<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
__
|_X_| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
__
|__| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission file number 0-17431
NETWORK GENERAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0115204
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4200 Bohannon Drive, Menlo Park, California 94025
- ------------------------------------------------------------------------------
(address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (415) 473-2000
----------------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of December 31, 1996, there were outstanding 43,249,642 shares of the
Registrant's Common Stock (par value $0.01 per share).
The exhibit index begins on page 14.
<PAGE>
FORM 10-Q
INDEX
PAGE
Cover Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Income -
three and nine months ended December 31,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
nine months ended December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements - December 31, 1996 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14 - 16
Signatures 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $42,165 $34,180
Marketable securities 68,335 81,417
Accounts receivable, net 50,263 34,043
Inventories 6,916 4,863
Prepaid expenses and deferred tax assets 14,461 11,303
---------- ----------
Total current assets 182,140 165,806
Property and Equipment, at cost:
Demonstration and rental equipment 12,316 9,968
Office and development equipment 32,555 27,443
Leasehold improvements 4,248 2,771
---------- ----------
49,119 40,182
Less accumulated depreciation and amortization (30,724) (23,006)
---------- ----------
Net property and equipment 18,395 17,176
Long-term Investments 44,152 37,139
Other Assets 7,124 3,209
---------- ----------
$251,811 $223,330
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,801 $4,300
Accrued liabilities 18,164 14,749
Deferred revenue 27,259 20,916
---------- ----------
Total current liabilities 54,224 39,965
Long-term Deferred Revenue and Taxes 3,838 3,248
Stockholders' Equity:
Common stock
Issued - - 47,339,642 shares at
December 31, 1996 and 46,068,302 shares
at March 31, 1996 473 461
Additional paid-in-capital 146,155 127,482
Retained earnings 123,317 91,799
Less treasury stock, at cost -- 4,090,000
shares at December 31, 1996
2,490,000 shares at March 31, 1996 (76,196) (39,625)
---------- ----------
Total stockholders' equity 193,749 180,117
---------- ----------
$251,811 $223,330
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands, except per share data) December 31, December 31,
1996 1995 1996 1995
--------- --------- --------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product $51,766 $41,972 $136,031 $109,238
Services 13,672 9,618 36,632 25,821
-------- -------- -------- --------
Total Revenues 65,438 51,590 172,663 135,059
-------- -------- -------- --------
Cost of Revenues:
Product 12,894 9,200 33,663 23,848
Services 4,218 2,960 10,529 7,507
-------- -------- -------- --------
Total Cost of Revenues 17,112 12,160 44,192 31,355
-------- -------- -------- --------
Gross margin 48,326 39,430 128,471 103,704
Operating Expenses:
Sales and marketing 19,496 16,835 54,375 45,513
Research and development 7,588 7,434 22,182 20,049
General and administrative 4,053 3,104 11,388 8,681
Acquired in-process research
and development --- --- --- 7,153
-------- -------- -------- --------
Total Operating Expenses 31,137 27,373 87,945 81,396
-------- -------- -------- --------
Income from operations 17,189 12,057 40,526 22,308
Interest Income, net 1,526 1,719 4,823 5,325
-------- -------- -------- --------
Income before provision
for income taxes 18,715 13,776 45,349 27,633
Provision for Income Taxes 5,708 4,202 13,831 10,558
-------- -------- -------- --------
Net income $13,007 $9,574 $31,518 $17,075
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Share $0.28 $0.21 $0.69 $0.37
-------- -------- -------- --------
-------- -------- -------- --------
Weighted Average Common and Common
Equivalent Shares Outstanding 45,801 46,054 45,757 45,880
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
(in thousands) December 30,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $31,518 $17,075
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,819 5,925
Acquired in-process research & development - 7,153
Deferred taxes, net (1,603) (724)
Net change in certain assets and liabilities (10,311) 1,262
--------- ---------
Net cash provided by operating activities 27,423 30,691
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of held-to-maturity investments (98,503) (141,666)
Purchases of available-for-sale investments (28,174) -
Proceeds from maturities of held-to-maturity investments 102,687 137,651
Proceeds from sales/maturities of available-for-sale
investments 32,022 -
Cash used to purchase AIM Technology, Inc. - (6,501)
Net additions to property and equipment (8,959) (11,670)
--------- ---------
Net cash used in investing activities (927) (22,186)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs 18,060 12,307
Repurchases of common stock (36,571) (22,594)
--------- ---------
Net cash used in financing activities (18,511) (10,287)
Net increase in cash and cash equivalents 7,985 (1,782)
Cash and cash equivalents at beginning of period 34,180 18,950
--------- ---------
Cash and cash equivalents at end of period $42,165 $17,168
--------- ---------
--------- ---------
Supplemental Disclosures
Cash paid during the period for income taxes $8,395 $5,546
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Network General Corporation ("Network General" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. These unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements, and notes
thereto, for the year ended March 31, 1996 included in the Company's 1996 Annual
Report on Form 10-K. The results of operations for the three and nine months
ended December 31, 1996 are not necessarily indicative of the results that may
be expected for the fiscal year ending March 31, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. CASH AND CASH EQUIVALENTS, MARKETABLE DEBT AND EQUITY SECURITIES, AND LONG-
TERM INVESTMENTS
For purposes of the condensed consolidated balance sheets and statements of cash
flows, the Company considers certificates of deposits, commercial paper, money
market funds, and other similar financial instruments with an original maturity
date of three months or less to be cash equivalents.
SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE: Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when the company has the positive intent and
ability to hold the securities to maturity. Marketable debt and equity
securities and long term investments not classified as held-to-maturity are
classified as available-for-sale. Held-to-maturity investments are stated at
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Available-for-sale debt and equity securities are carried at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity, if significant.
As of December 31, 1996, the following is a summary of held-to-maturity and
available-for-sale securities:
HELD-TO-MATURITY SECURITIES
<TABLE>
<CAPTION>
(In thousands) Amortized Aggregate Unrealized
Costs Fair Value Gains
--------- ---------- ----------
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury and
other U.S. government agencies $1,983 $1,983 $0
Debt securities issued by states of the United States
and political subdivisions of the state 79,510 79,780 270
--------- --------- ----------
$81,493 $81,763 $270
--------- --------- ----------
--------- --------- ----------
</TABLE>
AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
(In thousands) Amortized Aggregate Unrealized
Costs Fair Value Gains
--------- ---------- ----------
<S> <C> <C> <C>
Gains
Debt securities issued by states of the United States
and political subdivisions of the state $28,836 $28,952 $116
Equity securities issued by corporations $1,000 $2,042 $1,042
--------- --------- ----------
$29,836 $30,994 $1,158
--------- --------- ----------
--------- --------- ----------
</TABLE>
6
<PAGE>
C. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
include material, labor and related manufacturing overhead. Inventories consist
of:
(In thousands) December 31, 1996 March 31, 1996
----------------- --------------
Purchased parts $2,882 $2,650
Finished goods 4,034 2,213
------ ------
$6,916 $4,863
------ ------
------ ------
D. EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Fully
diluted earnings per share are the same as primary earnings per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning
of section 27A of the Securities and Exchange Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, which
reflect the Company's current judgment on those issues. Because such statements
apply to future events, they are subject to risks and uncertainties that could
cause the actual results to differ materially. Important factors which could
cause actual results to differ materially are described in the following
paragraphs and are particularly noted under BUSINESS RISKS on pages 12 and 13
and in the Company's reports on Form 10-K for the year ended March 31, 1996 and
on Forms 10-Q for the quarters ended June 30, 1996 and September 30, 1996, each
of which reports are on file with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenues for the quarter ended December 31, 1996 were $65,438,000, an increase
of 27% over revenues of $51,590,000 for the quarter ended December 31, 1995.
For the nine months ended December 31, 1996, revenues were $172,663,000, an
increase of 28% over revenues of $135,059,000 for the nine months ended December
31, 1995. Revenue growth was fueled by continued acceptance of the Company's
tool and system products and services offerings.
Domestic revenues increased 15% to $46,003,000 for the quarter ended December
31, 1996 compared to $40,072,000 for the quarter ended December 31, 1995. For
the nine months ended December 31, 1996, domestic revenues were $127,280,000, an
increase of 19% over the same period ended December 31, 1995.
International revenues increased 69% for the third quarter of fiscal year 1997
compared to the third quarter of fiscal year 1996, growing from $11,518,000 to
$19,435,000. International revenues increased 63% to $45,383,000 for the nine
months ended December 31, 1996 from $27,886,000 for the same period ended
December 31, 1995. Pacific Rim and Latin America revenues increased 56% quarter
over quarter and increased 58% for the nine months ended December 31, 1996
compared to the same period ended December 31, 1995 due to increased sales
volumes by the Company's exclusive distributor for Japan as well as increased
sales volumes in Australia, Hong Kong and Korea. European revenues grew 87% for
the quarter and 71% for nine months ended December 31, 1996 compared to the same
periods ended December 31, 1995 resulting from the Company's focus on a new,
revised European sales strategy involving both direct and indirect sales
channels.
