<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
---------------------------
DATE OF REPORT: JANUARY 6, 1995
---------------------------
Network Systems Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-9691 41-1231031
---------------------------------- ------ -------------------
(State or other jurisdiction Commission (I.R.S. Employer
of incorporation or organization) File Number Identification No.)
7600 Boone Avenue North, Minneapolis, Minnesota 55428
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(Address of principal executive offices) (Zip Code)
612-424-4888
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(Registrant's telephone number, including area code)
<PAGE>
NETWORK SYSTEMS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1994 (Unaudited) and
December 31, 1993. . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
Three months and nine months ended September 30,
1994 and 1993 (Unaudited). . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1994
and 1993 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .9-13
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 14-15
</TABLE>
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<PAGE>
NETWORK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
-------------- -------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Cash and short-term investments $ 15,364 $ 25,911
Marketable securities 5,605 7,902
Accounts receivable, net 71,706 64,495
Interest and other receivables 3,287 5,531
Inventories 25,785 26,599
Other current assets 27,578 26,029
-------- --------
Total current assets 149,325 156,467
Property, plant, and equipment, at cost 113,155 95,838
Less accumulated depreciation 62,395 51,989
-------- --------
Net property, plant, and equipment 50,760 43,849
Goodwill and other intangible assets, net 41,062 36,534
Software development, less
accumulated amortization of
$10,831 (1993-$8,686) 3,924 4,194
Income tax deposits, including
interest of $1,374 (1993-$3,171) 17,292 39,804
Notes receivable from officers 3,611 --
Other assets, net 29,847 24,633
-------- --------
Total other assets 95,736 105,165
-------- --------
$295,821 $305,481
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 6,996 $ 9,317
Accrued liabilities 26,283 41,131
Income taxes payable 6,114 4,689
Deferred revenue -- 1,500
-------- --------
Total current liabilities 39,393 56,637
Long-term debt 1,000 1,000
Deferred compensation 12,325 11,852
Deferred income taxes 3,360 3,360
Other long-term liabilities 8,088 9,251
STOCKHOLDERS' EQUITY
Common stock 606 595
Additional paid-in capital 114,043 110,271
Retained earnings 117,816 115,111
Cumulative translation adjustment (810) (2,596)
-------- --------
Total stockholders' equity 231,655 223,381
-------- --------
$295,821 $305,481
-------- --------
-------- --------
</TABLE>
(Note) The balance sheet at December 31, 1993, has been
taken from the audited financial statements and condensed.
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<PAGE>
NETWORK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per-share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
1994 1993 1994 1993
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product $39,529 $37,091 $121,827 $100,198
Services 18,495 16,249 54,599 48,250
------- ------- -------- --------
Total revenues 58,024 53,340 176,426 148,448
Cost of revenues:
Product 18,163 16,300 54,745 43,329
Services 11,487 10,375 34,245 30,911
------- ------- -------- --------
Total cost of revenues 29,650 26,675 88,990 74,240
------- ------- -------- --------
Gross profit 28,374 26,665 87,436 74,208
Operating expenses:
Research and development 8,297 6,619 26,315 19,374
Selling, general,
and administrative 20,124 17,504 57,878 49,150
Amortization of goodwill 624 0 1,874 0
------- ------- -------- --------
Total operating expenses 29,045 24,123 86,067 68,524
------- ------- -------- --------
Income (loss) from operations (671) 2,542 1,369 5,684
Interest income, net 847 1,536 2,956 5,840
------- ------- -------- --------
Income before income taxes 176 4,078 4,325 11,524
Income taxes 70 1,500 1,620 4,240
------- ------- -------- --------
Net income $ 106 $ 2,578 $ 2,705 $ 7,284
------- ------- -------- --------
------- ------- -------- --------
Earnings per common and
common equivalent share $ .00 $ .09 $ .09 $ .24
------- ------- -------- --------
------- ------- -------- --------
Common and common equivalent
shares used in the calculation
of earnings per share 30,380 30,052 30,104 30,208
</TABLE>
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NETWORK SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,705 $ 7,284
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 11,014 10,701
Amortization of software development 2,145 2,442
Amortization of intangibles 4,411 --
(Increase) decrease in assets 7,868 (25,801)
Decrease in liabilities (18,524) (7,590)
-------- --------
Net cash flows provided by (used in)
by operations 9,619 (12,964)
Cash flows from investing activities:
Cost of companies acquired, net of cash
acquired (8,940) (24,120)
Decrease in marketable
securities 2,672 42,170
Purchases of property, plant, and
equipment (11,788) (10,271)
Additions to software development (1,875) (1,875)
(Addition to) reduction of notes receivable (3,611) 522
-------- --------
Net cash flows provided by (used in)
investing activities (23,542) 6,426
Cash flows from financing activities:
