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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q/A
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
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 and zip code)
Registrant's telephone number: (415) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock was 15,802,142
at October 31, 1995.
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NETWORK COMPUTING DEVICES, INC.
INDEX
DESCRIPTION PAGE NUMBER
- ----------------------------------------------------------- -----------
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations
for the Three- and Nine-Month Periods Ended
September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended September 30,
1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II: Other Information
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signature 17
2
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NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
September 30, December 31,
1995 1994
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $12,497 $7,407
Short-term investments 25,349 23,813
Accounts receivable, net 22,169 31,743
Inventories 14,412 23,622
Prepaid expenses and other 4,380 1,325
Deferred income taxes 1,976 2,535
------- --------
Total current assets 80,783 90,445
Property and equipment, net 6,564 6,052
Other assets 5,154 4,532
------- --------
Total assets $92,501 $101,029
------- --------
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,093 $17,636
Current installments of capital lease obligations 1,104 1,346
Income taxes payable - 833
Accrued expenses 10,386 6,855
Deferred revenue 5,580 973
------- --------
Total current liabilities 26,163 27,643
Capital lease obligations, excluding current portion 1,082 1,497
Shareholders' equity:
Common stock 61,115 63,420
Retained earnings 4,141 8,469
------- --------
Total shareholders' equity 65,256 71,889
------- --------
Total liabilities and shareholders' equity $92,501 $101,029
------- --------
------- --------
See accompanying notes.
3
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1995 1994 1995 1994
------- ------- -------- --------
Net revenues:
Systems division $24,410 $34,648 $ 85,839 $106,605
Software division 9,097 4,774 20,227 12,156
------- ------- -------- --------
Total net revenues 33,507 39,422 106,066 118,761
Cost of revenues:
Systems division 20,586 25,343 64,713 77,443
Software division 1,068 804 2,376 1,764
------- ------- -------- --------
Total cost of revenues 21,654 26,147 67,089 79,207
------- ------- -------- --------
Gross profit margin 11,853 13,275 38,977 39,554
Operating expenses:
Research and development 3,515 2,690 9,505 7,407
Marketing and selling 8,366 8,861 25,514 25,716
General and administrative 2,121 1,699 6,135 4,890
Charge for acquired in-process
research and development - 2,421 - 17,452
Charge for business
restructuring 4,832 - 4,832 -
------- ------- -------- --------
Total operating expenses 18,834 15,671 45,986 55,465
------- ------- -------- --------
Operating loss (6,981) (2,396) (7,009) (15,911)
Other income, net 335 231 950 7,950
------- ------- -------- --------
Loss before income taxes (6,646) (2,165) (6,059) (7,961)
Provision for income taxes
(income tax benefit) (1,927) 90 (1,729) 3,322
------- ------- -------- --------
Net loss ($4,719) ($2,255) ($4,330) ($11,283)
------- ------- -------- --------
------- ------- -------- --------
Net loss per share:
Primary ($0.30) ($0.14) ($0.27) ($0.70)
------- ------- -------- --------
------- ------- -------- --------
Fully diluted ($0.30) ($0.22) ($0.27) ($0.77)
------- ------- -------- --------
------- ------- -------- --------
Shares used in per share computations:
Primary 15,851 15,638 15,783 16,082
------- ------- -------- --------
------- ------- -------- --------
Fully diluted 15,851 15,770 15,783 16,136
------- ------- -------- --------
------- ------- -------- --------
See accompanying notes.
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
Nine Months Ended
September 30,
---------------------
1995 1994
------- -------
Cash flows from operations:
Net loss ($4,330) ($11,283)
Reconciliation to cash provided by operations:
Acquired in-process research and development - 17,452
Gain on sale of NetManage, Inc. common stock - (7,237)
Noncash restructuring charges 6,588 -
Depreciation and amortization 3,564 2,984
Changes in:
Accounts receivable 9,574 3,247
Inventories 6,505 (9,735)
Prepaid expenses and other (3,055) (160)
Deferred income taxes 559 -
Accounts payable (8,543) 9,079
Income taxes payable (833) (668)
Accrued expenses (352) 192
Deferred revenue 4,607 382
------- -------
Cash provided by operations 14,284 4,253
Cash flows from investing activities:
Short-term investment, net (1,536) (1,044)
Changes in other assets (1,056) (317)
Capitalization of software costs (392) (1,265)
Acquisition of Z-Code Software Corp.,
net of cash acquired - (3,104)
Proceeds from sale of NetManage, Inc.
common stock - 9,237
Property and equipment purchases (2,743) (1,713)
------- -------
Cash provided by (used in) investing activities (5,727) 1,794
Cash flows from financing activities:
Principal payments on capital lease obligations (1,162) (1,091)
Repurchases of stock (4,026) (7,570)
Proceeds from issuance of stock, net
of issuance costs 1,721 694
------- -------
Cash used in financing activities (3,467) (7,967)
Increase (decrease) in cash and equivalents 5,090 (1,920)
Cash and equivalents:
Beginning of period 7,407 6,879
------- -------
End of period $12,497 $4,959
------- -------
------- -------
Noncash investing and financing activities:
Common stock issued for and accrued direct
expenses of Z-Code acquisition $ - $12,333
------- -------
------- -------
Property and equipment acquired under
capital leases $482 $1,022
------- -------
------- -------
See accompanying notes.
5
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of Network Computing
Devices, Inc. (the Company) furnished herein reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's consolidated financial
position, the results of operations and cash flows for the periods presented.