8
<PAGE>
The following table presents the Company's revenues for each of its product
lines in absolute dollars and as a percentage of revenues for each of the
periods shown below:
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ---------------------
(dollars in thousands) (dollars in thousands)
SOURCES OF REVENUES 1996 1995 1996 1995
------- ------- -------- --------
Tool Products(1) $31,713 $25,055 $86,841 $66,770
System Products(2) 20,053 16,917 49,190 42,468
------- ------- -------- --------
Subtotal Product Revenues 51,766 41,972 136,031 109,238
Services(3) 13,672 9,618 36,632 25,821
------- ------- -------- --------
Total Revenues $65,438 $51,590 $172,663 $135,059
------- ------- -------- --------
------- ------- -------- --------
PERCENTAGES OF REVENUES 1996 1995 1996 1995
------- ------- -------- --------
Tool Products 48% 48% 50% 49%
System Products 31% 33% 29% 32%
------- ------- -------- --------
Subtotal Product Revenues 79% 81% 79% 81%
Services 21% 19% 21% 19%
------- ------- -------- --------
Total Revenues 100% 100% 100% 100%
------- ------- -------- --------
------- ------- -------- --------
(1) Tool Products in each of the three and nine months ended December 31, 1996
and 1995 include revenues from the Sniffer-Registered Trademark- Network
Analyzer local area network (LAN) analysis products, wide area network
(WAN) analysis products, the Netsys Technologies, Inc. line of connectivity
and performance tools, the Ganymede Software, Inc. line of network
performance test tools and royalties from license agreements. In both the
three and nine months ended December 31, 1995, revenues from Tool Products
also include product rentals.
(2) System Products consist of revenues from the Distributed Sniffer System-
Registered Trademark- analysis products, performance measurement analysis
products, the Foundation probe and agent remote monitoring products, the
Sharpshooter monitoring products, the DATACOM Systems, Inc. line of network
switching devices and Frontier Software Development, Inc.'s line of
"Netscout" remote monitoring products.
(3) Services revenues in each of the three and nine months ended December 31,
1996 and 1995 include first-year warranty revenues as defined by Statement
of Position ("SOP") 91-1 and revenues from software support and maintenance
contracts and training and consulting services. In both the three and nine
months ended December 31, 1996, services revenues also include product
rentals.
The Company's tool products revenues increased 27% to $31,713,000 for the
third quarter of fiscal year 1997 compared to $25,055,000 for the third
quarter of fiscal year 1996. For the nine months ended December 31, 1996,
tool products revenues totaled $86,841,000, an increase of 30% over tool
products revenues totaling $66,770,000 for the nine months ended December 31,
1995. The growth in both periods reflects continued acceptance of the
Company's Sniffer-Registered Trademark- Network Analyzer products, which
accounted for substantially all of the Company's tool products revenues in
both the three and nine month periods ended December 31, 1996 and 1995. Tool
products revenues represented approximately 48% of Network General's revenues
for the third quarters of fiscal 1996 and 1995. For the nine months ended
December 31, 1996, tool products represented 50% of the Company's total
revenues, compared to 49% for the same period ended December 31, 1995.
Revenues for the quarter ended December 31, 1996 included $20,053,000 of system
products revenues, a 19% increase compared to $16,917,000 of system products
revenues for the same period in fiscal year 1996. System products revenues
increased 16% to $49,190,000 for the nine months ended December 31, 1996
compared to $42,468,000 for the same period ended December 31, 1995. The
Distributed Sniffer System-Registered Trademark- analysis products accounted for
the majority of the Company's system products revenues in both the three and
nine month periods ended December 31, 1996 and 1995. System products revenues
decreased to approximately 31% and 29% of Network General's revenues for the
three and nine months ended December 31, 1996, respectively, compared to 33% and
32% for the three and nine months ended December 31, 1995, respectively, due to
faster growth in tool products and services revenues resulting from increased
international revenues which consist primarily of tool products and services.
9
<PAGE>
Services revenues include revenues from software support and maintenance
contracts and training and consulting services, as well as those revenues
from the first-year warranty period of customer support which have been
deferred and recognized in accordance with SOP 91-1, "Software Revenue
Recognition." For the three and nine month periods ended December 31, 1996,
services revenues increased 42% compared to the same periods in the prior
fiscal year. These increases came in all categories of services revenues
principally due to the growth of the installed customer base and the
resulting renewal of maintenance contracts, as well as increased demand for
the Company's training and consulting services. As a percentage of total
revenues, services revenues represented approximately 21% of Network
General's revenues for the three and nine months ended December 31, 1996, an
increase from 19% for the same periods ended December 31, 1995.
