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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 1995
[ ] 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: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (Zip code)
(415) 694-0650
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
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 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 [ ] NO [X]
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 aggregate market value of registrant's voting stock held by non-affiliates
of registrant, based upon the closing sale price of the Common Stock on March
29, 1996, as reported on the Nasdaq National Market System, was approximately
$57,320,000. Shares of Common Stock held by each officer, director and holder
of 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 29, 1996, 16,396,525 shares of registrant's Common Stock were
outstanding.
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FORM 10-K/A
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items of its Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, as set forth in
the pages attached hereto:
PART I
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT
NOT LIMITED TO STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL
PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES, AND ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS."
OVERVIEW
The Company designs, develops, manufactures and markets hardware and
software products that provide information access to networks of heterogeneous
computers. During 1995, the Company took various actions to reorganize the two
basic components of its business into two separate business units: the Systems
business, consisting of the Company's network computers and related software;
and the Software business, consisting of its lines of PC connectivity software,
electronic messaging software and, initially, its Mariner Internet access
software. In addition, the Company took steps to consolidate the management and
sales organizations of the geographically separated segments of its Software
business and reoriented its software sales strategy toward the increased use of
distributors, VARs and other resellers.
During the third quarter of 1995, the Company began implementing a plan to
restructure its Systems business to reduce operating expenses and improve its
operating performance. The plan included substantial modifications to the
Company's manufacturing processes, phasing out lower margin products, a
reduction in the amount of leased space devoted to the conduct of the Systems
business and a reduction in the number of employees engaged in Systems business
activities. During the third quarter of 1995, the Company recognized charges
totalling $7.5 million relating to the implementation of this plan, which will
continue into 1996. Included in these restructuring charges were amounts
related to the severance of personnel, phase out of certain products and costs
associated with the termination of lease obligations. The charges associated
with the restructuring of the Systems business resulted in operating losses for
the quarter ended September 30, 1995 and for the year ended December 31, 1995.
In 1994, the Company began the development of Mariner, an Internet access
and navigation tool which it intended to market to large enterprises, as well as
to OEMs and VARs. In January 1995, the Company entered into a software
development and licensing agreement with AT&T to develop a custom version of
Mariner for AT&T (the "AT&T Agreement"). See "Item 1. Business -- Recent
Developments." In 1995, the Company recognized license fees totalling $6.8
million under the AT&T Agreement and received $500,000 in fees for non-recurring
engineering costs that offset research and development expenses. In 1995, the
Company also recognized revenues of $300,000 from customers other than AT&T
related to the Mariner product line. The Company anticipates that approximately
$1.7 million in additional revenues associated with the AT&T Agreement will be
recognized in 1996. In light of the Company's inability to develop a long-term
relationship with AT&T, as well as other changes in the Internet market,
including the development of intense price competition among vendors of Internet
access products, the Company in late 1995 determined to sell the Mariner product
line and focus its attention on its core business of providing desktop
information access solutions for network computing environments. In
February 1996, the Company sold the Mariner product line to FTP for
$9.8 million. NCD paid FTP a one-time license fee of $2.5 million for the right
to incorporate Mariner technology into future versions of NCD's hardware and
software products.
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In February 1994, the Company acquired all of the outstanding stock of Z-
Code Software Corp. ("Z-Code"), a developer of electronic mail and messaging
application products for open systems environments across heterogeneous
computing architectures, operating systems and networks. Z-Code currently
operates as a part of the Company's Software business unit, and its operating
results have been included in the Company's consolidated financial statements
from the date of acquisition. The initial consideration for the acquisition was
approximately $3.2 million in cash and 3,000,000 shares of the Company's Common
Stock (including approximately 269,000 shares issuable upon the exercise of
options). Of these shares, approximately 1,183,000 (the "Performance Shares")
were held in escrow and subject to release in whole or in part upon the
achievement of certain financial performance objectives over a 15-month period
that ended in the second quarter of 1995. Additional cash of up to $3.2 million
was contingently payable based on the achievement of these objectives. In July
1994, the Company repurchased 1,361,802 shares of its Common Stock from the
former principal shareholder of Z-Code for approximately $5.0 million and paid
approximately $2.5 million for his contingent rights to an additional 1,041,378
Performance Shares that were held in escrow as well as his contingent right to
receive up to approximately $2.5 million in cash. In the second quarter of
1995, the Company determined that the performance objectives had not been
achieved and that, accordingly, none of the remaining Performance Shares or
contingent cash payments are issuable or payable. In light of disappointing
recent operating results, intensifying competition in this market and other
factors, the Company is evaluating various options including the sale or
discontinuation of the Z-Mail product line. See "Item 1. Business -- Recent
Developments."
On January 31, 1996, the Company issued a press release reporting its
operating results for the fourth quarter and year ended December 31, 1995.
Later in the first quarter, the Company accepted returns of several large
product orders from certain distributors of its software products. In
connection with these product returns, the Company undertook a detailed review
of the sales documentation related to these and other software orders. As a
result of this review, the Company concluded that the Company's financial
statements for the year ended December 31, 1995 would be adjusted to reduce
Software revenues by $2.7 million from revenues as originally reported on
January 31, 1996. Of this amount, $1.4 million represents an adjustment to
fourth quarter revenues. In addition, the Company concluded that revenues for
the second quarter of 1995 would be restated to reduce Software revenues by
$500,000 from revenues as originally reported in July 1995, and revenues for the
third quarter would be restated to reduce Software revenues by $753,000 from
revenues as originally reported in October 1995. The second quarter restatement
and most of the fourth quarter adjustment related to the Company's Z-Mail
electronic messaging software, while the third quarter restatement related
primarily to the Company's PC connectivity software. The effect of this
adjustment and restatements was to decrease second quarter net income from
$440,000, or $0.03 per share, as originally reported, to $85,000, or $0.00 per
share, to increase third quarter net loss from $4.2 million, or $0.26 per share,
as originally reported, to $4.7 million, or $0.30 per share, to decrease fourth
quarter net income from $1.1 million, or $0.07 per share, as originally
reported, to $301,000, or $0.02 per share, and to increase the Company's net
loss for the year ended December 31, 1995 from $2.3 million, or $0.15 per share,
as originally reported, to $4.0 million, or $0.25 per share.
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RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statements of operations as a percentage of net revenues for the periods
indicated. Figures are rounded to the nearest whole percentage, and line items
presenting subtotal and total percentages may therefore differ, due to rounding,
from the sum of the percentages for each line item.
Year Ended December 31,
--------------------------
1995 1994 1993
------ ------ ------
Net revenues:
Systems . . . . . . . . . . . . . . . . . . . . . . 81% 89% 94%
Software. . . . . . . . . . . . . . . . . . . . . . 19 11 6
------ ------ ------
Total net revenues. . . . . . . . . . . . . . 100 100 100
------ ------ ------
Cost of revenues:
Systems . . . . . . . . . . . . . . . . . . . . . . 60 65 62
Software. . . . . . . . . . . . . . . . . . . . . . 2 1 1
------ ------ ------
Total cost of revenues. . . . . . . . . . . . 62 67 63
------ ------ ------
Gross profit . . . . . . . . . . . . . . . . . . . . 38 33 37
------ ------ ------
Operating expenses:
Research and development. . . . . . . . . . . . . . 9 7 5
Marketing and selling . . . . . . . . . . . . . . . 25 22 18
General and administrative. . . . . . . . . . . . . 6 4 4
Charge for acquired in-process research
and development. . . . . . . . . . . . . . . . . . -- 11 --
Charge for business restructuring . . . . . . . . . 3 -- --
------ ------ ------
Total operating expenses. . . . . . . . . . . 43 43 28
------ ------ ------
Operating income (loss). . . . . . . . . . . . . . . (5) (10) 9
Other income, net. . . . . . . . . . . . . . . . . . 1 5 1
------ ------ ------
Income (loss) before income taxes. . . . . . . . . . (4) (5) 10
Provision for income taxes (income tax benefit). . . (1) 2 4
------ ------ ------
Net income (loss). . . . . . . . . . . . . . . . . . (3)% (7)% 6%
------ ------ ------
------ ------ ------
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TOTAL NET REVENUES
Total net revenues were $139 million in 1995, representing a decrease of
13% compared with $161 million in 1994. Total net revenues for 1994 increased
by 12% compared to $144 million in 1993.
Sales to Motorola, Inc. ("Motorola"), which is deemed a related party due
to its ownership of approximately 10% of the Company's Common Stock, accounted
for 7%, 9% and 9% of total net revenues in 1995, 1994 and 1993, respectively.
