increased 17% compared to
expenses of $7,847,000 for the fiscal year ended March 31, 1994. As a percentage
of revenues, general and administrative expenses were 7% for the three fiscal
years ended March 31, 1996, 1995 and 1994. Increased staffing and increased use
of outside services to support the growth of the Company accounted for the
increased spending in fiscal years 1996 and 1995.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired in-process research and development was $7,153,000 in fiscal year
1996 and reflects the value of development projects in process at the time of
the acquisition of AIM Technology ("AIM") which was charged to operations in the
second quarter of fiscal year 1996. The amount allocated to in-process research
and development related to projects which had not reached technological
feasibility and had no probable alternative future uses. (See Note 2 of Notes to
Consolidated Financial Statements.)
There were no acquired in-process research and development charges for the
fiscal years ended March 31, 1995 or 1994.
18
<PAGE>
RESTRUCTURING AND OTHER OPERATING EXPENSES
Restructuring and other operating expenses were $5,662,000 in fiscal year
1994. The majority of these expenses occurred in the fourth quarter of fiscal
year 1994 and were associated with the acquisition of ProTools. Total charges
associated with the merger were approximately $4,903,000. 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 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, 1996 or 1995.
INTEREST INCOME, NET
Interest income, net increased to $7,086,000 in fiscal year 1996 compared
to $5,328,000 in fiscal year 1995 and $3,338,000 in fiscal 1994. The increase in
interest income is primarily a reflection of higher balances of cash, cash
equivalents and marketable securities available for investment during each year,
as well as an investment diversification from tax-free municipal to taxable U.S.
debt securities which paid higher pre-tax interest during fiscal years 1996 and
1995. Due to the Company's continued commitment to its systematic share
repurchase program and the likelihood of downward trends in the interest rate
environment, interest income is expected to decline in fiscal 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes was 35.5% of pre-tax income for the fiscal
year ended March 31, 1996, compared to 31.5% for the fiscal year ended March 31,
1995 and 34.6% for the fiscal year ended March 31, 1994. The increase in the
effective tax rate in fiscal year 1996 compared to fiscal year 1995 was largely
a result of the acquisition of AIM, since a portion of the purchase price was
not tax deductible.
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.
EARNINGS PER SHARE
Earnings per share for the year ended March 31, 1996 were $0.60, an
increase of 5%, compared to $0.57 per share earned in fiscal year 1995, after
retroactively adjusting for the 2-for-1 stock split in the form of a stock
dividend approved by the Company's Board of Directors which was effective May
1996. Excluding the one-time charge to write off acquired in-process research
and development related to the AIM acquisition in the second quarter of
fiscal year 1996, earnings per share for fiscal year 1996 were $0.77, an
increase of 35% over fiscal year 1995 earnings per share of $0.57. Earnings
per share in fiscal year 1995 increased 111% compared to earnings per share
of $0.27 in fiscal year 1994.
Earnings per share in fiscal year 1994 were affected by two non-recurring
transactions:
1) earnings were reduced by approximately $0.01 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 $0.09 per share in the
fourth quarter of fiscal year 1994 as a result of expenses associated with the
acquisition of ProTools.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased $22,683,000,
$37,355,000 and $24,451,000 in fiscal years 1996, 1995 and 1994, respectively.
The primary source of these funds in all periods was cash provided by operating
activities, as well as proceeds from the issuance of common stock.
Net cash generated from operations in fiscal year 1996 was $39,873,000
compared to $33,144,000 in fiscal year 1995 and $20,244,000 in fiscal year 1994.
The primary source of these funds was net income before depreciation and
amortization for all periods. The net increase in fiscal year 1996, after
adjustments related to depreciation and amortization and acquired in-process
research and development, reflects increases in accounts payable, accrued
liabilities and deferred revenue, offset by an increase in accounts receivable.
The net increase in fiscal year 1995, after adjustments related to depreciation
and amortization, reflects increases in deferred taxes and deferred revenue and
reductions in accounts receivable, partially offset by an increase in
inventories, prepaid expenses and other assets.
Net cash used in investing activities was $11,748,000, $26,373,000 and
$33,036,000 during fiscal years 1996, 1995 and 1994, respectively. The Company
used $13,883,000, $8,752,000, and $7,492,000 in fiscal years 1996, 1995, and
1994, respectively, for capital expenditures on property and equipment.
Additionally, the Company decreased its investments by $8,636,000 and used cash
of $6,501,000 to complete the purchase of AIM in fiscal year 1996. The Company
increased its investments by $17,621,000 and $25,544,000, in fiscal years 1995
and 1994, respectively.
Net cash used in financing activities was $12,895,000 for fiscal year 1996.
The primary use of those funds was to repurchase 1,700,000 shares of the
Company's common stock at an average price of $18.16 for a total cash outlay of
$30,870,000, which was partially offset by proceeds from the issuance of common
stock. 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 proceeds from the issuance of common stock. During fiscal year 1995, the
Company repurchased 790,000 shares of its common stock at an average price of
$11.08 for a total cash outlay of $8,755,000. As of March 31, 1996, the Company
was authorized to repurchase up to an additional 1,510,000 of its shares on the
open market. The Company anticipates it will continue its systematic share
repurchase program.
As of March 31, 1996, the Company's principal sources of liquidity included
cash, cash investments, marketable securities and long-term investments totaling
$152,736,000, including $37,139,000 in 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of fiscal year 1997 and
does not believe the effect of adoption will be significant.
20
<PAGE>
BUSINESS RISKS
The Company's future operating results may be adversely affected by certain
factors and trends of its market which are beyond its control. The market for
Network General's products is characterized by rapidly changing technology and
evolving industry standards. Included in such changes is the development of
switching technologies for the transmission of data along local area and wide
area networks, such as asynchronous transfer mode ("ATM") and switched-Ethernet.
Network General believes its future success will depend, in part, on its ability
to continue to develop, introduce and sell new products. The Company is
committed to continuing investments in research and development; however, there
is no assurance these efforts will result in the development, 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. New and competitive entrants into the field of network
fault and performance management may come from areas as diverse as embedded
systems in network hardware from established network hardware companies, as well
as certain software referred to as "network management" by smaller companies.