Cost of revenues consists of manufacturing costs, cost of services, royalties
and warranty expenses. Gross margin as a percentage of revenues decreased to
74% for the quarter and nine months ended December 31, 1996 from 76% for the
quarter and nine months ended December 31, 1995. These decreases resulted
from: changes in the mix of products sold (increased sales of third party
products and platforms which have a higher cost of revenue than the Company's
own products), higher growth in services revenues which have historically
lower gross margins than the Company's products gross margins, increased
sales volumes through indirect channels of distribution which have lower
margins than revenues from direct sales, and increased market pressure to
reduce prices on the Company's products. If these trends continue, overall
gross margins would continue to decline as a percentage of revenues. The
Company expects to continue offering third party products and platforms and
to grow its services business, but also intends to increase its sales and
licensing of internally developed products and reduce certain of its platform
resale activities. During the three and nine month periods ended December 31,
1996, the Company was able to offset the impact of reduced gross margins with
a reduction in operating expenses as a percent of revenue. There can be no
assurances that these trends will continue.
Sales and marketing expenses were $19,496,000 in the third quarter of fiscal
year 1997, an increase of 16% compared to $16,835,000 in the third quarter of
fiscal year 1996. For the nine months ended December 31, 1996, sales and
marketing expenses totaled $54,375,000, an increase of 19% over $45,513,000
incurred for the same period ended December 31, 1995. These increases were
primarily due to increased staffing, commission expenses and promotional
activity required to support increased sales volumes. As a percentage of
revenues, sales and marketing expenses decreased to 30% from 33% for the
quarters ended December 31, 1996 and 1995, respectively, and decreased from 34%
to 31% for the nine months ended December 31, 1995 and 1996, respectively, due
to increased use of indirect distribution channels to sell the Company's
products and services, thereby reducing the amount of direct selling costs
related to such sales of the Company's products and services.
Research and development expenses were $7,588,000 in the third quarter of fiscal
year 1997, compared to $7,434,000 in the third quarter of fiscal year 1996 and
$22,182,000 for the nine months ended December 31, 1996 compared to $20,049,000
for the same period ended December 31, 1995. As a percentage of revenues,
research and development expenses decreased to 12% for the quarter ended
December 31, 1996 compared to 14% for the prior year's comparable quarter and
13% for the nine months ended December 31, 1996 compared to 15% for the nine
months ended December 31, 1995. These decreases were due to the incurring of
significant expenses in the fiscal 1996 periods to support accelerated
development efforts of high speed network technology products. The increase in
absolute dollar spending was a result of increased staffing and equipment
expense to support growth in the Company's breadth of product and services
offerings. The Company believes continued commitment to research and
development is required to remain competitive.
Research and development expenses are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, under which the Company is required to
capitalize software development costs after technological feasibility is
established. Capitalizable software development costs incurred to date have not
been significant and, therefore, the Company has charged all software
development costs to research and development expenses in the consolidated
statements of income.
General and administrative expenses were $4,053,000 for the quarter ended
December 31, 1996 and $3,104,000 for the quarter ended December 31, 1995. For
the nine months ended December 31, 1996, general and administrative expenses
totaled $11,388,000 compared to $8,681,000 incurred for the nine months ended
December 31, 1995. Increased spending for general and administrative expenses
was primarily the result of increased staffing to support operations. General
and administrative expenses as a percentage of revenues were 6% and 7% for the
quarter and nine months ended December 31, 1996, respectively. For the quarter
and nine months ended December 31, 1995, general and administrative expenses as
a percentage of revenues were 6%.
10
<PAGE>
Interest income, net decreased 11% to $1,526,000 in the third quarter of fiscal
year 1997 compared to $1,719,000 in the third quarter of fiscal year 1996. For
the nine months ended December 31, 1996, interest income, net decreased to
$4,823,000 from $5,325,000 for the same period ended December 31, 1995. These
decreases reflect a combination of lower balances invested in marketable
securities and long-term investments as well as lower average yields earned on
investments held during the third quarter and nine months of fiscal year 1997
compared to the same periods in fiscal year 1996.
The provision for income taxes for the three and nine month periods ended
December 31, 1996 was 30.5% of pretax income compared to 30.5% and 38.2% of
pretax income for the three and nine month periods ended December 31, 1995.