Motorola is the Company's largest OEM customer and also purchases the Company's
products as an end user customer. The reduction in sales to Motorola accounted
for 19% of the decrease in total net revenues in 1995. The Company does not
have a long-term sales contract with Motorola, which purchases products on an
as-needed basis to satisfy the requirements of its own customers as well as its
internal requirements. The Company believes that sales to Motorola will decline
further during 1996, but is unable to predict future levels of sales to Motorola
over the longer term. Substantial reductions in such sales levels could have a
material adverse effect on the Company's operating results in future periods.
International sales (sales to customers outside North America) accounted
for 33%, 31% and 28% of net revenues for 1995, 1994 and 1993, respectively.
International sales declined by $4.2 million (8%) from 1994 to 1995, principally
reflecting lower Systems sales in Europe. International sales increased by
$10.1 Million (25%) from 1993 to 1994, primarily due to several large sales of X
terminals to Barclays Bank, which accounted for 8% of total net revenues for
1994, compared to 1% in 1993. The Company expects that international sales will
continue to represent a significant portion of total net revenues.
SYSTEMS REVENUES
Systems revenues consist primarily of revenues from the sale of network
computers, or X terminals, and, to a lesser extent, revenues from the licensing
of related network computing system software and the sale of customer support
services. Systems revenues were $112 million for 1995, compared to $144 million
for 1994 and $135 million for 1993. The 22% decline in Systems revenues from
1994 to 1995 was due to a combination of factors, including a decline in the
overall market demand for X terminal products during 1995, a decline in the
average selling prices of the Company's products due to intense price
competition, the introduction of lower-priced Explora network computers, and new
product introductions by certain of the Company's competitors. In addition,
Systems revenues were adversely affected by product transition difficulties
related to the introduction of the Explora product line in the fourth quarter of
1995, including the loss of sales of some older products due to inventory
shortages. Systems revenues increased by 6% from 1993 to 1994, primarily due to
large shipments to several end-user customers, which accounted for approximately
24% of total net revenues for the year. The introduction of new network
computer products also contributed to the growth in Systems revenues during
1994. The Company's HMX product line, the first color X terminal based on
64-bit RISC architecture, was introduced late in 1994 and contributed
approximately 4% of total net revenues for the year.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the development and
licensing of PC connectivity software, electronic mail and messaging software,
and Internet connectivity software. Software revenues were $27 million for
1995, representing an increase of 57% compared to 1994. Software revenues for
1994 increased by 87% compared to 1993. The Company recorded revenue growth in
1995 in both its PC connectivity and Z-Mail electronic messaging product lines.
However, the growth in total Software revenues was primarily associated with the
AT&T Agreement entered into in January 1995. Net revenues related to the AT&T
Agreement, and other revenues related to the Mariner product line, totalled $7.1
million in 1995. Revenues related to the Z-Mail product line, which the Company
is contemplating selling or discontinuing, were $5.1 million in 1995. Exclusive
of revenues related to the Mariner and Z-Mail product lines, Software revenues
for 1995 would have increased by 8% over 1994. Among the factors adversely
affecting Software revenues in 1995 were the introduction of new products by
competitors,
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delays in the Company's new product introductions and longer sales cycles.
These factors particularly affected fourth quarter Software revenues which
(exclusive of AT&T-related revenues) declined to $4.0 million from $5.8 million
in the third quarter. Software revenues increased in 1994 over 1993 primarily
due to a new version of PC-Xware, the Company's PC-UNIX integration software,
which was introduced in July 1994, as well as the addition of revenues from
Z-Mail products subsequent to the Z-Code acquisition in February 1994.
GROSS MARGIN ON SYSTEMS REVENUES
The Company's gross profit margin on Systems revenues was 26%, 27% and 34%
for the years ended December 31, 1995, 1994 and 1993, respectively. The decline
in Systems gross margin from 1994 to 1995 was primarily due to a $2.7 million
charge to cost of revenues associated with the restructuring of the Systems
business. This charge related to products in inventory that are being phased
out as part of the restructuring. Exclusive of this charge, Systems gross
margin would have been 28% for 1995. Systems gross margins were adversely
affected by intense price competition, the introduction of the lower priced,
lower-margin Explora network computers and increases in certain component costs.
The Company expects Systems gross margins to continue to be affected by these
factors in 1996. The decline in Systems gross margin from 1993 to 1994 was
principally due to aggressive pricing policies on X terminal products in
response to increasingly intense competition, both from other X terminal vendors
and from providers of alternative desktop solutions and, to a lesser degree,
increased manufacturing costs.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross profit margin on Software revenues was 88%, 86% and 75%
for the years ended December 31, 1995, 1994 and 1993, respectively. The
improvement in Software gross margin from 1994 to 1995 was due to the relatively
higher margin revenues related to the AT&T Agreement. The increase in Software
gross margin from 1993 to 1994 reflected the efficiencies associated with the
substantial increase in Software revenues.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $13.1 million, $10.5 million
and $7.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The increases were primarily attributable to increased Software
product development efforts and reflect the inclusion of the R&D expenses of the
Company's Z-Mail business following the Z-Code acquisition in February 1994.
Included in R&D expenses in 1995 was $2.1 million in costs and expenses
associated with the AT&T Agreement and the commercialization of the Mariner
product line. The increase in Software R&D expenses was partially offset by the
capitalization of certain costs incurred in the development of new e-mail
products, including Z-Mail for Windows and Macintosh, and new versions of
PC-Xware and NCDware. These capitalized costs were $686,000, $945,000 and
$324,000 in 1995, 1994 and 1993, respectively. The increase in R&D expenses in
1994 was also due in part to additions to the engineering staff of the Systems
business. As a percentage of net revenues, R&D expenses were 9%, 7% and 5%, for
the years ended December 31, 1995, 1994 and 1993, respectively, reflecting the
combined impact of increased spending over the three-year period and lower net
revenues in 1995. The Company plans to continue investing in research and
development in order to improve its competitive position in the market.
However, the amount of such expenses may fluctuate in future periods.
MARKETING AND SELLING
Marketing and selling expenses were $34.1 million, $34.7 million and $26.1
million for the years ended December 31, 1995, 1994 and 1993, respectively. The
decrease from 1994 to 1995 was primarily related to lower payroll costs
associated with reduced permanent and contract personnel, in addition to lower
costs associated with commissions and other performance-related compensation.
The increase from 1993 to 1994 was largely due to an increased emphasis on
selling and marketing programs during 1994, which included an increase in the
staffing of the Company's sales and sales support organizations, the
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addition of expenses related to the Z-Mail product line beginning in February
1994 and higher commission expense related to higher sales volumes. As a
percentage of total net revenues, marketing and selling spending was 25%, 22%
and 18%, for the years ended December 31, 1995, 1994 and 1993, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses were $8.5 million, $6.7 million
and $5.9 million, for the years ended December 31, 1995, 1994 and 1993,
respectively. The increase from 1994 to 1995 was primarily related to higher
consulting costs and compensation expenses. As a percentage of net revenues,
G&A spending was 6%, 4% and 4%, for the years ended December 31, 1995, 1994 and
1993, respectively, reflecting the combined impact of increased spending over
the three-year period and lower net revenues in 1995.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's acquisition of Z-Code in February 1994,
approximately $15.0 million of the initial consideration was allocated to the
value of in-process research and development. This in-process research and
development had not achieved technological feasibility at the time of the
acquisition and, therefore, did not qualify for capitalization under generally
accepted accounting principles. Accordingly, the portion of the purchase price
allocated to the value of in-process research and development was charged to
operations in the first quarter of 1994. Substantially all of the $5.0 million
paid to the former principal shareholder of Z-Code in July 1994 in exchange for
his contingent stock and cash rights was also allocated to the in-process
research and development acquired in the Z-Code acquisition and charged to
operations in the third quarter of 1994.
NET INTEREST INCOME
Interest income net of interest expense was $1.4 million, $0.9 million and
$0.9 million for 1995, 1994 and 1993, respectively. The increase from 1994 to
1995 was primarily due to higher interest income generated by higher average
cash balances in addition to slightly lower interest expense related to
declining capital lease obligations. The modest increase from 1993 to 1994 was
due to reduced interest expense on declining capital lease obligations which was
partially offset by lower interest income earned on lower average cash balances.
OTHER INCOME
Other income includes non-operating income, net of non-operating expense.
Other income in 1994 consisted primarily of gains realized on the Company's sale
of all of its shares of NetManage, Inc. common stock in an underwritten public
offering in February 1994.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax benefit on net losses before income
taxes during the year ended December 31, 1995. This compares to a provision for
income taxes during 1994. The provision for income taxes was made, despite a
pre-tax loss, as a result of the charges for in-process research and development
associated with the Z-Code acquisition. Since the acquisition was a tax-free
reorganization, the related charges were not deductible for income tax purposes.
The tax provision rate for the year ended December 31, 1993 was 37%.