There can be no assurance Network General will be able to compete successfully
in the future with existing or future competitors. New entrants, new technology
and new marketing techniques may cause customer confusion, thereby lengthening
the sales cycle process for the Company. Increased competition may also lead to
downward pricing pressure on the Company's products.
The Company is in the early stages of developing its direct sales force in
certain countries in Europe. There can be no assurance that the Company will be
able to attract qualified salespeople in Europe or that any salespeople hired
will be successful.
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 effect
on the Company's operating results.
Network General products may be considered by certain customers to be
capital purchases. An adverse change in general economic conditions could cause
certain of the Company's customers to reduce their capital spending, which may
adversely affect the Company's operating results.
In September 1995, the Company acquired the remaining 90% of voting
interest of AIM. The successful combination of companies in the high technology
industry may be more difficult to accomplish than in other industries. There can
be no assurance that Network General will be successful in developing products
based on AIM's engineering expertise and technology, that Network General will
be successful in integrating its own distribution channels with those of AIM,
that Network General will be successful in penetrating AIM's customer base, that
Network General will be successful in selling AIM's products to its own customer
base, that the combined companies will retain their key personnel or that
Network General will realize any of the benefits anticipated at the time of the
merger.
There has been substantial litigation regarding patent and other
intellectual property rights in the software industry. As is typical in the
software industry, the Company has received from time to time notices from third
parties alleging infringement claims. Although there are currently no pending
lawsuits against Network General regarding any possible infringement claims,
there can be no assurance infringement claims will not be asserted in the future
or that such assertions will not materially adversely affect the Company's
business, financial condition and results of operations. If any such claims are
asserted against Network General, the Company may need to seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance a license will be available on reasonable terms or at all. Failure to
obtain a necessary license on commercially reasonable terms would materially
adversely affect the Company's business, financial condition and results of
operations. Network General could decide, in the alternative, to resort to
litigation to challenge such claims. Such litigation could be expensive and time
consuming and could materially adversely affect the Company's business,
financial condition and results of operations.
21
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page number
-----------
Consolidated Balance Sheets 23
Consolidated Statements of Income 24
Consolidated Statements of Stockholders' Equity 25
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27
Report of Independent Public Accountants 35
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
March 31
1996 1995
----------------------------
(Dollars in thousands, except
per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents $ 34,180 $18,950
Marketable securities 81,417 73,964
Accounts receivable, net of allowances
of $2,445 in 1996 and $1,492 in 1995 34,043 18,800
Inventories 4,863 4,226
Prepaid expenses and deferred tax assets 11,303 13,974
------------------------
Total current assets 165,806 129,914
Property and Equipment:
Demonstration and rental equipment 9,968 6,147
Office and development equipment 27,443 20,486
Leasehold improvements 2,771 1,816
------------------------
40,182 28,449
Less-accumulated depreciation and amortization (23,006) (15,425)
------------------------
Net property and equipment 17,176 13,024
Long-term Investments 37,139 52,410
Other Assets 3,209 842
------------------------
$223,330 $196,190
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,300 $ 4,186
Accrued liabilities 14,749 9,817
Deferred revenue 20,916 14,375
------------------------
Total current liabilities 39,965 28,378
Long-term Deferred Revenue and Taxes 3,248 2,225
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-46,068,302 shares at March 31, 1996 and
44,450,414 shares at March 31, 1995 461 445
Additional paid-in capital 127,482 109,523
Retained earnings 91,799 64,374
Less treasury stock, at cost-2,490,000 shares at
March 31, 1996 and 790,000 shares at
March 31, 1995 (39,625) (8,755)
------------------------
Total stockholders' equity 180,117 165,587
------------------------
$223,330 $196,190
------------------------
------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31
1996 1995 1994
-----------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Product $152,656 $112,986 $ 96,973
Services 36,189 26,769 17,927
----------------------------
Total Revenues 188,845 139,755 114,900
Cost of Revenues:
Product 33,072 23,437 23,546
Services 10,849 8,362 5,490
----------------------------
Total Cost of Revenues 43,921 31,799 29,036
----------------------------
Gross profit 144,924 107,956 85,864
Operating Expenses:
Sales and marketing 62,533 47,049 42,906
Research and development 27,417 19,968 15,534
General and administrative 12,383 9,171 7,847
Acquired in-process research and development 7,153 -- --
Restructuring and other operating expenses -- 5,662
----------------------------
Total Operating Expenses 109,486 76,188 71,949
----------------------------
Income from operations 35,438 31,768 13,915
Interest Income, Net 7,086 5,328 3,338
----------------------------
Income before provision for income taxes 42,524 37,096 17,253
Provision for Income Taxes 15,099 11,685 5,977
----------------------------
Net Income $27,425 $ 25,411 $ 11,276
----------------------------
----------------------------
Earnings Per Share $ 0.60 $ 0.57 $ 0.27
----------------------------
----------------------------
Weighted Average Common and Common
Equivalent Shares Outstanding 45,822 44,626 42,346
----------------------------
----------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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
---------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BALANCE MARCH 31, 1993 38,942,864 $389 $ 81,579 $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 $4.78-$4.83 per share 256,350 3 1,229 -- -- 1,232
Exercise of stock options
at $.01-$7.75 per share 1,374,444 14 4,248 -- -- 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 1,345,872 14 2,192 -- -- 2,206
Net income -- -- -- 11,276 -- 11,276
---------------------------------------------------------------------------
BALANCE MARCH 31, 1994 41,919,530 420 92,900 38,963 -- 132,283
Issuance of common stock under
the Employee Stock Purchase
Plan at $6.80-$6.85 per share 239,778 2 1,635 -- -- 1,637
Exercise of stock options
at $.01-$10.25 per share 2,291,106 23 10,106 -- -- 10,129
Tax benefit of stock options -- -- 4,882 -- -- 4,882
Repurchase of common stock