Excluding the impact of the AIM Technology, Inc. ("AIM") acquisition in the
second quarter of fiscal year 1996, the provision for income taxes for the nine
months ended December 31, 1995 would have been 30.5% of pretax income. The
fiscal year 1997 provision rate of 30.5% of pre-tax income reflects the
Company's ability to utilize operating loss carryforwards which will be fully
utilized by the end of fiscal year 1997 and, in turn, will lead to increased
provision for income taxes, beginning in the first quarter of fiscal year 1998.
Earnings per share for the quarter ended December 31, 1996 increased to $0.28
compared to $0.21 per share earned in the quarter ended December 31, 1995. For
the nine months ended December 31, 1996, earnings per share increased to $0.69
from $0.37 for the same period in fiscal year 1996. Excluding the one-time
charge to write off acquired in-process research and development related to the
acquisition of AIM in the second quarter of fiscal year 1996, earnings per share
for the nine months ended December 31, 1995 would have been $0.54. These
increases were due to increased revenues and gross margin dollars, as well as
lower operating expenses as a percentage of revenues. The number of weighted
average common and common equivalent shares outstanding decreased from
46,054,000 in the third quarter of fiscal year 1996 to 45,801,000 in the third
quarter of fiscal year 1997 due to increased repurchases of common stock.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $27,423,000 for the nine months
ended December 31, 1996 and $30,691,000 for the nine months ended December 31,
1995. In fiscal year 1997, the primary source of these funds was net income
adjusted for depreciation, offset by increased deferred taxes and net changes
(uses) in certain assets and liabilities. In fiscal year 1996, the primary
sources of cash provided by operating activities were net income adjusted for
depreciation, the one-time charge to write off acquired in-process research and
development related to the acquisition of AIM and net changes (sources) in
certain assets and liabilities, offset by increased deferred taxes.
Net cash used in investing activities was $927,000 for the nine months ended
December 31, 1996, compared to net cash used in investing activities of
$22,186,000 for the nine months ended December 31, 1995. Net cash used in
investing activities in the first nine months of fiscal year 1997 reflects
purchases of held to maturity and available for sale investments and net
additions to property and equipment, offset by proceeds from maturities of held-
to-maturity investments and sales/maturities of available-for-sale investments
reinvested in cash and cash equivalents. Net cash used in investing activities
in the first nine months of fiscal year 1996 reflects purchases of held to
maturity investments, net additions to property and equipment and cash used to
purchase AIM, offset by maturities of held-to-maturity investments.
Net cash used in financing activities was $18,511,000 for the nine months ended
December 31, 1996 and $10,287,000 for the same period ended December 31, 1995.
The primary use of these funds were repurchases of common stock totaling
$36,571,000 and $22,594,000 for the nine months ended December 31, 1996 and
1995, respectively. Offsetting these uses were proceeds from the issuance of
common stock totaling $18,060,000 for the nine months ended December 31, 1996
and $12,307,000 for the same period ending December 31, 1995.
11
<PAGE>
As of December 31, 1996, the Company's principal sources of liquidity included
cash, cash equivalents, marketable debt and equity securities and long-term
investments totaling $154,652,000, including $44,152,000 of long-term
investments. The Company currently has no outstanding bank borrowings and has
no established lines of credit. The Company believes cash generated from
operations, together with existing cash and investment balances, will be
sufficient to satisfy operating cash and capital expenditure requirements
through at least the next twelve months.
BUSINESS RISKS
The Company's future operating results may be 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. Network General believes its
future success will depend, in part, on its ability to continue to develop,
introduce and sell new products. The Company is committed to continuing
investments in research and development; however, there is no assurance these
efforts will result in the development of products for the appropriate
platforms or operating systems, or the timely release or market acceptance of
new products.
The Company's results may be adversely affected by the actions of existing or
future competitors including established and emerging computer, communications,
intelligent network wiring, network management and test instrument companies.
New and competitive entrants into the field of network fault and performance
management may come from such diverse entities as established network hardware
companies which have embedded systems in their network hardware and smaller
companies which market their software products as having "network management"
functionality. There can be no assurance Network General will be able to
compete successfully in the future with existing or future competitors. New
entrants, new technology and new marketing techniques may cause customer
confusion, thereby lengthening the sales cycle process for the Company's
products, particularly the Company's system products. Increased competition may
also lead to downward pricing pressure on the Company's products.
Network General does not carry a significant level of backlog. The majority
of the Company's revenues in each quarter are a result of shippable orders
booked in that quarter. Orders in the most recent quarters were received by
the Company later in their respective fiscal quarters than they have been in
prior quarters. The Company's ability to forecast achievement of market and
internal expectations of quarterly revenue levels and operating results is
delayed and becomes more difficult when orders are placed later in the
quarter. It is anticipated this trend will continue into the near future.