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OPERATING INCOME (LOSS)
The Company's Systems business accounted for an operating loss of $7.2
million in 1995 and operating income of $2.2 million and $12.7 million in 1994
and 1993, respectively. Exclusive of restructuring-related charges of $7.5
million, the Systems business would have had a slight operating profit in 1995.
Reductions in operating income were primarily related to continued reductions in
gross margins.
The Company's Software business accounted for operating losses of $.4
million and $17.7 million in 1995 and 1994, respectively, and an operating
profit of $.2 million in 1993, inclusive of a $17.5 million charge related to
acquired research and development in 1994.
FINANCIAL CONDITION
Total assets as of December 31, 1995 decreased by $3.5 million, or 3%, from
December 31, 1994. The change in total assets reflected a decrease in
inventories of $9.2 million, attributable primarily to lower business volumes.
This decrease was partially offset by growth in cash and short-term investments
of $4.9 million, generated from operations. During 1995, the Company
repurchased an aggregate of approximately 571,000 shares of its Common Stock for
a total of $4.0 million pursuant to a repurchase program that was in effect from
October 1994 through October 1995.
Total liabilities as of December 31, 1995 increased by $.4 million, or 1%,
from December 31, 1994. The increase was primarily due to deferred revenue
associated with the AT&T Agreement, and an increase in accrued expenses,
primarily due to accruals related to the restructuring of the Systems business.
These increases were offset by a decrease in accounts payable balances related
to reduced business volumes.
CAPITAL REQUIREMENTS
Capital spending requirements for 1996 are estimated at approximately $3.5
million, and at December 31, 1995, the Company had commitments for material
capital expenditures of approximately $250,000. These commitments are primarily
related to information technology and facilities. Cash payments associated with
the restructuring of the Systems business during 1995 totaled approximately $1.5
million, and it is anticipated that approximately $2.5 million in related cash
outlays will be required during 1996.
LIQUIDITY
At December 31, 1995, the Company's primary sources of liquidity consisted
of cash and equivalents and short-term investments totalling $36.2 million. The
Company has a $7.0 million bank line of credit; however, as a result of its loss
for the year ended December 31, 1995, the Company was in default under certain
financial covenants in its credit agreement as of December 31, 1995, and,
accordingly, its line of credit was unavailable.
In January 1996, the Company sold its Mariner product line to FTP for $7.3
million in cash, net of a one-time license fee paid to FTP to retain certain
rights to Mariner technology.
The Company believes that its existing sources of liquidity are sufficient
to meet operating cash requirements and capital lease repayment obligations at
least thorough the next twelve months.
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FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
EVOLVING NETWORK COMPUTING MARKET
The Company derives a majority of its revenues from the sale of network
computer products, or X terminals, and related software. During the past
several years, the Company and other manufacturers of network computing systems
and products have experienced intense competition from alternative desktop
computing products, particularly personal computers, which has slowed the growth
and development of the network computing market. Until recently, the absence of
X protocol support from Microsoft, combined with the proliferation of
off-the-shelf Windows-based application software, constituted an obstacle to the
expansion of the network computing model into Windows-based environments. The
introduction of the Company's WinCenter Pro multi-user Windows application
server software and new, lower-priced network computers have allowed the Company
to offer network computing systems that provide users with access to Windows
applications, although sales of these new products have been limited to date.
The Company's future success will depend in substantial part upon increased
acceptance of the network computing model and the successful marketing of the
Company's new network computing products. There can be no assurance that the
Company's new network computing products will compete successfully with
alternative desktop solutions or that the network computing model will be widely
adopted in the rapidly evolving desktop computer market. The failure of new
markets to develop for the Company's network computing products would have a
material, adverse effect on the Company's business, operating results and
financial condition. See "Item 1. Business -- Industry Background" and
"Business -- Markets and Applications."
COMPETITION
The desktop computer and information access markets are characterized by
rapidly changing technology and evolving industry standards. The Company
experiences significant competition from other network computer manufacturers,
suppliers of personal computers and workstations and software developers.
Competition within the network computing market has intensified over the past
several years, resulting in price reductions, reduced profit margins and the
loss of the Company's leading market share position in the X terminal market.
This competition has adversely affected the Company's operating results. In
addition, intense competition from alternative desktop computing products,
particularly personal computers, has resulted in a reduction in demand for X
terminal products. The Company expects this intense competition to continue and
there can be no assurance that the Company will be able to continue to compete
successfully against current and future competitors as the desktop computer
market evolves and competition increases. The Company's software products also
face substantial competition from software vendors that offer similar products,
including several large software companies. See "Item 1. Business --
Competition."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied significantly, particularly on
a quarterly basis, as a result of a number of factors, including general
economic conditions affecting industry demand for computer products, the timing
and market acceptance of new product introductions by the Company and its
competitors, the timing of significant orders from and shipments to large
customers, periodic changes in product pricing and discounting due to
competitive factors, and the availability and pricing of key components, such as
video monitors, integrated circuits and electronic sub-assemblies, some of which
require substantial order lead times. The Company's operating results may
fluctuate in the future as a result of these and other factors, including the
Company's success in developing and introducing new products, its product and
customer mix, the level of competition which it experiences and its ability to
develop and maintain strategic business alliances. In addition, the Company
operates with a relatively small backlog. Revenues and operating results
therefore generally depend on the volume and timing of
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orders received which are difficult to forecast and which may occur
disproportionately during any given quarter or year. The Company's expense
levels are based in part on its forecast of future revenues. If revenues are
below expectations, the Company's operating results may be adversely affected.
The Company has experienced an increasingly disproportionate amount of shipments
occurring in the last month of its fiscal quarters. This trend increases the
risk of material quarter-to-quarter fluctuations in the Company's revenues and
operating results. In the past, the Company has experienced reduced orders
during the first and third quarters due to buying patterns common in the
computer industry. In addition, sales in Europe have been adversely affected in
the third calendar quarter, when many European customers reduce their business
activities.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS
The markets for the Company's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The Company's future results will
depend to a considerable extent on its ability to continuously develop,
introduce and deliver in quantity new hardware and software products that offer
its customers enhanced performance at competitive prices. The development and
introduction of new products is a complex and uncertain process requiring
substantial financial resources and high levels of innovation, accurate
anticipation of technological and market trends and the successful and timely
completion of product development. Once a hardware product is developed, the
Company must rapidly bring it into volume production, a process that requires
accurate forecasting of customer requirements in order to achieve acceptable
manufacturing costs. The introduction of new or enhanced products also requires
the Company to manage the transition from older, displaced products in order to
minimize disruption to customer ordering patterns, avoid excessive levels of
older product inventories and insure that adequate supplies of new products can
be delivered to meet customer demand. As the Company is continuously engaged in
this product development and transition process, its operating results may be
subject to considerable fluctuation, particularly when measured on a quarterly
basis. The inability to finance important research and development projects,
delays in the introduction of new and enhanced products, the failure of such
products to gain market acceptance, or problems associated with new product
transitions could adversely affect the Company's operating results. See "Item
1. Business - Industry Background" and "Business -- Research and Development."
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
The Company relies substantially on independent distributors and resellers
for the marketing and distribution of its products, particularly its Software
products. During 1995, the Company consolidated its Software sales operations
by creating a single organization devoted to the sale of the Company's PC
connectivity and messaging software and re-oriented its Software sales strategy
toward the increased use of distributors, VARs and other resellers. In late
1995 and early 1996, the Company has experienced significant returns of its
Software products from its distributors. There can be no assurance that the
Company will not continue to experience similar problems. In addition, there
can be no assurance that the Company's distributors and resellers will continue
their current relationships with the Company or that they will not give higher
priority to the sale of other products, which could include products of the
Company's competitors. A reduction in sales effort or discontinuance of sales
of the Company's products by its distributors and resellers could lead to
reduced sales and could adversely affect the Company's operating results. In
addition, there can be no assurance as to the continued viability or the
financial stability of the Company's distributors and resellers, the Company's
ability to retain its existing distributors and resellers or the Company's
ability to add distributors and resellers in the future. See "Item 1. Business
- -- Marketing and Sales."
10
<PAGE>
RELIANCE ON INDEPENDENT CONTRACTORS
The Company relies on independent contractors for the sub-assembly of the
Company's network computer products. The Company's reliance on these
independent contractors limits its control over delivery schedules, quality
assurance and product costs. In addition, a number of the Company's independent
suppliers are located abroad. The Company's reliance on these foreign suppliers
subjects the Company to risks such as the imposition of unfavorable governmental
controls or other trade restrictions, changes in tariffs and political
instability. The Company currently obtains all of the sub-assemblies used for
its network computer products (consisting of all major components except
monitors and cables) from a single supplier located in Thailand. Any
significant interruption in the supply of sub-assemblies from this contractor
would have a material adverse effect on the Company's business and operating
results. Disruptions in the provision of components by the Company's other
suppliers, or other events that would require the Company to seek alternate
sources of supply, could also lead to supply constraints or delays in delivery
of the Company's products and adversely affect its operating results. The
operations of certain of the Company's foreign suppliers were briefly disrupted
during 1992 due to political instability in Thailand. See "Item. 1. Business --
Manufacturing and Supplies."