at $8.37-$14.44 per share -- -- -- -- (8,755) (8,755)
Net income -- -- -- 25,411 -- 25,411
---------------------------------------------------------------------------
BALANCE MARCH 31, 1995 44,450,414 445 109,523 64,374 (8,755) 165,587
ISSUANCE OF COMMON STOCK UNDER
THE EMPLOYEE STOCK PURCHASE
PLAN AT $10.57-$13.97 PER SHARE 176,584 2 2,155 -- -- 2,157
EXERCISE OF STOCK OPTIONS
AT $2.19-$16.31 PER SHARE 1,441,304 14 9,459 -- -- 9,473
TAX BENEFIT OF STOCK OPTIONS -- -- 6,345 -- -- 6,345
REPURCHASE OF COMMON STOCK
AT $11.87-$21.81 PER SHARE -- -- -- -- (30,870) (30,870)
NET INCOME -- -- -- 27,425 -- 27,425
---------------------------------------------------------------------------
BALANCE MARCH 31, 1996 46,068,302 $461 $127,482 $91,799 $(39,625) $180,117
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31
1996 1995 1994
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $27,425 $25,411 $11,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment to conform year-end of pooled company -- -- 93
Depreciation and amortization 9,201 6,837 6,174
Deferred taxes, net (516) 2,599 (5,473)
Acquired in-process research and development 7,153 -- --
Changes in operating assets and liabilities, net of effects
from purchase of AIM Technology:
Accounts receivable (14,896) 1,638 (2,171)
Inventories (637) (2,194) 2,927
Prepaid expenses and other assets 1,058 (3,405) (164)
Accounts payable and accrued liabilities 3,609 202 1,986
Deferred revenue 7,476 2,056 5,596
-----------------------------------
Net cash provided by operating activities 39,873 33,144 20,244
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of held-to-maturity investments (204,626) (114,264) --
Proceeds from maturities of held-to-maturity investments 213,262 96,643 --
Cash used to purchase AIM Technology (6,501) -- --
Increase in marketable securities -- -- (28,437)
Decrease in long-term investments -- -- 2,893
Purchases of property and equipment (13,883) (8,752) (7,492)
-----------------------------------
Net cash used in investing activities (11,748) (26,373) (33,036)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of issuance costs 17,975 16,648 8,868
Repurchase of common stock (30,870) (8,755) --
Principal payments on notes and capital lease obligations -- -- (271)
Proceeds from issuance of notes payable -- -- 209
-----------------------------------
Net cash (used in) provided by financing activities (12,895) 7,893 8,806
-----------------------------------
Net increase (decrease) in cash and cash equivalents 15,230 14,664 (3,986)
Cash and cash equivalents at beginning of period 18,950 4,286 8,272
-----------------------------------
Cash and cash equivalents at end of period $34,180 $ 18,950 $ 4,286
-----------------------------------
-----------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Notes payable and accrued interest converted
into common stock $ -- $ -- $ 1,940
Repurchase of common stock in exchange for note payable $ -- $ -- $ 29
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ -- $ -- $ 18
Income taxes $ 9,042 $ 5,368 $ 9,866
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Network General Corporation (the "Company") designs, manufactures, markets and
supports software-based fault and performance solutions for managing computer
networks. The Company also provides software update and maintenance, consulting
and professional services. The Company's markets are worldwide and include the
communications, banking, finance and insurance, manufacturing, services and
government industries. 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.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACQUISITIONS. In September 1995, the Company acquired all of the remaining 90%
of voting interest of AIM Technology ("AIM"), which it did not own, for
approximately $7,101,000, including $600,000 invested by the Company in fiscal
year 1995 for 10% of the voting interest of AIM. The acquisition was funded with
existing cash and was accounted for using the purchase method of accounting.
Accordingly, the results of AIM's operations have been included with those of
the Company since the date of acquisition.
A portion of the purchase price was allocated to the net assets acquired
and liabilities assumed based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $1,385,000 and $1,437,000,
respectively. In addition, $7,153,000 of the purchase price was allocated to in-
process research and development projects that had not reached technological
feasibility and had no probable alternative future uses, which the Company
expensed at the date of acquisition.
The following table reflects the unaudited pro forma combined results of
operations of the Company and AIM on the basis that the acquisition had taken
place at the beginning of the fiscal year for each of the periods presented:
1996 1995
-------------------------------------------------
(In thousands, except per share amounts)
Revenues $190,740 $142,537
Net income $ 27,526 $ 25,327
Earnings per share $ 0.60 $ 0.57
Shares used in computation 45,822 44,626
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 4,000,000 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. Total charges associated with the merger were
approximately $4,903,000. 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 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 to the licensees of software products.
27
<PAGE>
Export revenues as a percentage of revenues were as follows:
1996 1995 1994
---------------------------------
Europe 9% 12% 12%
Asia/Americas 15% 10% 10%
---------------------------------
Total Export Revenues 24% 22% 22%
---------------------------------
---------------------------------
STATEMENTS 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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115. 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 effect 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 maturities of less than one year, and long-term debt investments as
"Held-to-Maturity." All of these investments are carried at amortized cost.
Accordingly, no adjustment for unrealized holding gains or losses has been
reflected in the Company's financial statements.
At March 31, the amortized cost basis, aggregate fair value and gross
unrealized holding gains/(losses) by security type were as follows:
<TABLE>
<CAPTION>
Amortized Aggregate Unrealized
Cost Fair Value Gains/(Losses)
------------------------------------------
1996: (In thousands)
<S> <C> <C> <C>
DEBT SECURITIES ISSUED BY THE U.S. TREASURY AND
OTHER U.S. GOVERNMENT AGENCIES $ 41,071 $ 41,053 $ (18)
DEBT SECURITIES ISSUED BY STATES OF THE UNITED STATES
AND POLITICAL SUBDIVISIONS OF THE STATES 77,485 77,962 477
------------------------------------------
$118,556 $119,015 $ 459
------------------------------------------
------------------------------------------
1995:
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 states 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:
1996 1995
---------------------
(In thousands)
Purchased parts $2,650 $1,496
Finished goods 2,213 2,730
---------------------
$4,863 $4,226
---------------------
---------------------
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation
is computed by the straight-line method for financial reporting purposes.