Proceeds from issuing common stock to
employees 4,225 3,323
Repurchase of common stock (442) (10,976)
-------- --------
Net cash flows provided by (used in)
financing activities 3,783 (7,653)
Effects of exchange rate changes (407) (503)
-------- --------
Decrease in cash and
short-term investments (10,547) (14,694)
Cash and short-term investments
at beginning of period 25,911 38,075
-------- --------
Cash and short-term investments
at end of period $ 15,364 $ 23,381
-------- --------
-------- --------
</TABLE>
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NETWORK SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1994, the condensed
consolidated statements of income for the three- and nine-month periods ended
September 30, 1994 and 1993, and the condensed consolidated statements of cash
flows for the nine-month periods then ended have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1994, and for
all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1993, annual
report to shareholders. The results of operations for the period ended
September 30, 1994, are not necessarily indicative of the operating results for
the full year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
-------------- -------------
(In thousands)
<S> <C> <C>
Raw material $10,631 $10,210
Work in process 6,686 7,200
Finished goods 8,468 9,189
------- -------
$25,785 $26,599
------- -------
------- -------
</TABLE>
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<PAGE>
3. AGREEMENT AND PLAN OF MERGER
On August 8, 1994, Network Systems Corporation ("NSC") and Storage Technology
Corporation ("STC") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which a newly formed subsidiary of STC will be merged
(the "Merger") into NSC, with NSC as the surviving corporation and a wholly
owned subsidiary to STC. In connection with the Merger, each outstanding share
of Common Stock of NSC will be converted into .2618 shares of Common Stock of
STC. In addition, at the effective time of the Merger, NSC will redeem from its
stockholders all of the rights outstanding under its Amended and Restated Rights
Agreement at a redemption price of $.05 per right. The Merger is expected to be
completed in January 1995.
With the exception of the $.05 per share for redemption of special preference
stock rights, the Merger is intended to be tax free for federal income tax
purposes to the holders of NSC Common Stock receiving shares of STC Common Stock
and is to be accounted for as a "pooling of interests."
The Merger is subject to various conditions, including the approval of the
stockholders of NSC. If the merger has not been consumated, either party may
terminate the agreement after February 28, 1995. In the event the average
price of STC Common Stock is below $30.37 per share for the ten day trading
period ending two trading days before the closing, the Company may terminate its
obligation to complete the merger unless STC agrees to make an adjustment to
the exchange ratio.
Through September 30, 1994, one-time merger charges of approximately
$540,000 have been deferred. These merger charges will be recognized in the
period the merger is consumated.
4. ACQUISITION
In September 1994, the Company's wholly owned subsidiary, Bus-Tech, Inc.,
acquired the assets and assumed certain liabilities of TMD Products, Inc.
("TMD") in return for cash. The accompanying financial statements include TMD's
results of operations since the acquisition. The purchase price, including
acquisition expenses, totaled approximately $9,040,000. The acquired assets and
liabilities have been recorded at their estimated fair values at the date of
acquisition. The value of software acquired is approximately $8,940,000. The
acquired software is included in other intangible assets and is being amortized
to cost of sales over its estimated 5-year life.
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<PAGE>
5. STOCKHOLDERS' EQUITY (In thousands)
<TABLE>
<CAPTION>
Additional Cumulative
Common paid-in Retained translation
stock capital earnings adjustment Total
------ ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1993 $595 $110,271 $115,111 $(2,596) $223,381
Issuance of common
stock upon exercise
of stock options 11 3,667 3,678
Issuance of common
stock through
employee stock
purchase plan 1 414 415
Nonqualified discount
options considered
earned compensation 132 132
Repurchase and
retirement of
common stock (1) (441) (442)
Change in cumulative
translation
adjustment 1,786 1,786
Net income 2,705 2,705
--- ------- ------- ------ -------
Balances at
September 30, 1994 $606 $114,043 $117,816 $ (810) $231,655
--- ------- ------- ------ -------
--- ------- ------- ------ -------
</TABLE>
6. MARKETABLE SECURITIES
Effective January 1, 1994 the Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". The Company's marketable
securities are classified as available-for-sale, all are corporate debt
securities and all mature within one year. Sales of marketable securities for
the three and nine months of 1994 total $1,471,000 with no gain or loss
realized. The cost basis of securities sold are computed by specific
identification. There were no material unrealized holding gains or losses in
the three and nine month periods of 1994.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items from Network Systems Corporation's
Condensed Consolidated Statements of Income as percentages of total revenues.