INTERNATIONAL SALES
A majority of the Company's international sales are denominated in U.S.
dollars, and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in those markets.
Over the past two years, a significant portion of international revenues have
been derived from sales to a customer in the United Kingdom that have been
denominated in pound sterling and sales denominated in foreign currencies may
increase in the future. These sales are subject to exchange rate fluctuations
which could affect the Company's operating results negatively or positively,
depending on the value of the U.S. dollar against the other currency. Where the
Company believes foreign currency-denominated sales could pose significant
exposure to exchange rate fluctuations, the Company acquires forward exchange
contracts in an effort to reduce such exposure. International sales and
operations may also be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of technology,
political instability, trade restrictions, changes in tariffs and difficulties
in staffing and managing international operations and managing accounts
receivable. In addition, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. There can be no assurance that these factors will
not have an adverse effect on the Company's future international sales and,
consequently, on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees. Moreover,
partially as a consequence of the restructuring of its business in 1995, the
Company has experienced significant turnover of management personnel,
particularly in its finance and sales organizations. The Company believes that
its future success will also depend in large part on its ability to attract and
retain highly-skilled engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, integrating and retaining such
personnel. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, operating results or financial
condition.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated significantly
over the past several years and is subject to material fluctuations in the
future in response to announcements concerning the Company or its competitors or
customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general conditions
in the computer industry, developments in the
11
<PAGE>
financial markets and other factors. In particular, shortfalls in the Company's
quarterly operating results from historical levels or from levels forecast by
securities analysts could have an adverse effect on the trading price of the
Common Stock. The Company may not be able to quantify such a quarterly
shortfall until the end of the quarter, which could result in an immediate and
adverse effect on the Common Stock price. In addition, the stock market has,
from time to time, experienced extreme price and volume fluctuations that have
particularly affected the market prices for technology companies and which have
been unrelated to the operating performance of the affected companies. Broad
market fluctuations of this type may adversely affect the future market price of
the Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ......................................... 13
Consolidated Balance Sheets as of December 31, 1995 and 1994 ......... 14
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993 ................................ 15
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993 ................................ 16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 ................................ 17
Notes to Consolidated Financial Statements ........................... 18
Supplementary Data: Quarterly Financial Data (Unaudited) ............ 31
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Network Computing Devices, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Jose, California
May 14, 1996
13
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31,
-----------------------
1995 1994
------- --------
Assets:
Current assets:
Cash and cash equivalents $13,364 $7,407
Short-term investments 22,786 23,813
Accounts receivable, net of allowances of
$1,976 and $1,224 at December 31, 1995
and 1994, respectively 28,591 31,743
Inventories 14,398 23,622
Prepaid expenses and other current assets 6,863 3,860
------- --------
Total current assets 86,002 90,445
Property and equipment, net 6,749 6,052
Other assets 4,786 4,532
------- --------
Total assets $97,537 $101,029
------- --------
------- --------
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $13,893 $17,636
Accrued expenses 7,429 6,855
Current portion of capital lease obligations 1,246 1,346
Income taxes payable 2,666 833
Deferred revenue 3,298 973
------- --------
Total current liabilities 28,532 27,643
Long-term portion of capital lease obligations 991 1,497
Commitments and contingencies
Shareholders' equity:
Undesignated preferred stock: 3,000,000 shares
authorized, none issued and outstanding - -
Common stock, no par value: 30,000,000 shares
authorized, 16,118,800 and 15,636,513 issued
and outstanding at December 31, 1995 and 1994,
respectively 63,543 63,420
Net unrealized gain on securities 31 -
Retained earnings 4,440 8,469
------- --------
Total shareholders' equity 68,014 71,889
------- --------
Total liabilities and shareholders' equity $97,537 $101,029
------- --------
------- --------
See accompanying notes.
14
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Systems $112,388 $143,673 $135,071
Software 26,940 17,198 9,194
-------- -------- --------
Total net revenues 139,328 160,871 144,265
-------- -------- --------
Cost of revenues:
Systems 83,283 104,706 89,225
Software 3,102 2,413 2,312
-------- -------- --------
Total cost of revenues 86,385 107,119 91,537
-------- -------- --------
Gross profit 52,943 53,752 52,728
-------- -------- --------
Operating expenses:
Research and development 13,119 10,486 7,850
Marketing and selling 34,147 34,653 26,059
General and administrative 8,502 6,668 5,894
Charge for acquired
in-process research and
development - 17,452 -
Charge for business
restructuring 4,832 - -
-------- -------- --------
Total operating expenses 60,600 69,259 39,803
-------- -------- --------
Operating income (loss) (7,657) (15,507) 12,925
Interest income 1,557 1,198 1,227
Interest expense (198) (290) (373)
Other income (expense) 93 7,314 (21)
-------- -------- --------
Income (loss) before
income taxes and
cumulative effect
of accounting change (6,205) (7,285) 13,758
Provision for income
taxes (income tax
benefit) (2,176) 3,558 5,090
-------- -------- --------
Net income (loss) before
cumulative effect of
accounting change (4,029) (10,843) 8,668
Cumulative effect of
accounting change - - 573
-------- -------- --------
Net income (loss) ($4,029) ($10,843) $9,241
-------- -------- --------
-------- -------- --------
Primary earnings
per share:
Income (loss) before
cumulative effect
of accounting
change ($0.25) ($0.68) $0.55
Cumulative effect of
accounting change - - 0.04
-------- -------- --------
Net income (loss)
per share ($0.25) ($0.68) $0.59
-------- -------- --------
-------- -------- --------
Shares used in per
share computation 15,832 15,908 15,587
-------- -------- --------
-------- -------- --------
Fully diluted earnings
per share:
Income (loss) before
cumulative effect of
accounting change ($0.25) ($0.77) $0.55
Cumulative effect of
accounting change - - 0.04
-------- -------- --------
Net income (loss)
per share ($0.25) ($0.77) $0.59
-------- -------- --------
-------- -------- --------
Shares used in per
share computation 15,832 16,039 15,587
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
15
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating actitivites:
Net income (loss) ($ 4,029) ($ 10,843) $ 9,241
Reconciliation to cash provided by (used in) operating activities:
Acquired in-process research and development - 17,452 -
Gain on sale of NetManage, Inc. common stock - (7,237) -
Non-cash restructuring charges 2,474 - -
Depreciation and amortization 4,505 4,334 3,653
Deferred income taxes (2,227) - 940
Cumulative effect of accounting change - - (573)
Changes in:
Accounts receivable, net 3,152 (2,502) (9,336)
Inventories 9,224 (8,763) 496
Prepaid expenses and other current assets (1,450) 322 776
Accounts payable (3,743) 9,155 (8,917)
Accrued expenses (1,900) (444) 203
Income taxes payable 1,833 (266) (21)
Deferred revenue 2,325 973 -
---------- ---------- ----------
Cash provided by (used in) operating activites 10,164 2,181 (3,538)
Cash flows from investing activities:
Purchases of short-term investments (192,090) (364,950) (121,626)
Sales and maturities of short-term investments 193,148 369,890 127,322
Changes in other assets (200) (490) (516)
Capitalization of software costs (436) (945) (324)
Acquisition of Z-Code Software Corp., net of cash acquired - (3,104) -
Investment in NetManage, Inc. - - (2,000)
Proceeds from sale of NetManage, Inc. common stock - 9,237 -
Purchases of property and equipment (3,217) (2,736) (2,450)
---------- ---------- ----------
Cash provided by (used in) investing activities (2,795) 6,902 406
Cash flows from financing activities:
Principal payments on capital lease obligations (1,535) (1,497) (1,242)
Repurchases of common stock (4,027) (8,388) -
Proceeds from issuance of stock, net 4,150 1,330 2,167
---------- ---------- ----------
Cash provided by (used in) financing activities (1,412) (8,555) 925
Increase (decrease) in cash and equivalents 5,957 528 (2,207)
Cash and equivalents:
Beginning of period 7,407 6,879 9,086
---------- ---------- ----------
End of period $ 13,364 $ 7,407 $ 6,879
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Noncash investing and financing activities:
Common stock issued for and accrued direct
expenses of Z-Code acquisition $ - $ 10,833 $ -
---------- ---------- ----------
---------- ---------- ----------
Property and equipment acquired under capital leases $ 929 $ 1,022 $ 1,599
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
16
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Net Unrealized Total
Common Stock Gain on Retained Shareholders'
---------------------
Shares Amount Securities Earnings Equity
------ ------ -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 14,700 $55,058 $ - $10,071 $65,129
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 352 2,167 - - 2,167
Net income - - - 9,241 9,241
------- -------- -------- -------- --------
Balances at December 31, 1993 15,052 57,225 - 19,312 76,537
Issuance of common stock for the
acquisition of Z-Code 1,547 10,833 - - 10,833
Repurchase of common stock from
principal Z-Code shareholder (1,362) (5,022) - - (5,022)
Repurchase of common stock (219) (946) - - (946)
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 619 1,330 - - 1,330
Net loss - - - (10,843) (10,843)
------- -------- -------- -------- --------
Balances at December 31, 1994 15,637 63,420 - 8,469 71,889
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 1,053 4,150 - - 4,150
Repurchase of common stock (571) (4,027) - - (4,027)
Net unrealized gain on securities - - 31 - 31
Net loss - - - (4,029) (4,029)
------- -------- -------- -------- --------
Balances at December 31, 1995 16,119 $63,543 $31 $4,440 $68,014
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
See accompanying notes.