Estimated useful lives range from two to five years for demonstration, rental,
office and developmental equipment. Leasehold improvements are amortized over
the corresponding lease term.
28
<PAGE>
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of fiscal year 1997 and
does not believe the effect of adoption will be significant.
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. The
period of time beginning with the establishment of a working model and ending
when a product is offered for sale is typically very short. Accordingly, 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 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.
The Board of Directors authorized a 2-for-1 stock split in the form of a
stock dividend of the Company's $0.01 par value common stock which was effective
May 1996. All references in the accompanying financial statements to the number
of common shares and per share amounts for all periods presented have been
restated to reflect the stock split.
PRESENTATION. Certain prior year financial statement balances have been
reclassified to conform to the 1996 presentations.
3. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash 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. No single customer accounted for more than 10% of revenues in
fiscal years 1996, 1995 or 1994.
4. ACCRUED LIABILITIES
As of March 31, accrued liabilities consist of the following:
1996 1995
----------------------
(In thousands)
Accrued compensation and related taxes $ 5,583 $4,378
Accrued acquisition and merger costs 293 353
Accrued commissions 1,126 912
Accrued income taxes 1,157 1,812
Accrued sales and use taxes 331 47
Other accrued expenses 6,259 2,315
----------------------
$14,749 $9,817
----------------------
----------------------
29
<PAGE>
5. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements. As of March 31, 1996, the minimum future lease
payments under these leases are as follows:
Fiscal Year (In thousands)
1997 $4,040
1998 2,510
1999 1,670
2000 1,493
2001 11
------
$9,724
------
------
Total rent expense was approximately $4,785,000, $4,115,000, and $3,854,000 in
fiscal years 1996, 1995 and 1994, 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. Annual 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 2,000,000 shares of its common stock
on the open market to satisfy commitments under its stock option and stock
purchase plans. In fiscal year 1996, up to an additional 2,000,000 shares of the
Company's common stock were authorized for repurchase for the same purpose. As
of March 31, 1996, the Company has repurchased 2,490,000 shares at an aggregate
cost of approximately $39,625,000.
EMPLOYEE STOCK OPTION PLAN. Under the Company's 1989 Employee Stock Option
Plan, key employees 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 14,000,000 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 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 not submitted for
repricing in fiscal year 1994 continue to vest according to their original
schedule.
30
<PAGE>
Option activity under the 1989 Employee Stock Option Plan is summarized as
follows:
Available
for Grant Outstanding Price Per Share
---------------------------------------------
Balance as of March 31, 1993 368,156 5,632,228 $ 2.00 -$ 9.50
Authorization increase 2,000,000 -- --
Granted (4,097,694) 4,097,694 $ 4.31-$ 9.94
Cancelled 2,144,538 (2,144,538) $ 2.19-$ 9.50
Exercised -- (1,097,690) $ 2.00-$ 7.75
---------------------------------------------
Balance as of March 31, 1994 415,000 6,487,694 $ 2.19-$ 9.94
Authorization increase 5,000,000 -- --
Granted (3,355,076) 3,355,076 $ 7.12-$14.22
Cancelled 1,578,526 (1,578,526) $ 3.75-$10.25
Exercised -- (1,879,584) $ 2.19-$10.25
---------------------------------------------
Balance as of March 31, 1995 3,638,450 6,384,660 $ 2.19-$14.22
Granted (3,199,670) 3,199,670 $11.53-$20.00
Cancelled 1,063,938 (1,063,938) $ 2.19-$19.50
Exercised -- (1,357,884) $ 2.19-$16.31
---------------------------------------------
Balance as of March 31, 1996 1,502,718 7,162,508 $ 2.19-$20.00
---------------------------------------------
---------------------------------------------
Of the outstanding options, 1,353,814 were exercisable as of March 31, 1996.
During fiscal year 1994, the Company cancelled 1,384,464 options at $4.87
to $9.50 per share and reissued the same number of options at the then current
fair market value of $4.56 per share with vesting restarting on the new grant
date. In addition, some of the option grants 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 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 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 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.
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 920,000. 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 40,000 shares upon election to the Board and an option
grant of 10,000 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, 1996, 80,000 options are available for future grants and 420,000 options are
outstanding, of which 179,166 shares were exercisable at an average price of
$6.89 per share. Options issued 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.
31
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN. The Company has authorized 1,400,000 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 176,584 shares at an average price of $12.21 per share in 1996,
239,778 shares at an average price of $6.82 per share in 1995 and 256,350 shares
at an average price of $4.80 per share in 1994.
COMMON STOCK AWARD PLAN. In June 1989, the Board of Directors approved the 1989
Common Stock Award Plan and reserved 240,000 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 years 1996, 1995 or 1994. As
of March 31, 1996, the number of shares that have been awarded under this plan
is 58,936, 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, 545,660 equivalent ProTools incentive stock
options were outstanding. As of March 31, 1996, 8,042 incentive stock options
remain outstanding, all of which are fully vested and exercisable at $0.33 per
share. The Company does not intend to grant any additional incentive stock
options under this plan.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE.