<TABLE>
<CAPTION>
Three-months ended Nine-months ended
September 30, September 30,
------------------- -------------------
1994 1993 1994 1993
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product 68.1% 69.5% 69.1% 67.5%
Service 31.9 30.5 30.9 32.5
------- ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product 31.3 30.6 31.0 29.2
Service 19.8 19.4 19.4 20.8
------- ------ ------ ------
Total cost of revenues 51.1 50.0 50.4 50.0
------- ------ ------ ------
Gross profit 48.9 50.0 49.6 50.0
Operating expenses:
Research and development 14.3 12.4 14.9 13.0
Selling, general, and administrative 34.7 32.8 32.8 33.1
Amortization of goodwill 1.1 0.0 1.1 0.0
------- ------ ------ ------
Total operating expenses 50.1 45.2 48.8 46.1
------- ------ ------ ------
Income (loss) from operations (1.2) 4.8 0.8 3.9
Interest income, net of interest
and other expense 1.5 2.8 1.6 3.9
------- ------ ------ ------
Income before income taxes 0.3 7.6 2.4 7.8
Income taxes 0.1 2.8 0.9 2.9
------- ------ ------ ------
Net income 0.2% 4.8% 1.5% 4.9%
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
Revenues from product sales are 7 and 22 percent higher for the three- and nine-
month periods ended September 30, 1994, when compared with the same periods in
1993. Revenues from services are 14 and 13 percent higher in the three- and
nine-month periods, respectively, resulting in an overall increase in total
revenues of 9 and 19 percent, respectively. When the three- and nine-month
periods ended September 30, 1993, are compared with the same periods for 1992,
revenues from product sales had
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<PAGE>
decreased 8 and 9 percent, revenues from services had decreased 4 and 3 percent,
and total revenues had decreased 7 percent for both periods. The increase in
total revenues for the third quarter 1994 over third quarter 1993 is due to the
addition of revenues from the acquisition of Bytex Corporation ("Bytex")
acquired in fourth quarter 1993. The increase in total revenues for the nine-
months 1994 over the nine-months 1993 is also due to the addition of revenues
from the Bytex acquisition along with revenues added by the acquisition of Bus-
Tech, Inc. ("BTI") acquired in second quarter 1993. While total revenues
increased in 1994 over the comparable periods of 1993, revenue growth for the
third period of 1994 was lower than expected, largely due to higher
than normal sales personal turnover and managements' loss of focus due to
the pending merges. The Company's shareholders are expected to vote on the
proposed merger in early 1995. The results of the shareholder's vote will remove
the uncertainty about the merger proposal and allow management to focus on the
Company's operations.
Product sales include sales of the Company's family of networking hardware,
licensing of associated software, and other related income. The Company
summarizes its product revenues by market applications. For the three-months
ended September 30, 1994 and 1993, market applications for CPU Connection
represented 22 and 22 percent, Channel Extension 22 and 31 percent, and
Internetworking 25 and 17 percent of total revenues, respectively. For the
nine-months ended September 30, 1994 and 1993, market applications for CPU
Connection represented 23 and 22 percent, Channel Extension 22 and 25 percent,
and Internetworking 24 and 21 percent of total revenues, respectively.
As a percentage of total revenues, sales to customers in the United States
("Domestic") and customers outside the United States ("International") are:
<TABLE>
<CAPTION>
Three-months ended Nine-months ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Domestic 62% 60% 61% 54%
International 38 40 39 46
-------- ------- ------- ------
Total revenues 100% 100% 100% 100%
-------- ------- ------- ------
-------- ------- ------- ------
</TABLE>
The increase in domestic revenue for the third quarter and nine-months of 1994
over the same periods in 1993 reflects the source of the growth in total
revenues. The growth in total revenues is the result of the acquisitions of
Bytex and BTI. Bytex and BTI had fewer international sales channels and due to
their recent acquisition, the Bytex and BTI products have not been fully
integrated into all of the Company's international sales channels.
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<PAGE>
The Company's management team is continuing with the process of implementing its
strategic plan to re-engineer the Company's operations. In January the Company
introduced its sales force to a new solutions selling approach. To provide
products for certain solution packages the Company signed several OEM
agreements. Finally, the Company reorganized around three strategic business
units. The strategic business units will be responsible for their products from
product development through marketing of the products. The Company anticipates
the new solution selling approach and business unit reorganization will take
some time to become effective. In addition, some of the Company's products are
reaching the end of their product life. However, with revenue growth from the
Bytex and BTI acquisitions, the Company expects modest increases in revenues for
1994, and with the addition of several new products including its new Enterprise
Routing Switch family of products, increased revenue growth for 1995.
Gross profit as a percentage of total revenues is 1.1 percent lower for the
three-months and .4 percent lower for the nine-months of 1994 than the
comparable periods in 1993. During second quarter 1994 the Company completed
its movement of the majority of Bytex manufacturing operations to Minneapolis.
The Company believes the cost savings from reducing the number of manufacturing
locations and expected increased in product volume will lead to improvement in
the Company's overall gross profit for 1994.