Further, the Company has entered the most recent fiscal quarters with a lower
level of backlog as a percentage of revenue shipped within such quarters
compared to prior periods. If the trends of orders received later in the
quarter and lower levels of backlog entering the quarter continue, there is
more risk the Company may not attain quarterly revenue objectives. Since the
Company's expense levels are based on expectations of future revenues,
failure of the Company to achieve quarterly revenue objectives would,
therefore, have a materially adverse effect on the Company's operating
results.
During fiscal 1997, the Company expanded its use of indirect product
distribution channels. The existence of direct and indirect sales channels
may lead to conflict among the channels for the same customer, pressure by
current and prospective customers for price reductions for the Company's
products and changes to the Company's gross margins and operating margins.
The Company's gross margin as a percentage of revenues declined during
fiscal 1997 as a result of more sales of third party products and platforms,
increased services business, higher sales through indirect distribution
channels and greater market pressure to reduce prices on the Company's
products. The Company has been able to offset the impact of the decline in
gross margin percentages through operating expense control. If the Company is
unable to continue to offset future gross margin declines, if any, by
continued control of operating expenses, the Company's operating results
could be materially adversely affected.
The Company remains in the process of implementing its revised distribution
strategy in Europe, which includes the replacement of an independent
distribution network with a direct sales force in certain countries. The
success of a direct sales organization is dependent on a number of factors,
including the ability to attract and retain qualified sales personnel, timely
and effective training of the sales force and obtaining access to and
penetrating the prospective customer base previously accessed by third party
resellers. There may be fluctuating results in European sales efforts until the
strategy is fully implemented.
12
<PAGE>
Network General products may be considered by certain customers to be capital
purchases. Capital purchases are often considered discretionary and,
therefore, an adverse change in general economic conditions could cause
certain of the Company's customers to reduce their discretionary spending,
which may materially adversely affect the Company's operating results.
There has been substantial litigation regarding patent and other intellectual
property rights in the software industry. As is typical in the software
industry, the Company has received from time to time notices from third parties
alleging infringement claims. Although there are currently no pending lawsuits
against Network General regarding any possible infringement claims, there can be
no assurance infringement claims will not be asserted in the future or that such
assertions will not materially adversely affect the Company's business,
financial condition and results of operations. If any such claims are asserted
against Network General, the Company may need to seek to obtain a license under
the third party's intellectual property rights. There can be no assurance a
license will be available on reasonable terms or at all.
Failure to obtain a necessary license on commercially reasonable terms would
materially adversely affect the Company's business, financial condition and
results of operations. Network General could decide, in the alternative, to
resort to litigation to challenge such claims. Such litigation could be
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations.
For certain critical components of its products, Network General relies on a
limited number of suppliers. In addition, some of the Company's products are
designed around specific computer platforms which are only available from
certain manufacturers. As a result of product transitions by these computer
platform manufacturers, the Company has found it increasingly necessary to
purchase and inventory computer platforms for resale to its customers. Any
significant shortage of computer platforms or other critical components for
the Company's products could lead to cancellations or delays of purchases of
the Company's products which would materially adversely affect the Company's
operating results. If purchases of computer platforms or other components
exceed demand, the Company would incur expenses for disposing of the excess
inventory, which would also materially adversely affect the Company's
operating results.
TRADEMARKS
Sniffer and Distributed Sniffer System are registered trademarks of Network
General Corporation and/or its wholly owned subsidiaries.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
From time to time the Company has been, or may become, involved in
litigation proceedings incidental to the conduct of its business.
The Company does not believe any such proceedings presently pending
will have a material adverse affect on the Company's financial
position or its results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
1) Exhibits
Exhibit
Number Exhibit Title
------- -------------
3.1 Third restated certificate of Incorporation
of Network General Corporation, a Delaware
corporation, which is incorporated by
reference to Exhibit 3.1 of the Company's
Quarterly Report by Form 10-Q for the
quarter ended September 30, 1996
("September 1996 Form 10-Q").
3.2 Amended and Restated Bylaws of Network
General Corporation, which is incorporated
by reference to Exhibit 3.2 of the
September 1996 Form 10-Q.
4.1 Registration Rights Agreement between the
Company and certain investors dated
December 31, 1987, which is incorporated by
reference to Exhibit 4.2 of the Company's
Registration Statement No. 33-26107 on Form
S-1, which became effective February 2,
1989 ("Form S-1").