As of March 31, 1996:
1989 Employee Stock Option Plan 8,665,226
1989 Outside Directors Stock Option Plan 500,000
1989 Employee Stock Purchase Plan 345,716
1989 Common Stock Award Plan 181,064
1990 ProTools, Inc. Stock Option Plan 8,042
---------
9,700,048
---------
---------
8. INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes."
Pre-tax income from continuing operations for the years ended March 31 was
taxed in the following jurisdictions:
1996 1995 1994
----------------------------------------------
(In thousands)
Domestic $42,119 $36,535 $17,038
Foreign 405 561 215
----------------------------------------------
$42,524 $37,096 $17,253
----------------------------------------------
----------------------------------------------
32
<PAGE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
1996 1995 1994
----------------------------------------------
(In thousands)
Federal
Current payable $13,990 $11,311 $ 6,868
Deferred tax asset (1,399) (605) (2,270)
Non-current deferred (503) (1,673) (554)
----------------------------------------------
Total federal 12,088 9,033 4,044
State
Current payable 2,730 2,876 2,092
Non-current deferred (189) (489) (328)
----------------------------------------------
Total state 2,541 2,387 1,764
Foreign 470 265 169
----------------------------------------------
Total Provision $15,099 $11,685 $ 5,977
----------------------------------------------
----------------------------------------------
Deferred tax assets are comprised of the following at March 31:
<TABLE>
<CAPTION>
1996 1995
-----------------------
(In thousands)
<S> <C> <C>
Deferred revenue currently recognized for tax purposes $ 1,058 $ 1,163
Reserves and accruals not currently deductible for tax purposes 4,183 3,532
State taxes, not currently deductible for federal tax purposes 307 310
Depreciation 2,763 2,702
Operating loss carryover of ProTools and AIM 2,472 2,042
-----------------------
Total deferred tax asset 10,783 9,749
Valuation allowance (2,472) (2,042)
-----------------------
Net deferred tax asset $ 8,311 $ 7,707
-----------------------
-----------------------
</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 and AIM, a wholly owned subsidiary acquired in
September 1995, in a transaction accounted for as a purchase. The operating
losses are subject to certain annual limitations as a result of the acquisitions
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.
Realization of the remaining net deferred tax asset of $8.3 million as of
March 31, 1996 is dependent on generating sufficient taxable income to offset
future deduction of the related items. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
1996 1995 1994
-------------------------
Tax at U.S. statutory rates 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 5.2 5.1 5.7
Permanent differences (10.4) (8.6) (10.6)
Reduction due to tax law changes -- -- (3.8)
Operating losses of ProTools and AIM not realized -- -- 4.5
Merger, acquisition and other costs 5.7 -- 3.8
-------------------------
35.5% 31.5% 34.6%
-------------------------
-------------------------
33
<PAGE>
9. 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 was being expensed as a cost of goods sold as
related revenues were recognized and was fully expensed as of March 31, 1996.
34
<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,
1996 and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996 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 19, 1996
35
<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 9, 1996. 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
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 9, 1996.
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 9, 1996. 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 9, 1996. 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 9, 1996. Such information is incorporated herein by reference.
36
<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, 1996 and 1995 23
Consolidated Statements of Income:
Years ended March 31, 1996, 1995 and 1994 24
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1996, 1995 and 1994 25
Consolidated Statements of Cash Flows
Years ended March 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 27 - 34
Report of Independent Public Accountants 35
(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:
Schedule Page Number(s)
-------- --------------
II Valuation and Qualifying Accounts 38
(a)(3) EXHIBITS:
See Index to Exhibits on Pages 40 through 42 herein.
(b) REPORTS ON FORM 8-K:
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1996.
37
<PAGE>
NETWORK GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged
Beginning Costs and Against Balance at
Description of Period Expenses Revenues Deductions(1) End of Period
- - ----------- ---------- ---------- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE ALLOWANCES:
Fiscal year ended -
March 31, 1994 $ 622 $341 $ 249 ($ 496) $ 716
------------------------------------------------------------------
------------------------------------------------------------------
March 31, 1995 $ 716 $631 $ 892 ($ 747) $1,492
------------------------------------------------------------------
------------------------------------------------------------------
MARCH 31, 1996 $1,492 $558 $1,710 ($1,315) $2,445
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
(1) Deductions represent charges against the allowances for the purposes for
which the allowances were established, as well as changes in estimates of the
required allowances.
38
<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, 1996.
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, 1996
CHIEF FINANCIAL OFFICER
by /s/James T. Richardson
---------------------
James T. Richardson June 26, 1996
CHIEF ACCOUNTING OFFICER
by /s/Bernard J. Whitney
--------------------
Bernard J. Whitney June 26, 1996
DIRECTORS
by /s/Harry J. Saal
---------------
Harry J. Saal June 26, 1996
by /s/Charles J. Abbe
-----------------
Charles J. Abbe June 26, 1996
by /s/Douglas C. Chance
-------------------
Douglas C. Chance June 26, 1996
by /s/Leslie G. Denend
------------------
Leslie G. Denend June 26, 1996
by /s/Howard Frank
--------------
Howard Frank June 26, 1996
by /s/Gregory M. Gallo
------------------
Gregory M. Gallo June 26, 1996
by /s/Laurence R. Hootnick
----------------------
Laurence R. Hootnick June 26, 1996
by /s/Janet L. Hyland
-----------------
Janet L. Hyland June 26, 1996
39
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
- - ------- ------------- ------------
3.1 Third restated certificate of Incorporation of
Network General Corporation, a Delaware
Corporation.
3.2 Amended and Restated Bylaws of Network General
Corporation.
4.1 Registration Rights Agreement between the Company
and certain investors dated December 31, 1987,
which is incorporated by reference to Exhibit 4.2
of the Company's Registration Statement No. 33-
26107 on Form S-1, which became effective February
2, 1989 ("Form S-1").
4.2 Rights Agreement between the Company and Chemical
Trust Company of California dated June 26, 1992,
as amended, which is incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form
10-K for the year ended March 31, 1993.
10.1 Standard Business Lease (Net) for the Company's
principal facility dated June 18, 1991, between
the Company and Menlo Oaks Partners, L.P., which
is incorporated by reference to Exhibit 10.3 of
the Company's Annual Report on Form 10-K for the
year ended March 31, 1991.
10.2 First Amendment to Lease dated June 10, 1992,
between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to Exhibit 10.3
of the Company's Annual Report on Form 10-K for
the year ended March 31, 1992 ("1992 Form 10-K").
10.3 Standard Business Lease (Net) for the Company's
principal facility dated March 11, 1992, between
the Company and Menlo Oaks Partners, L.P., which
is incorporated by reference to Exhibit 10.4 of
the 1992 Form 10-K.