17
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Network Computing Devices, Inc. (the Company) was
incorporated on February 17, 1988. The Company designs, develops, manufactures
and markets hardware and software products that provide information access to
networks of computers. The Company's broad range of X terminals offer graphical
multi-window interfaces for users in various operating system environments via
the industry-standard X Window System. The Company's Systems division is a
worldwide supplier of Internet-based enterprise-wide desktop hardware products,
and specializes in addressing connectivity issues through the integration of
high-powered software and innovative desktop products. The Company's Software
division provides desktop information access solutions for network computing
environments, and is a supplier of software products that include PC-Xware
server software that integrates Microsoft Windows- and DOS-based PCs into X/UNIX
networks, and Z-Mail, a cross-platform electronic-mail and messaging software
product for open systems environments. Please see also Part I, Item 1 of this
Annual Report on Form 10-K.
CONSOLIDATION The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The Company has
invested in a joint venture in Japan (Nihon NCD), which is accounted for at
cost. The functional currency for the Company and its subsidiaries is the U.S.
Dollar. All significant intercompany balances and transactions have been
eliminated.
CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with a purchased maturity date of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS Short-term investments are carried at market value
(amortized cost, net of any unrealized gains or losses) in accordance with SFAS
115, and are primarily comprised of highly liquid debt instruments with an
original maturity date of greater than three months.
INVENTORIES Inventories are stated at the lower of standard cost, which
approximates actual cost on a first-in, first-out basis, or market (net
realizable value).
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment
under capital leases is stated at the lower of fair value or the present value
of the minimum lease payments at the inception of the lease. Depreciation is
computed using the straight-line method. Useful lives of three to five years
are used for equipment and furniture; demonstration equipment is depreciated
over an 18-month period. Leasehold improvements and equipment under capital
leases are amortized over the shorter of the lease term or the useful lives of
the respective assets.
REVENUE RECOGNITION Revenue on the sale of systems is generally recognized upon
shipment, net of estimated allowances for product returns. Revenue from
licensing of software products is generally recognized upon shipment, provided
that no significant obligations remain and collection of the resulting
receivable is deemed probable. Product warranty costs and an allowance for
sales returns are accrued at the time the related revenues are recognized.
Service contract revenues are recognized ratably over the contract period.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to
engineering expense when incurred. Costs incurred in the development of new
software products and enhancements to existing software products are also
expensed as incurred until the technological feasibility of the product has been
established. After technological feasibility has been established, any
additional costs are capitalized in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86. Capitalized software technology is
amortized to cost of goods sold over eighteen months to three years, based on
the expected life of the product.
18
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES Under the asset and liability method of SFAS No. 109, "Accounting
for Income Taxes," deferred tax assets and liabilities are established to
recognize the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company adopted SFAS No. 109 effective January 1, 1993 and
has reported the cumulative effect of that change in the method of accounting
for income taxes in the 1993 consolidated statement of operations.
USE OF ESTIMATES Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
PER SHARE INFORMATION Per share information is computed using the weighted
average number of common and dilutive common equivalent shares outstanding. For
primary and fully diluted earnings per share, common equivalent shares consist
of the incremental shares issuable upon the assumed exercise of dilutive stock
options (using the treasury stock method). For 1994, common equivalent shares
were adjusted by assuming that all financial performance objectives had been
achieved, the maximum number of performance shares (see Note 9) had been issued,
and the maximum amount of cash contingently payable had been paid, with a
significant portion of the cash and the value of the performance shares
allocated to in-process research and development and charged to operations at
the beginning of the year.
RECLASSIFICATION Certain items in the consolidated financial statements of
prior years have been reclassified to conform to the current year's
presentation.
RECENT PRONOUNCEMENTS In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 will be effective for fiscal years beginning after December 15, 1995, and
will require that the Company either recognize in its financial statements costs
related to its employee stock-based compensation plans, such as stock option and
stock purchase plans, or make pro forma disclosures of such costs in a footnote
to the financial statements. The Company expects to continue to use the
intrinsic value based method of Accounting Principles Board Opinion No. 25, as
allowed under SFAS No. 123, to account for all of its employee stock-based
compensation plans. Therefore, in its consolidated financial statements for
fiscal 1996, the Company will make the required pro forma disclosures in a
footnote to the financial statements. SFAS No. 123 is not expected to have a
material effect on the Company's results of operations or financial position.
NOTE 2. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
cumulative effect of adopting SFAS No. 115 was not significant. Under SFAS No.
115, the Company has classified its short-term investments as available-for-
sale. Such securities are stated at market and unrealized holding gains and
losses, net of the related tax effect, are excluded from earnings and are
reported as a separate component of shareholders' equity until realized. A
decline in the market value of the security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a new cost
basis for the security.
19
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term investments consisted of the following at December 31, 1995 (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Corporate debt securities $11,486 $37 $ -- $11,523
Municipal notes/bonds 4,016 -- -- 4,016
Commercial paper 4,200 -- -- 4,200
U.S. Treasury Notes 3,040 7 -- 3,047
------- --- ----- -------
$22,742 $44 $ -- $22,786
------- --- ----- -------
------- --- ----- -------
The maturities of available-for-sale securities at December 31, 1995 were as
follows (in thousands)
Within One to
One Year Two Years
-------- ---------
Corporate debt securities $7,240 $4,283
Municipal notes/bonds 4,016 --
Commercial paper 4,200 --
------- ------
U.S. Treasury Notes 3,047 --
$18,503 $4,283
------- ------
------- ------
Short-term investments consisted of the following at December 31, 1994 (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Corporate debt securities $12,233 $ -- $ -- $12,233
Municipal notes/bonds 10,458 -- -- 10,458
Commercial paper 1,098 -- -- 1,098
Tax exempt money market fund 24 -- -- 24
------- ----- ----- -------
$23,813 $ -- $ -- $23,813
------- ----- ----- -------
------- ----- ----- -------
20
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
1995 1994
---- ----
Inventories at December 31 consist of (in
thousands):
Purchased components and sub-assemblies $ 9,548 $17,282
Work in process 1,814 1,121
Finished goods 3,036 5,219
------- -------
$14,398 $23,622
------- -------
------- -------
1995 1994
---- ----
Property and Equipment at December 31 consist of
(in thousands):
Machinery and equipment $15,897 $12,160
Demonstration equipment 3,933 2,977
Office furniture and fixtures 2,210 2,957
Leasehold improvements 1,683 1,483
------- -------
23,723 19,577
Less accumulated depreciation
and amortization 16,974 13,525
------- -------
$ 6,749 $ 6,052
------- -------
------- -------
Included in property and equipment is approximately $3,072,000 and $4,891,000 of
equipment under capital leases at December 31, 1995 and 1994, respectively.
Accumulated amortization related to this equipment is approximately $1,360,000
and $3,047,000 at December 31, 1995 and 1994, respectively.
1995 1994
---- ----
Accrued expenses at December 31 consist of (in
thousands):
Payroll-related costs $3,533 $3,582
Restructuring 2,474 -
Warranty 510 834
Other accrued expenses 912 2,439
------ ------
$7,429 $6,855
------ ------
------ ------
Income taxes paid were $204,000, $3,828,000, and $3,616,000 for 1995, 1994, an
1993, respectively. Interest paid was $46,000, $294,000, and $373,000 for 1995,
1994, and 1993, respectively.
NOTE 4. BUSINESS RESTRUCTURING
In the third quarter of 1995, the Company determined that it was appropriate to
undertake a strategic restructuring plan to realign and consolidate its software
businesses and reduce operating expenses, and improve the operating performance
of its X-Terminal, or "Systems," operations in reaction to intense competition
and slowness in the X terminal market. The Company began implementing this plan
during the third quarter of 1995, and has streamlined its Systems operations as
a result, including the termination of approximately fifty employees associated
with such operations.