4.2 Rights Agreement between the Company and
Chemical Trust Company of California dated
June 26, 1992, as amended, which is
incorporated by reference to Exhibit 4.2 of
the Company's Annual Report on Form 10-K
for the year ended March 31, 1993.
10.1 Standard Business Lease (Net) for the
Company's principal facility dated June 18,
1991, between the Company and Menlo Oaks
Partners, L.P., which is incorporated by
reference to Exhibit 10.3 of the Company's
Annual Report on Form 10-K for the year
ended March 31, 1991.
10.2 First Amendment to Lease dated June 10, 1992, between
the Company and Menlo Oaks Partners, L.P., which is
incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K for the year ended
March 31, 1992 ("1992 Form 10-K").
10.3 Standard Business Lease (Net) for the Company's
principal facility dated March 11, 1992,
between the Company and Menlo Oaks Partners,
L.P., which is incorporated by reference to
Exhibit 10.4 of the 1992 Form 10-K.
10.4 First Amendment to Lease dated June 18, 1992,
between the Company and Menlo Oaks Partners,
L.P., which is incorporated by reference to
Exhibit 10.5 of the 1992 Form 10-K.
10.5 Lease dated March 31, 1992, between the
Company and Equitable Life Assurance Society
of the United States, which is incorporated
by reference to Exhibit 10.4 of the 1992 Form
10-K.
10.6 Description of Company's Cash Bonus Plan, which
is incorporated by reference to Exhibit 10.6 of
the Form S-1.
14
<PAGE>
10.7 Form of Director and Officer Indemnification
Agreement, which is incorporated by reference
to Exhibit 10.7 of the Form S-1.
10.8 Amended and Restated 1989 Outside Directors
Stock Option Plan and related
documentation, as amended August 9, 1996,
which is incorporated by reference to
Exhibit 10.8 of the September 1996 Form 10-
Q.
10.9 OEM Agreement dated August 3, 1991 between
the Company and NCR Corporation which is
incorporated by reference to Exhibit 10.18
of the Company's Registration Statement No.
33-45580 on Form S-3 which became effective
on April 6, 1992.
10.10 Employment agreement dated April 6, 1994
between the Company and Leslie Denend,
which is incorporated by reference to
Exhibit 10.21 of the Company's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994 ("June 1994 Form 10-Q").
10.11 Employment agreement dated April 6, 1994
between the Company and James T.
Richardson, which is incorporated by
reference to Exhibit 10.22 of the June 1994
Form 10-Q.
10.12 Employment agreement dated April 6, 1994
between the Company and Richard Lewis,
which is incorporated by reference to
Exhibit 10.23 of the June 1994 Form 10-Q.
10.13 Second Amendment to Lease dated February 1,
1995 between the Company and Menlo Oaks
Partners, L.P., which is incorporated by
reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994 ("December
1994 Form 10-Q").
10.14 Third Amendment to Lease dated February 1,
1995 between the Company and Menlo Oaks
Partners, L.P., which is incorporated by
reference to Exhibit 10.23 of the December
1994 Form 10-Q.
10.15 Fourth Amendment to Lease dated May 31,
1995 between the Company and Menlo Oaks
Partners, L.P., which is incorporated by
reference to Exhibit 10.27 of the Company's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 10-Q ("June
1995 Form 10-Q").
10.16 Fifth Amendment to Lease dated June 13,
1995 between the Company and Menlo Oaks
Partners, L.P., which is incorporated by
reference to Exhibit 10.28 of the June 1995
Form 10-Q.
10.17 Network General Corporation 1989 Employee
Stock Option Plan and related
documentation, as amended August 9, 1996,
which is incorporated by reference to
Exhibit 10.17 of the September 1996 Form
10-Q.
10.18 Network General Corporation 1989 Employee
Stock Purchase Plan and related
documentation, as amended August 9, 1996,
which is incorporated by reference to
Exhibit 10.18 of the September 1996 Form
10-Q.
15
<PAGE>
10.19 Employment Agreement dated August 19, 1995
between the Company and Michael Kremer,
which is incorporated by reference to
Exhibit 10.22 of the Company's Annual
Report on Form 10-K for the year ended
March 31, 1996 ("1996 Form 10-K").
10.20 Lease dated July 3, 1996, between the
Company and Campbell Avenue Associates,
which is incorporated by reference to
Exhibit 10.22 of the 1996 Form 10-K.