10.4 First Amendment to Lease dated June 18, 1992,
between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to Exhibit 10.5
of the 1992 Form 10-K.
10.5 Lease dated March 31, 1992, between the Company
and Equitable Life Assurance Society of the United
States, which is incorporated by reference to
Exhibit 10.4 of the 1992 Form 10-K.
10.6 Description of the 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.
40
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE 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 Form of Stock Purchase Agreement used in
conjunction with the 1989 Outside Directors Stock
Option Plan, which is incorporated by reference to
Exhibit 10.15 to 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.
10.12 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 10.2
of 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 31, 1995 ("June 1995
Form 10-Q").
41
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE 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
Option 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.
10.22 Employment Agreement dated August 19, 1995 between
the Company and Michael Kremer. 43
21.1 Subsidiaries of Network General Corporation. 52
23.1 Consent of Independent Public Accountants. 53
27.0 Financial Data Schedule. 54
42
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
August 19, 1995 (the "Effective Date"), by and between Network General
Corporation, a Delaware corporation (the "Company") and Michael Kremer
("Employee").
RECITALS
The Company recognizes that the possibility of a change of control or other
event may occur which may change the nature and structure of the Company and
that uncertainty regarding the consequences of such events may adversely affect
the Company's ability to retain its key employees. The Company also recognizes
that the Employee possesses an intimate and essential knowledge of the Company
upon which the Company may need to draw for objective advice and continued
services in connection with any acquisition of the Company or other change of
control that is potentially advantageous to the Company's stockholders. The
Company believes that the existence of this Agreement will serve as an incentive
to Employee to remain in the employ of the Company and will enhance its ability
to call on and rely upon the Employee in connection with a change of control.
The Company and the Employee desire to enter into this Agreement in order
to provide additional compensation and benefits to the Employee in recognition
of past services and to encourage Employee to continue to devote his full
attention and dedication to the Company and to continue his employment with the
Company.
1. DEFINITIONS. As used in this Agreement, unless the context requires a
different meaning, the following terms shall have the meanings set forth herein:
(a) "CAUSE" means:
(i) theft, a material act of dishonesty, fraud, the
falsification of any employment or Company records or the commission of any
criminal act which impairs Employee's ability to perform his/her duties under
this Agreement;
(ii) improper disclosure of the Company's confidential, business
or proprietary information by the Employee;
(iii) any action by Employee which the Company's Board of
Directors (the "Board") reasonably believes has had or will have a material
detrimental effect on the Company's reputation or business; or
43
<PAGE>
(iv) persistent failure of the Employee to perform the lawful
duties and responsibilities assigned by the Company which is not cured within a
reasonable time following the Employee's receipt of written notice of such
failure from the Company.
(b) "CHANGE OF CONTROL EVENT" means an Ownership Change in which the
shareholders of the Company before such Ownership Change do not retain, directly
or indirectly, at a least a majority of the beneficial interest in the voting
stock of the Company after such transaction or in which the Company is not the
surviving corporation. For purposes of this Agreement, an "Ownership Change"
shall be deemed to have occurred in the event any of the following occurs with
respect to the Company:
(i) the direct or indirect sale or exchange by the shareholders
of the Company of all or substantially all of the stock of the Company;
(ii) a merger or consolidation in which the Company is a party
and in which the shareholders of the Company before such Ownership Change do not
retain, directly or indirectly, at a least a majority of the beneficial interest
in the voting stock of the Company after such transaction or in which the
Company is not the surviving corporation;
(iii) the sale, exchange, or transfer of all or substantially all
of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(c) "CONSTRUCTIVE TERMINATION" means one or more of the following
that occurs within two (2) years after the occurrence of any Change of Control
Event:
(i) without the Employee's express written consent, the
assignment to the Employee of any duties, or any limitation of the Employee's
responsibilities, substantially inconsistent with the Employee's positions,
duties, responsibilities and status with the Company immediately prior to the
date of the Change of Control Event;
(ii) without the Employee's express written consent, the removal
of the Employee from the Employee's position with the Company as held by the
Employee immediately prior to the Change of Control Event, except in connection
with the termination of the employment of the Employee by the Company for Cause
or as a result of the death or Permanent Disability of the Employee;
(iii) without the Employee's express written consent, the
relocation of the principal place of the Employee's employment to a location
that is more than twenty-five (25) miles from the Employee's principal place of
employment immediately prior to the date of the Change of Control Event, or the
imposition of travel requirements on the Employee substantially inconsistent
with such travel requirements existing immediately prior to the date of the
Change of Control Event;
44
<PAGE>
(iv) any failure by the Company to pay, or any reduction by the
Company of (a) the Employee's base salary in effect immediately prior to the
date of the Change of Control Event (unless reductions comparable in amount and
duration are concurrently made for all other employees of the Company with
responsibilities, organizational level and title comparable to the Employee), or
(b) the Employee's bonus compensation in effect immediately prior to the date of
the Change of Control Event (subject to applicable performance requirements with
respect to the actual amount of bonus compensation earned by the Employee and
all other participants in the bonus program);
(v) any failure by the Company to (a) continue to provide the
Employee with the opportunity to participate, on terms no less favorable than
those in effect for the benefit of any executive, management or administrative
group which customarily includes a person holding the employment position or a
comparable position with the Company then held by the Employee, any benefit or
compensation plans and programs, including, but not limited to, the Company's
life, disability, health, dental, medical, savings, profit sharing, stock
purchase and retirement plans in which the Employee was participating
immediately prior to the date of the Change of Control Event, or their
equivalent, or (b) provide the Employee with all other fringe benefits (or their
equivalent) from time to time in effect for the benefit of any executive,
management or administrative group which customarily includes a person holding
the employment position or a comparable position with the Company then held by
the Employee;
(vi) any failure or refusal of a successor company to assume the
Company's obligations under this Agreement as required by Section 12; or
(d) "EFFECTIVE DATE" means the day and year first set forth above.