21
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plan's major components include:
- modifying the method of manufacturing and materials management to
a "build-to-order" paradigm in order to increase the efficiency
with which the Company receives product orders and manufactures
and delivers products to its customers;
- phasing out X-Terminal products that were currently yielding, or
were anticipated to yield, profit margins that did not meet
certain minimum requirements of the Company;
- reducing and consolidating facilities devoted to the conduct of
the Systems portion of the business through a combination of
sublease activities or negotiating early exits to existing lease
agreements; and
- reducing the number of employees engaged in Systems business
activities to a level deemed to be essential to reengineer the
business for improved operating performance.
It is anticipated that the plan for restructuring will continue into 1996.
The costs associated with restructuring the business were accrued during the
third quarter of 1995, the period in which the restructuring plan was finalized
by the Company's management. Such costs have been segregated into two
fundamentally different classifications within the Statements of Operations for
the year ended December 31, 1995: cost of systems revenues, and operating
expenses. Included in cost of systems revenues is $2.7 million related to
products in inventory that are being phased out as part of the business
restructuring. Included in operating expenses under the caption, "Charge for
business restructuring" is $4.8 million related to severance of employees, the
write-down of assets impaired by the restructuring plan, and exit costs for
leased facility obligations.
A description of the types and amounts (in thousands) of accruals made for
restructuring costs in 1995 is presented below.
Initial December 31,
Amounts Asset Cash 1995
Accrued Write-offs Payments Balance
------- ---------- -------- ------------
Reserve for the write-down of
phase-out inventories $2,706 ($2,706) $ - $ -
Employee termination benefits 1,580 - (842) 738
Exiting facilities -related
obligations 2,256 - (701) 1,555
Asset impairment & other 996 (815) - 181
------ -------- -------- ------
Total $7,538 ($3,521) ($1,543) $2,474
------ -------- -------- ------
------ -------- -------- ------
NOTE 5. SHAREHOLDERS' EQUITY
PREFERRED STOCK Prior to June 1992, the Company was authorized to issue
9,023,636 shares of Preferred Stock, all of which were outstanding. Upon
closing of the Company's initial public offering of 2,500,000 shares of common
stock in June 1992, all outstanding shares of Preferred Stock automatically
converted into shares of common stock on a one-for-one basis. Thereafter, the
Company's Articles of Incorporation were amended to increase the total number of
authorized shares of common stock to 30,000,000 and to authorize 3,000,000
shares of undesignated Preferred Stock.
STOCK PURCHASE PLAN In 1992, the Company established the 1992 Employee Stock
Purchase Plan and has reserved 800,000 shares of common stock for issuance
thereunder. The plan permits eligible employees to purchase
22
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock through payroll deductions at a purchase price equal to the lesser
of 85% of the fair market value of such shares at the beginning of each six-
month offering period (or the commencement of the employee's participation, if
later) or the end of such offering period. As of December 31, 1995, 675,869
shares have been issued under this plan, of which 176,178 were issued in 1995.
STOCK REPURCHASE PROGRAM In October 1994, the Company's Board of Directors
adopted a program to repurchase from time to time at management's discretion up
to 1,500,000 shares of the Company's common stock on the open market at
prevailing market prices during the twelve month period ending October 31, 1995.
Repurchases will be made under the program using the Company's own cash
resources. As of December 31, 1995, the Company had repurchased 790,000 shares
for a total cost of $4,973,000.
STOCK OPTION PLANS At December 31, 1995, the Company had reserved 4,405,850
shares and 200,000 shares of common stock for issuance under its 1989 Stock
Option Plan and the 1994 Outside Directors' Stock Option Plan, respectively (the
Plans). Under the 1989 Stock Option Plan, options are granted to employees,
officers, directors and consultants to purchase shares of the Company's common
stock at not less than the fair market value of common stock at the grant date
(for incentive stock options) or 85% of the fair market value of such common
stock (for nonstatutory stock options). Options generally vest and become
exercisable to the extent of 25% one year from grant date with the remainder
vesting ratably over the 36-month period thereafter. Prior to August 1994, the
options generally expired five years from grant date. Since August 1994, the
options expire ten years from grant date. Under the 1994 Outside Directors'
Stock Option Plan, options are granted to outside directors to purchase shares
of the Company's common stock at not less than the fair market value of common
stock at the grant date. Options vest and become exercisable to the extent of
25% on the first anniversary of the grant date with the remainder vesting 25% on
each of the following three anniversary dates. At December 31, 1995, 955,983
options were exercisable under the Plans.
In November 1994, upon approval by the Board of Directors, the Company repriced
1,257,250 options originally issued at prices ranging from $4.00 to $17.75. The
options were repriced at $3.875, the then current market value of the Company's
stock. The 1994 cancellations and grants in the summary below include the
1,257,250 options.
A summary of option transactions under the Plans follows:
Options
Available Shares Price Per
For Grant Outstanding Share
--------- ----------- -----------
Balances at December 31, 1992 25,277 1,258,913 $0.20-15.00
Options authorized 1,500,000 -- --
Options granted (726,850) 726,850 6.38-17.75
Options cancelled 83,154 (83,154) 0.20-15.00
Options exercised -- (162,998) 0.20-10.50
---------- ------------ ----------
Balances at December 31, 1993 881,581 1,739,611 0.40-17.75
Options authorized 1,500,000 -- --
Options granted (3,613,875) 3,613,875 3.56- 7.88
Options cancelled 2,238,962 (2,238,962) 0.50-17.75
Options exercised -- (366,898) 0.40-10.50
---------- ------------ ----------
Balances at December 31, 1994 1,006,668 2,747,626 0.50-17.75
Options authorized 200,000 -- --
Options granted (1,295,000) 1,295,000 4.00-9.375
Options cancelled 565,194 (565,194) 1.50-15.75
Options exercised -- (693,278) 0.50- 7.50
---------- ------------ ----------
23
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balances at December 31, 1995 476,862 2,784,154 $1.50-17.75
---------- ------------ ----------
---------- ------------ ----------
In February 1994, the Company acquired all of the outstanding stock of Z-Code
Software Corp. (See Note 9). All options that had been issued under Z-Code's
1992 Stock Option Plan were converted to the Company's options at a rate of one
Z-Code share converted to 0.2054 of the Company's options, $1.00 of Z-Code share
price converted to $0.2054 of the Company's share price. Options to purchase
269,174 common shares were assumed in association with this transaction, and are
excluded from the option table above. Grant prices ranged from $0.48685 to
$0.97371. A provision in the agreement states that when an employee terminates
from the Z-Code Division, any unvested shares forfeited are regranted to the
original two owners of Z-Code Software Corp. Upon termination of one owner in
July 1994 (See Note 9), all forfeit shares are now regranted to the remaining
original owner. Options to purchase 59,919 common shares and 22,003 common
shares were forfeit and regranted to the remaining original owner in 1994 and
1995, respectively. Options to purchase 72 and 28 common shares were canceled
in 1994 and 1995, respectively. Options to purchase 5,674 and 39,993 common
shares were exercised in 1994 and 1995, respectively, and options to purchase
263,428 and 223,407 common shares associated with this transaction remained
unexcercised at December 31, 1994 and 1995, respectively.
24
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BUSINESS SEGMENTS (UNAUDITED)
Information about the Company's different product segments for the three years
ended December 31, 1995, 1994 and 1993 is as follows (in thousands):
1995 1994 1993
---- ---- ----
Net sales to customers
Systems $112,388 $143,673 $135,071
Software 26,940 17,198 9,194
-------- -------- --------
Consolidated total $139,328 $160,871 $144,265
-------- -------- --------
-------- -------- --------
Income (loss) from operations*
Systems $ (7,245) $ 2,180 $ 12,699
Software (412) (17,687) 226
-------- -------- --------
Consolidated total $ (7,657) $(15,507) $ 12,925
-------- -------- --------
-------- -------- --------
Identifiable assets
Systems $54,817 $ 65,070 $ 54,270
Software 6,210 4,739 4,267
Corporate 36,510 31,220 35,632
-------- -------- --------
Consolidated total $ 97,537 $101,029 $ 94,169
-------- -------- --------
-------- -------- --------
Capital expenditures
Systems $2,093 $2,107 $2,216
Software 2,053 629 234
Consolidated total $ 4,146 $ 2,736 $ 2,450
--------- --------- ---------
* Software segment losses from operations include charges related to acquired
in-process research and development of $17.5 million in 1994. Systems segment
losses from operations include charges related to business restructuring of $7.5
million in 1995.