Research and development costs as a percentage of total revenues increased by
approximately 2 percent for both the third quarter of 1994 and the nine months
of 1994 compared with the same periods in 1993. The third quarter 1994
expenditures were 25 percent higher than for 1993, and for the nine-months, 1994
expenditures were 36 percent higher than in 1993. The Company is devoting a
significant amount of resources to reduce the backlog for new product
development. Through acquisitions, partnerships, and future product
development, the Company is developing the products to meet its commitment to
selling solutions. The Company anticipates it will be required to continue
making significant investments in product developments to keep pace with
technological advancements in the networking field. Total research and
development expenditures for the year 1994 are expected to be greater than for
the year 1993.
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<PAGE>
With the acquisition of Bytex and BTI, selling, general, and administrative
expense are 15 and 18 percent higher for the third quarter and nine-months than
for the same periods in 1993. As a percentage of total revenue the increase is
reflected only in the three-month period. For three months selling, general,
and administrative expense is approximately 35 percent of total revenues in 1994
compared to approximately 33 percent of total revenues in 1993. However, for
the nine months, selling, general, and administrative expense is approximately
33 percent of total revenue for both 1994 and 1993. The Company is continuing
its re-engineering of processes and procedures to improve efficiency throughout
the Company. And in connection with this re-engineering process, additional cost
cutting may be required. Efficiencies from consolidating certain Bytex
operations and continued gains from re-engineering are expected to help the
Company maintain control of operating costs.
Net interest income, including capital gains, was $847,000 and $2,956,000 in
this year's third quarter and nine-months. This compares with $1,536,000 and
$5,840,000 in the respective 1993 periods. The decrease in net interest income
is largely a result of the decrease in average invested cash balances. Cash
balances in 1994 are lower than the same periods in 1993 due to the acquisitions
of BTI during the second quarter of 1993 and Bytex during the fourth quarter of
1993.
The Company's income tax provision was 39.8 and 37.5 percent for the three- and
nine-month periods of 1994, respectively. This compares with effective income
tax rates of 36.8 percent for both the three- and nine month periods of 1993.
The addition of nondeductible goodwill associated with the acquisition of Bytex
caused the Company to increase its estimated effective tax rate for 1994. The
Company reviews the tax rate quarterly and could make adjustments to reflect
changing estimates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments and marketable securities decreased $12.8
million during the nine-months ended September 30, 1994, to a level of $21.0
million. Operating activities, net of the effect of exchange rate changes,
provided $9.6 million. This includes the receipt of $23.9 million from the
Internal Revenue Service for the refund of its assessment of an accumulated
earnings tax and related interest for the years 1983 through 1986 received
during second quarter 1994. The accumulated earnings tax
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<PAGE>
assessment issues for the 1987 and 1988 years are still being disputed. Payment
of the accumulated earnings tax and related interest remain in income tax
deposits for the 1987 and 1988 years. Financing activities, for proceeds from
the sale of common stock through employee plans net of cash used for the
repurchase of common stock, provided $3.8 million. Net investing activities
used approximately $26.2 million, including $8.9 million net cash for the
acquisition of TMD Products, Inc., with the balance for the addition of
equipment, for capitalized software development expenditures, and funding of
officer notes receivable. At September 30, 1994 the Company's accounts
receivable and inventory levels are higher than anticipated. Accounts receivable
collections fell short of expected levels due to the acquisition of Bytex
Corporation and billing delays related to installation of a new billing system.
The 1994 transfer of Bytex Corporation accounts receivable administration to
Company personnel resulted in slower collections. The Company believes its
accounts receivable collections will return to normal levels as Company
personnel gain familiarity with Bytex Corporation customers and its new billing
system. The inventory levels were primarily affected by the previously described
revenue shortfall. As previously noted, the shareholder vote on the Company's
merger proposal, expected to occur in early 1995, will remove uncertainty
regarding the merger proposal allowing the Company to return to more normal
operations.
The Company's principal sources of liquidity are its cash and short-term
investments and marketable securities of $21.0 million at September 30, 1994,
revolving credit agreements with various banks that make approximately $3.0
million of credit available to the Company's foreign subsidiaries, loan value
available from $22.0 million of cash values in company-owned life insurance
policies, and a one year $10.0 million bank line of credit negotiated in March
1994. The Company believes that this liquidity, together with cash flows from
operations, will meet its 1994 operating requirements, fund the payment of its
restructuring accruals of approximately $2.0 million, and provide cash for
additional business opportunities that may become available in 1994.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORK SYSTEMS CORPORATION
(Registrant)
Date: January 6, 1995
/s/ Malcolm D. Reid
-----------------------------------
Malcolm D. Reid
Vice President, Secretary
and General Counsel
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