(e) "PERMANENT DISABILITY" means that:
(i) the Employee has been incapacitated by bodily injury or
disease so as to be prevented thereby from engaging in the performance of the
Employee's duties;
(ii) such total incapacity shall have continued for a period of
six consecutive months; and
(iii) such incapacity will, in the opinion of a qualified
physician, be permanent and continuous during the remainder of the Employee's
life.
(f) "TERMINATION UPON CHANGE OF CONTROL" means any one of the
following:
(i) any termination of the employment of the Employee by the
Company without Cause within two (2) years after the occurrence of any Change of
Control Event;
(ii) any termination of the employment of the Employee by the
Company without Cause during the period commencing thirty (30) days prior to the
date of the Company's first public announcement that the Company has entered
into a definitive agreement to effect an
45
<PAGE>
Ownership Change (even though still subject to approval by the Company's
stockholders and other conditions and contingencies) and ending on the date of
the Change of Control Event; or
(iii) any resignation by the Employee immediately following any
Constructive Termination that occurs within two (2) years after the occurrence
of any Change of Control Event.
"Termination Upon Change of Control" shall not include any termination
of the employment of the Employee (a) by the Company for Cause; (b) by the
Company as a result of the Permanent Disability of the Employee; (c) as a result
of the death of the Employee; or (d) as a result of the voluntary termination of
employment by the Employee that is not deemed to be a Constructive Termination
pursuant to Subsection 1(c) above.
2. POSITION AND DUTIES. Employee shall continue to be an at-will
employee of the Company employed in his/her current position at his/her then
current salary. Employee shall also be entitled to continue to participate in
and to receive benefits on the same basis as other executive or senior staff
members under any of the Company's employee benefit plans as in effect from time
to time. In addition, Employee shall be entitled to the benefits afforded to
other employees similarly situated under the Company's vacation, holiday and
business expense reimbursement policies. Employee agrees to devote his/her full
business time, energy and skill to his/her duties at the Company. These duties
shall include, but not be limited to, any duties consistent with his/her
position which may be assigned to Employee from time to time.
3. BENEFITS UPON VOLUNTARY TERMINATION, PERMANENT DISABILITY OR DEATH.
In the event that Employee voluntarily terminates his/her employment
relationship with the Company at any time and such termination is not deemed to
be a Constructive Termination as described in Subsection 1(c) above, or in the
event that Employee's employment terminates as a result of his/her death or
Permanent Disability, Employee shall be entitled to no compensation or benefits
from the Company other than those earned under Section 2 above through the date
of his/her termination of employment.
4. TERMINATION UPON CHANGE OF CONTROL.
(a) In the event of the Employee's Termination Upon Change of
Control, Employee shall be entitled to the following separation benefits:
(i) those benefits earned under Section 2 (other than any unpaid
incentive bonus) through the date of Employee's termination;
(ii) Employee's employment as an officer of the Company shall
terminate immediately; however, the Company shall continue Employee's employment
as a non-officer employee of the Company for one (1) year (the "Severance
Period"). During such period, Employee shall be entitled to Employee's then
current salary plus an amount equal to the entire target bonus and/or target
commission pursuant to target bonus or commission plans in effect for the
Employee at
46
<PAGE>
the time of the Change of Control Event, less applicable withholding, payable in
accordance with the Company's normal payroll practices;
(iii) within ten (10) days of submission of proper expense reports
by the Employee, the Company shall reimburse the Employee for all expenses
reasonably and necessarily incurred by the Employee in connection with the
business of the Company prior to his/her termination of employment;
(iv) continued provision of the Company's standard employee
medical insurance coverages through the end of the Severance Period; thereafter,
Employee shall be entitled to elect continued medical insurance coverage in
accordance with the applicable provisions of federal law (COBRA).
Notwithstanding the above, in the event Employee becomes covered under another
employer's group health plan during the period provided for herein, the Company
shall cease provision of continued group health insurance for Employee; and
(v) notwithstanding any provisions to the contrary contained in
any stock option agreement between the Company and the Employee, upon a
Termination Upon Change of Control all stock options granted by the Company to
the Employee prior to the Change of Control Event shall become fully vested and
immediately exercisable in full to the extent such stock options remain
outstanding and unexercised at the time of such Termination Upon Change of
Control. This Subsection 4(a)(v) shall apply to all such stock option
agreements, whether heretofore or hereafter entered into, between the Company
and the Employee.
(b) In the event that Employee accepts employment with, or provides
any services to (whether as a partner, consultant, joint venturer or otherwise),
any person or entity which offers products or services that are competitive with
any products or services offered by the Company or with any products or services
that Employee is aware the Company intends to offer, Employee shall be deemed to
have resigned from his employment with the Company effective immediately upon
such acceptance of employment or provision of services. Upon such resignation,
Employee shall not be entitled to any further payments or benefits as provided
under this Section 4.
(c) In the event that Employee accepts employment with, or provides
any services to (whether as a partner, consultant, joint venturer or otherwise),
any person or entity while Employee continues to receive any separation benefits
pursuant to this Section 4, Employee shall immediately notify the Company of
such acceptance and provide to the Company information with respect to such
person or entity as the Company may reasonably request in order to determine if
that person's or entity's products or services are competitive with the
Company's.
5. LIMITATION OF PAYMENTS AND BENEFITS.
(a) To the extent that any of the payments and benefits provided for
in this Agreement or otherwise payable to the Employee constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code (the
"Code") and, but for this Section 5, would be subject to the excise tax imposed
by Section 4999 of the Code, the aggregate amount of
47
<PAGE>
such payments and benefits shall be reduced such that none of the payments and
benefits are subject to excise tax pursuant to Section 4999 of the Code.
(b) Within sixty (60) days after the later of termination of
employment or the related Change of Control Event, the Company shall notify the
Employee in writing if it believes that any reduction in the payments and
benefits that would otherwise be paid or provided to the Employee under the
terms of this Agreement is required to comply with the provisions of Subsection
5(a). If the Company determines that any such reduction is required, it will
provide the Employee with copies of the information used and calculations made
by the Company to determine the amount of such reduction. The Company shall
determine, in a fair and equitable manner after consultation with the Employee,
which payments and benefits are to be reduced so as to result in the maximum
benefit for the Employee.