25
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES
The components of the Company's provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $ 51 $2,384 $2,769
State and other - 1,174 826
---------- ---------- ----------
Total current 51 3,588 3,595
---------- ---------- ----------
Deferred
Federal (2,036) - 779
State and other (191) - 162
---------- ---------- ----------
Total deferred (2,227) - 941
---------- ---------- ----------
Charge in lieu of income taxes associated with
the exercise of stock options - - 554
---------- ---------- ----------
($2,176) $3,558 $5,090
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Total income tax expense (benefit) differs from the expected tax expense
(computed by applying the U.S. Federal income tax rate of 34% to income (loss)
before income taxes) as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Tax (benefit) expense at Federal statutory rate (2,110) $(2,477) $4,678
State income taxes, net of Federal benefit - 510 817
Tax exempt investment income (136) (176) (347)
In-process research and development charge - 5,934 -
Research and experimental credit - (423) -
Other 70 190 (58)
---------- ---------- ----------
($2,176) $3,558 $5,090
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
26
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 1995 and 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net deferred tax assets:
Acquired intangible assets $ - $ 157
Accruals, allowances and reserves 5,501 2,682
Property and equipment, principally due to differences
in depreciation and capitalized leases 466 806
Other - 183
---------- ----------
Total gross deferred tax assets 5,967 3,828
---------- ----------
Less: Valuation allowance - -
---------- ----------
Net deferred tax assets 5,967 3,828
---------- ----------
Net deferred tax liabilities:
Software development costs, principally due to
capitalization and amortization (205) (243)
Other - (50)
---------- ----------
Total gross deferred tax liabilities
(205) (293)
---------- ----------
$5,762 $3,535
---------- ----------
---------- ----------
</TABLE>
Based on the Company's historical operating results, management believes that it
is more likely than not that the Company will realize the benefit of the
deferred tax assets recorded, and, accordingly, has established no asset
valuation allowances.
NOTE 8. CUSTOMERS AND CREDIT CONCENTRATIONS
No sales to any one customer accounted for greater than 10% of net revenues for
the years ended December 31, 1995, 1994 and 1993
Export sales to the Company's international customers outside North America,
primarily Europe, comprised approximately 33%, 31% and 28% of net revenues for
the years ended December 31, 1995, 1994 and 1993, respectively.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents, short-term investments and
trade receivables. The Company places its cash equivalents and short-term
investments with high-credit qualified financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
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.
The identifiable assets, operating income and net income of the Company's
foreign subsidiaries are not significant to the Company's consolidated financial
statements.
27
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. ACQUISITION OF Z-CODE SOFTWARE CORP.
In February 1994, the Company purchased all of the outstanding stock of Z-Code
Software Corp. (Z-Code), a developer of electronic mail and messaging software.
The initial consideration for the acquisition was approximately $3.2 million in
cash and 3,000,000 shares of the Company's common stock (including approximately
269,000 shares issuable upon exercise of options). Of these shares,
approximately 1,183,000 (the Performance Shares) were held in escrow and subject
to release, in whole or in part, only upon the achievement of certain financial
performance objectives over a 15-month period ending in 1995. Additional cash
of up to $3.2 million was contingently payable based on the achievement of these
objectives.
The acquisition was accounted for using the purchase method and, accordingly,
the operating results of Z-Code are included in the consolidated financial
statements of the Company from the date of acquisition. The initial cash
payment, $1.5 million of direct expenses and the value of the stock (excluding
the Performance Shares) were allocated as follows (in thousands):
Net liabilities assumed $(245)
Research and development in-process 15,031
Purchased software technology and other intangibles 1,084
Deferred income tax liability (293)
-------
$15,577
-------
-------
The amounts allocated to purchased software technology and other intangibles are
being amortized over five years. The research and development in-process was
written off and charged to operations in the first quarter of 1994.
In July 1994, the Company repurchased 1,361,802 shares of its common stock at
fair market value from the former principal shareholder of Z-Code for
approximately $5.0 million and paid approximately $2.5 million in exchange for
his contingent rights to an additional 1,041,378 Performance Shares that were
held in escrow as well as his contingent right to receive up to approximately
$2.5 million in cash. Substantially all of the payment for the contingent stock
and cash rights was allocated to in-process research and development acquired in
the Z-Code acquisition and was charged to operations in the third quarter of
1994. The approximately 142,000 Performance Shares and $700,000 in cash which
remained contingently issuable to the other former Z-Code shareholder and option
holders were not earned due to lack of achievement of the performance objectives
in 1995.
28
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma combined results of operations for the years ended
December 31, 1994 and 1993 are presented as if the acquisition had occurred at
the beginning of the period. The charges associated with in-process research
and development have not been reflected in the following pro forma summary as
they are non-recurring. This pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and Z-Code had
constituted a consolidated entity during such periods.
(Unaudited) December 31,
(In thousands, except per share data) ------------------------
1994 1993
--------- ---------
Net revenues $ 161,083 $ 146,743
--------- ---------
--------- ---------
Net income $ 6,227 $ 9,037
--------- ---------
--------- ---------
Primary net income per share $ 0.38 $ 0.52
--------- ---------
--------- ---------
Fully diluted net income per share $ 0.37 $ 0.48
--------- ---------
--------- ---------
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company leases its principal facilities under noncancellable operating lease
agreements which expire between 1995 and 2000. The Company also leases office
facilities in several locations in the United States, two locations in Canada,
and one each in the United Kingdom, France and Germany, which are used as sales
offices; terms of these leases are generally 12 months. Rent expense was
approximately $3,083,000, $3,075,000 and $3,209,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The Company also leases certain equipment under capital leases. At December 31,
1995, minimum lease payments under all noncancellable lease agreements were as
follows (in thousands):
Capital Operating
Leases Leases
------ ------
Year Ending December 31,
1996 $1,340 $2,554
1997 732 2,145
1998 158 2,094
1999 92 2,124
Thereafter 69 1,634
------- -------
Total minimum lease payments 2,391 $10,551
-------
-------
Less amounts representing interest 154
-------
Present value of minimum lease payments 2,237
Less current portion 1,246
-------
Long-term capital lease obligations $991
-------
-------
29
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995, the Company had an unused revolving line of credit with a
U.S. bank for $7 million at an interest rate equal to the banks reference rate.
The line of credit, if used, would be secured by assets of the Company. The
line of credit expires in October 1996, and requires compliance with defined
financial covenants on the part of the Company. At December 31, the Company was
not in compliance with certain defined financial covenants, and amounts under
the line were therefore unavailable to the Company.
NOTE 11. SUBSEQUENT EVENT
During the first quarter of 1996, the Company consummated the sale of its
Mariner product line, including all related tangible and intangible assets. The
sales price, net of a purchased right to incorporate the Mariner technology in
the products of the Company in the future, was $7.3 million. The Company will
record a gain on the sale, and no material adverse effects on the Company's
assets as of December 31, 1995 resulted from the transaction.
In April 1996, one purported securities class action suit was filed in
California Superior Court for the of Santa Clara, and in April and May 1996,
three purported securities class action suits were filed in the United States
District Court for the Northern District of California. The suits name as
defendants the Company, current and former officers of the Company and one of
its outside directors, among others. The suits allege, among other things,
misrepresentations made by the Company to the public in violation of federal or
California securities laws, and the Superior Court action alleges that the
officer and director defendants disposed of the Company's common stock in
violation of California law. Management intends to defend the actions
vigorously, and while the ultimate results of the actions cannot be determined,
management does not expect them to have a materially adverse effect on the
Company's results of operations or financial position.
30
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME DATA:
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------------
March 31 June 30* Sept. 30* Dec. 31
------------------------------------------------------
<S> <C> <C> <C> <C>
1995
- ----
Systems revenues $32,599 $28,830 $24,410 $26,549
Software revenues 4,929 6,201 9,097 6,713
--------- --------- --------- ---------
Total net revenues 37,528 35,031 $33,507 $33,262
Gross profit 14,142 12,982 11,853 13,966
Operating income (loss) 195 (223) (6,981) (648)
Income (loss) before income taxes 467 120 (6,646) (146)
Net income (loss) 304 85 (4,719) 301
Net income (loss) per share:
Primary 0.02 0.00 (0.30) 0.02
Fully diluted (0.06) 0.00 (0.30) 0.02
Shares used in per share computations
Primary 16,575 17,003 15,851 17,149
Fully diluted 17,079 17,003 15,851 17,154
1994
- ----
Systems revenues $34,440 $37,516 $34,648 $37,068
Software revenues 3,742 3,641 4,774 5,043
--------- --------- --------- ---------
Total net revenues 38,182 41,157 $39,422 42,111
Gross profit 13,046 13,233 13,275 14,199
Operating income (loss) (13,564) 48 (2,396) 405
Income (loss) before income taxes (6,076) 280 (2,165) 677
Net income (loss) (9,210) 182 (2,255) 440
Net income (loss) per share:
Primary (0.58) 0.01 (0.14) 0.03
Fully diluted (1.27) (0.38) (0.22) (0.06)
Shares used in per share computations
Primary 15,910 17,327 15,638 16,045
Fully diluted 16,541 17,883 15,770 15,670
</TABLE>
* Revenues for the second and third quarters of 1995 are presented net of
adjustments to those quarters' previously reported revenue figures. The
adjustments were to decrease software revenues by approximately $500 and
$753 for the second and third quarters, respectively; the adjustments
caused related changes to gross margin, operating loss, income (loss)
before income taxes, the provision for income taxes (income tax benefit),
and net income (loss) for those quarters.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 COMPUTING DEVICES, INC.