10.21 Secured Loan Agreement dated October 29,
1996 between the Company and John Richard
Stringer, which is incorporated by
reference to Exhibit 10.21 of the September
1996 Form 10-Q.
10.22 Sixth Amendment to Lease dated November 29,
1996 between the Company and Menlo Oaks
Partners, L.P.
27.0 Financial Data Schedule
2) Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended December 31, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORK GENERAL CORPORATION
(Registrant)
Date: February 12, 1997 by S/JAMES T. RICHARDSON
-------------------------------
James T. Richardson
Senior Vice President, Corporate
Operations, Chief Financial Officer
and Assistant Secretary
(authorized officer)
Date: February 12, 1997 by S/BERNARD J. WHITNEY
-------------------------------
Bernard J. Whitney
Vice President, Controller and
Chief Accounting Officer
(authorized officer)
17
<PAGE>
EXHIBIT 10.22
SIXTH AMENDMENT TO LEASE
THIS SIXTH AMENDMENT TO LEASE (this "Amendment") is made as of November
12, 1996, between MENLO OAKS PARTNERS,, L.P., a Delaware limited partnership
("Landlord"), and NETWORK GENERAL CORPORATION, a Delaware corporation
("Tenant").
THE PARTIES ENTER INTO THIS AMENDMENT based upon the following facts,
understandings and intentions:
A. Landlord and Tenant previously entered into that certain Menlo Oaks
Corporate Center Standard Business Lease dated as of March 11, 1992, as
amended by (i) that certain First Amendment to Lease dated as of June 18,
1992, (ii) that certain Second Amendment to Lease dated as of March 18, 1993,
(iii) that certain Third Amendment to Lease (the "Third Amendment") dated as
of February 1, 1995, (iv) that certain Fourth Amendment to Lease dated as of
May 31, 1995 and (v) that certain Fifth Amendment to Lease dated as of June
13, 1995 (as amended, the "Lease"), pursuant to which Landlord leased to
Tenant approximately 62,920 rentable square feet of space (the "Premises") in
Landlord's building (the 114500 Bohannon Building") located at 4500 Bohannon
Drive, Menlo Park, California, as more particularly described in the Lease.
B. Pursuant to the Third Amendment, Landlord granted to Tenant an
option (the "Extension option") to extend the term of the Lease for an
additional five (5) years until June 30, 2002. Tenant exercised its
Extension Option by written notice to Landlord dated September 20, 1996.
C. Landlord and Tenant now desire to amend the Lease to, among other
things, set the Base Rent during the Extension Term. The capitalized terms
used in this Amendment and not otherwise defined herein shall have the same
meaning given to such terms in the Lease.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of
the parties, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. TERM. The term of the Lease shall be extended until June 30, 2002.
Tenant shall have no further options to extend the term of the Lease.
2. BASE RENT. The monthly Base Rent during the Extension Term shall be
as follows:
<PAGE>
Period Monthly Base Rent
------ -----------------
July 1, 1997 through One Hundred Sixty-Eight Thousand
December 31, 1999 Six Hundred Twenty-Five and 60/100
Dollars ($168,625.00)
January 1, 2000 One Hundred Eighty-Two Thousand
through June 30, 2002 One Hundred Fifty-Three and 40/100 Dollars
($182, 153.40)
3. ENTIRE AGREEMENT. This Amendment represents the entire
understanding between Landlord and Tenant concerning the subject matter
hereof, and there are no understandings or agreements between them relating
to the Lease or the Premises not set forth in writing and signed by the
parties hereto. No party hereto has relied upon any representation, warranty
or understanding not set forth herein, either oral or written, as an
inducement to enter into this Amendment.
4. CONTINUING OBLIGATIONS. Except as expressly set forth to the
contrary in this Amendment, the Lease remains unmodified and in full force
and effect. To the extent of any conflict between the terms of this Amendment
and the terms of the Lease, the terms of this Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
"Landlord"
MENLO OAKS PARTNERS, L.P., a
Delaware Limited partnership
By: AM Limited Partners, a California
limited partnership, as a General
Partner
By: Amarok Menlo, Inc. a
California corporation, as a
General Parnter
By: /s/ J. Marty Brill, Jr.
------------------------------------
J. Marty Brill, Jr.
President
<PAGE>
"Tenant"
NETWORK GENERAL CORPORATION, a
Delaware corporation
By: /s/ James T. Richardson
---------------------------------------------
Name: James T. Richardson
Its: Senior Vice President, Corporate Operations
and Chief Financial Officer
By: /s/ Bernard Whitney
---------------------------------------------
Name: Bernard Whitney
Its: Vice President and Controller
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