(c) Within thirty (30) days after the Employee's receipt of the
Company's notice pursuant to Subsection 5(b), the Employee shall notify the
Company in writing if the Employee disagrees with the amount of reduction
determined by the Company, or the selection of the payments and the benefits to
be reduced. As part of such notice, the Employee shall also advise the Company
of the amount of reduction, if any, that the Employee has, in good faith,
determined to be necessary to comply with the provisions of Subsection 5(b)
and/or the payments and benefits to be reduced. Failure by the Employee to
provide this notice within the time allowed will be treated by the Company as
acceptance by the Employee of the amount of reduction determined by the Company
and/or the payments and benefits to be reduced. If any differences regarding
the amount of the reduction and/or the payments and benefits to be reduced have
not been resolved by mutual agreement within sixty (60) days after the
Employee's receipt of the Company's notice pursuant to Subsection 5(b), the
amount of reduction and/or the payments and benefits to be reduced determined by
the Employee will be conclusive and binding on both parties unless, prior to the
expiration of such sixty (60) day period, the Company notifies the Employee in
writing of the Company's intention to have the matter submitted to arbitration
for resolution and proceeds to do so promptly. If the Company gives no notice
to the Employee of a required reduction as provided in Subsection 5(b), the
Employee may unilaterally determine the amount of reduction required, if any,
and/or the payments and benefits to be reduced, and, upon written notice to the
Company, the amount and/or the payments and benefits to be reduced will be
conclusive and binding on both parties.
(d) If, as a result of the reductions required by Subsection 5(a),
the amounts previously paid to the Employee exceed the amount to which the
Employee is entitled, the Employee will promptly return the excess amount to the
Company.
6. EXCLUSIVE REMEDY. Under any claim for breach of this Agreement or
wrongful termination, the payments and benefits provided for in Section 4 shall
constitute the Employee's sole and exclusive remedy for any alleged injury or
other damages arising out of the cessation of the employment relationship
between the Employee and the Company in the event of Employee's termination.
Except as expressly set forth herein, the Employee shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Section 4 have been provided to the Employee.
48
<PAGE>
7. PROPRIETARY AND CONFIDENTIAL INFORMATION. The Employee agrees to
continue to abide by the terms and conditions of the Company's confidentiality
and/or proprietary rights agreement between the Employee and the Company, a copy
of which is attached hereto as EXHIBIT A.
8. CONFLICT OF INTEREST. Employee agrees that for a period of one (1)
year after termination of his/her employment with the Company, he/she will not,
directly or indirectly, solicit the services of or in any other manner persuade
employees or customers of the Company to discontinue that person's or entity's
relationship with or to the Company as an employee or customer, as the case may
be.
9. ARBITRATION. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in San Mateo County or Santa
Clara County, California; provided, however, that this arbitration provision
shall not preclude the Company from seeking injunctive relief from any court
having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's trade secrets or
confidential and proprietary information. All costs and expenses of arbitration
or litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the Employee, shall be paid by the Company. Judgment may
be entered on the award of the arbitration in any court having jurisdiction.
10. INTERPRETATION. Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.
11. CONFLICT IN BENEFITS. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement; provided, however, that this Agreement is not intended
to and shall not affect, limit or terminate (i) any plans, programs, or
arrangements of the Company that are either in writing or regularly made
available to a significant number of employees of the Company, (ii) any
agreement or arrangement with the Employee that has been reduced to writing and
which does not relate to the subject matter hereof, or (iii) any agreements or
arrangements hereafter entered into by the parties in writing, except as
otherwise expressly provided herein.
12. SUCCESSORS AND ASSIGNS.
(a) SUCCESSORS OF THE COMPANY. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction shall be a breach of this
Agreement and shall entitle the Employee to terminate his or her employment with
the Company within three months thereafter and to receive the benefits provided
under Section 4(c) of this Agreement in the event of Termination Upon Change of
Control. As used in this Agreement, "Company" shall mean the Company as defined
above and any successor
49
<PAGE>
or assign to its business and/or assets as aforesaid which executes and delivers
the agreement provided for in this Section 12 or which otherwise becomes bound
by all the terms and provisions of this Agreement by operation of law.
(b) HEIRS OF EMPLOYEE. This Agreement shall inure to the benefit of
and be enforceable by the Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees. If the Employee should die after the conditions to payment of
benefits set forth herein have been met and any amounts are still payable to him
or her hereunder, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's
beneficiary, successor, devisee, legatee or other designee or, if there be no
such designee, to the Employee's estate. Until a contrary designation is made
to the Company, the Employee hereby designates as his or her beneficiary under
this Agreement the person whose name appears below his or her signature on this
Agreement.
13. NOTICES. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Network General Corporation
4200 Bohannon Drive
Menlo Park, CA 94025
Attn: Leslie G. Denend
and if to the Employee at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
14. NO REPRESENTATIONS. Employee acknowledges that he/she is not relying
and has not relied on any promise, representation or statement made by or on
behalf of the Company which is not set forth in this Agreement.
15. VALIDITY. If any one or more of the provisions (or any part thereof)
of this Agreement shall be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
(or any part thereof) shall not in any way be affected or impaired thereby.
16. MODIFICATION. This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.
50
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year written below.
NETWORK GENERAL CORPORATION EMPLOYEE
By: /s/ Leslie G. Denend By: /s/ Michael Kremer
-------------------------------- -----------------------------
Name: Leslie G. Denend Name: Michael Kremer
Title: President and Chief Executive Officer Address: 1147 Pulora Court
---------------------
Sunnyvale, CA 94087
------------------------------
Designated
Beneficiary: Uta Kremer
--------------
Address of Designated
Beneficiary: 1147 Pulora Court
------------------
Sunnyvale, CA 94087
------------------------------
51
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF NETWORK GENERAL CORPORATION
The Registrant's thirteen subsidiaries are 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.
52
<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 24, 1996
53
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<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
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<SECURITIES> 81,417
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<ALLOWANCES> (2,445)
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0
0
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