By: JACK A. BRADLEY
------------------------------------------
Jack A. Bradley, Vice President-Finance
and Chief Financial Officer
Dated: June 27, 1996
32
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2.1 (1)+ Agreement and Plan of Reorganization dated January 26, 1994, as
amended, among Registrant, ZIP Acquisition Corporation, a
wholly-owned subsidiary of Registrant ("Sub"), Z-Code Software
Corp. ("Z-Code") and the shareholders of Z-Code (the "Plan of
Reorganization"), together with the Agreement Not to Compete,
dated February 11, 1994, among Registrant, Sub and the
shareholders of Z-Code (Exhibit B to the Plan of Reorganization)
and the Employment Agreement, dated February 11, 1994, among
Registrant, Sub and Daniel Heller (Exhibit C-1 to the Plan of
Reorganization).
3.1 (2) Amended and Restated Articles of Incorporation of Registrant.
3.2 (4) Bylaws of Registrant, as amended.
4.1 (1) Stock Rights Agreement dated February 11, 1994, among Registrant
and the shareholders of Z-Code.
4.2 (3) Specimen Common Stock Certificate of Registrant.
4.3 Reference is made to Exhibits 3.1 and 3.2.
10.1 (3)* Form of Restricted Stock Purchase Agreement used in connection
with the sale of Common Stock to employees of Registrant.
10.2 (3) Series A Preferred Stock Purchase Agreement dated July 29, 1988.
10.3 (3) Series B Preferred Stock Purchase Agreement dated February 21,
1989.
10.4 (3) Series C Preferred Stock Purchase Agreement dated May 2, 1990.
10.5 (3) Restated Investor Rights Agreement dated May 2, 1990.
10.6 (5) Purchase Agreement dated April 25, 1990, between Registrant and
The Motorola Computer Group and correspondence relating thereto
(3) and Amendment thereto dated August 31, 1993.
10.7 (3) Master Maintenance Agreement dated September 4, 1990, between
Registrant and the Field Service Division of Motorola Inc.'s
Computer Group.
10.8 (3) Lease Agreement dated August 18, 1988, as amended, between
Registrant and Mountain View Industrial Associates for premises
at 350-360 North Bernardo Avenue, Mountain View, California.
10.9 (3) Lease Agreement dated September 21, 1989, as amended, between
Registrant and Mountain View Industrial Associates for premises
at 380 North Bernardo Avenue, Mountain View, California.
10.10 (3) Industrial Lease Agreement dated May 3, 1990, between Registrant
and the Vanni Business Park General Partnership for premises at
339 North Bernardo Avenue, Mountain View, California.
33
<PAGE>
Exhibit
Number Description
------ -----------
10.11 (6) 1989 Stock Option Plan, as amended.
10.12 (3)* Form of Stock Option Agreements for use with the 1989 Stock
Option Plan.
10.13 (3)* Employee Stock Purchase Plan (revised).
10.14 (3) Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.15 (3)* Registrant's 401(k) Retirement Plan.
10.16 (3) X Window Consortium Agreement dated July 19, 1988, as amended,
between Registrant and Massachusetts Institute of Technology.
10.17 (3) Consortium Participation Agreement dated December 7, 1990,
between Registrant and Massachusetts Institute of Technology.
10.18 (3) Software Agreement dated March 30, 1990, between Registrant and
AT&T Information Systems, Inc.
10.19 (5) Credit Agreement dated March 15, 1994, between Registrant and
Union Bank.
10.20 (3) Lease Agreement dated April 29, 1985, as amended, between
Graphic Software Systems, Inc. and Beaverton-Redmond Tech
Properties, a Joint Venture.
10.21 (3) Agreement to Form New Distribution Company dated July 23, 1990,
between Registrant and Software Research Associates, Inc.
10.22 (3) Distributorship and OEM Agreement and related Trademark License
Agreement, each dated July 23, 1990, between Registrant and
Nihon NCD K.K.
10.23 (3) Form of Registrant's standard purchase order.
10.24 (2)* Registrant's Incentive Bonus Plan.
10.25 (2) Lease Agreement dated August 18, 1992, between Registrant and
D.R. Stephens & Company for premises at 280(A) North Bernardo
Avenue, Mountain View, California.
10.26 (2) Lease Agreement dated August 18, 1992, between Registrant and
D.R. Stephens & Company for premises at 280(B) North Bernardo
Avenue, Mountain View, California.
10.27 Agreement Not to Compete dated February 11, 1994, among
Registrant, Sub and the shareholders of Z-Code. Reference is
made to Exhibit 2.1.
10.28 * Employment Agreement dated February 11, 1994, among Registrant,
Sub and Daniel Heller. Reference is made to Exhibit 2.1.
10.29 (5) Full Service Lease dated October 20, 1993 between Z-Code and
Novato Gateway Associates for premises at 101 Rowland Way, Suite
300, Novato, California.
10.30 (6)* Employment Agreement dated September 16, 1994 between Registrant
and Edward L. Marinaro.
34
<PAGE>
Exhibit
Number Description
------ -----------
10.31 (6)* 1994 Outside Directors Stock Option Plan.
10.32 (6)* Form of Nonstatutory Stock Option Agreement for Outside
Directors.
10.33 (7)* Employment Agreement dated January 1, 1995 between Registrant
and Jack A. Bradley.
10.34 (8) Lease agreement by and between Registrant and Ravendale
Investments dated September 20, 1995.
10.35 (9)*++ Confidential Separation Agreement dated November 9, 1995 between
Registrant and Edward L. Marinaro.
10.36 (9)++ Client/Server Software License Agreement dated March 29, 1996
between Registrant and Citrix Systems, Inc.
10.37 (9)++ Software Licensing Agreement dated as of June 30, 1995 between
Registrant and Evans & Sutherland Computer Corporation.
10.38 (9)++ License and Development Agreement dated December 18, 1995
between Registrant and Software.com, Inc.
10.39 (9)++ Cooperative Hardware Marketing Agreement dated November 29, 1995
between Registrant and IBM Corporation ("IBM"), as amended
December 20, 1995.
10.40 (9)++ X-Station Terminal Transition Agreement dated November 29, 1995
between Registrant and IBM, as amended December 13, 1995.
11.1 (9) Statement Regarding Computation of Net Income (Loss) Per Share.
21.1 List of subsidiaries of Registrant.
23.1 (9) Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick LLP.
24.1 (9) Power of Attorney.
- -------------------------
* Constitutes a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form 10-K.
+ Confidential treatment has been granted as to a portion of this exhibit.
++ Confidential treatment has been requested as to a portion of this exhibit.
(1) Incorporated by reference to identically numbered exhibit to Registrant's
Form 8-K Report dated February 11, 1994.
(2) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Annual Report for the year ended December 31, 1992.
35
<PAGE>
(3) Incorporated by reference to identically numbered exhibit to Registrant's
Form S-1 Registration Statement (No. 33-47246) which became effective on
June 4, 1992 (the "1992 Registration Statement").
(4) Incorporated by reference to Exhibit 3.3 to the 1992 Registration
Statement.
(5) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Annual Report for the year ended December 31, 1993.
(6) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Annual Report for the year ended December 31, 1994.
(7) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Quarterly Report for the quarter ended March 31, 1995.
(8) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Quarterly Report for the quarter ended September 30, 1995.
(9) Previously filed.
36
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Jurisdiction of
Name Organization
---- ---------------
NCD Graphic Software Corporation Oregon
NCD Software Corporation California
NCD Systems Corporation California
Network Computing Devices Australia
Australia Pty. Ltd.
Network Computing Devices Canada
(Canada), Inc.
Network Computing Devices England
(UK) Limited
Network Computing Devices France
(France) S.A.R.L.
Network Computing Devices Germany
(Germany) GmbH
Network Computing Devices Sweden
(Scandinavia) AB
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
Network Computing Devices, Inc.
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 33-51594 and 33-65638) of Network Computing Devices, Inc. of our
reports dated May 14, 1996, relating to the consolidated financial statements of
Network Computing Devices, Inc. as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995,
and the related schedule, which reports appear in Form 10-K/A Amendment No.1 to
the December 31, 1995 annual report on Form 10-K of Network Computing Devices,
Inc.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
San Jose, California
July 2, 1996