This Quarterly Report on Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1994 Annual Report to Shareholders. The consolidated results of operations for
the three- and nine-month periods ended September 30, 1995 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire year ending December 31, 1995. Certain financial statement amounts from
1994 have been reclassified to conform with current year methods of
presentation.
PER SHARE INFORMATION
Net loss per share is computed using the weighted average number of shares of
common stock and common stock equivalents determined to be outstanding during
the periods. Common stock equivalents are not considered in the calculation of
net loss per share when their effect would be antidilutive.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
September 30, December 31,
1995 1994
------------- ------------
Purchased components and sub-assemblies $9,405 $17,282
Work in process 1,935 1,121
Finished goods 3,072 5,219
------- -------
$14,412 $23,622
------- -------
------- -------
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 the second quarter of
1995. Additional cash of up to $3.2 million was also 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 have been included in the consolidated financial
statements of the Company from the date of acquisition. The initial cash
payment, $1.5
6
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
million of direct expenses and the value of the stock (excluding the Performance
Shares) was 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. Up to approximately 142,000 Performance Shares and $700,000 in cash were
contingently issuable to the other former Z-Code shareholder and option holders
following this transaction. In the second quarter of 1995, the Company
determined that the performance objectives had not been achieved. Accordingly,
none of the remaining Performance Shares or contingent cash payments will be
issued or paid.
The following unaudited pro forma combined results of operations for the quarter
ended September 30, 1994 are presented as if the acquisition had occurred at the
beginning of the period, including the subsequent repurchase of the stock the
Company issued. The one-time charge for the write-off of research and
development in-process has not been reflected in the following pro forma summary
as it is non-recurring, nor have adjustments been made for the assumption that
any of the financial performance objectives have been achieved. 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
the period.
Nine Months Ended
(IN THOUSANDS, EXCEPT PER SHARE DATA) September 30, 1994
------------------
Net revenues $118,972
--------
--------
Net income $5,787
--------
--------
Primary net income per share $ 0.35
--------
--------
Fully diluted net income per share $ 0.34
--------
--------
BUSINESS RESTRUCTURING
In July 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 intended to 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.
7
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED 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 be completed by the end
of the first quarter of 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 three- and nine-month periods ended September 30, 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
approximately one hundred 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 is presented below.
Amounts Amounts
Accrued Charged
------- -------
Reserve for the write-down of
phase-out inventories $2,706 $2,706
Employee termination benefits 1,580 764
Exiting facilities-related
obligations 2,256 -
Asset impairment & other 996 591
------ ------
Total $7,538 $4,061
------ ------
------ ------
STOCK REPURCHASE PLAN
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 12-month period ending October 31, 1995. Repurchases are made under
the program using the Company's own cash resources, and repurchased shares are
restored to the status of "authorized but unissued." During the third quarter
and first nine months of 1995, the Company repurchased a total of 226,292 and
571,162 shares, respectively, at an aggregate price of $1,654,104 and $4,026,754
for each of the respective periods. As of September 30, 1995, the Company had
repurchased a cumulative total under the program of 790,162 shares at an
aggregate price of $4,972,754.
8
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company recognized an income tax benefit on net losses before income
taxes during the three- and nine-month periods ended September 30, 1995.
This compares to provisions for income taxes made during the comparable
three- and nine-month periods of 1994, despite net losses before income taxes
of $2.2 million and $8.0 million for each of the respective periods. The
provisions made during the periods of pre-tax losses for 1994 related to
one-time charges for in-process research and development associated with the
acquisition of Z-Code. The acquisition was a tax-free reorganization, and
therefore the charges were not deductible for income tax purposes. Income
taxes paid were $120,000 and $3,990,000 for the first nine months of 1995 and
1994, respectively.
INTEREST PAYMENTS
Interest payments, primarily related to interest on capital lease liabilities,
were $173,000 and $219,000 for the first nine months of 1995 and 1994,
respectively.
9
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NETWORK COMPUTING DEVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION INCORPORATES CERTAIN CORRECTIONS TO HISTORICAL
FINANCIAL DATA BUT IS NOT INTENDED TO UPDATE ANY OTHER INFORMATION THAT WAS
PRESENTED IN THIS REPORT WHEN IT WAS ORIGINALLY FILED. THE FOLLOWING DISCUSSION
INCLUDES FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION THAT MAY BE INACCURATE
AS OF THE DATE OF THIS AMENDMENT IN LIGHT OF SUBSEQUENT EVENTS, CHANGES IN
CIRCUMSTANCES OR INFORMATION THAT HAS COME TO LIGHT SINCE THE ORIGINAL FILING OF
THIS REPORT. FOR A MORE RECENT DISCUSSION OF THE MATTERS ADDRESSED IN THIS
ITEM, SEE "PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION" SET FORTH IN THE COMPANY'S FORM 10-Q REPORT
FOR THE QUARTER ENDED JUNE 30, 1996.
The following discussion should be read in conjunction with the unaudited
condensed consolidated interim financial statements and notes thereto included
in Part I -- Item 1 of this Quarterly Report and the audited consolidated
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1994 contained in the Company's 1994 Annual Report to Shareholders.
The Company designs, develops, manufactures and markets hardware and software
products that provide information access to networks of heterogeneous computers.
The Company has increasingly segregated two separate operations of the business:
Systems (primarily focused on X-Terminal markets and products) and Software
(primarily focused on PC-to-UNIX connectivity software, electronic mail and
messaging software, and Internet connectivity software). During and subsequent
to the third quarter of 1995, the Company formed NCD Systems Corporation and NCD
Software Corporation, both wholly owned subsidiaries, to formalize this
segregation of the two operations, and to bring greater focus to the basic
enterprise of each separate business segment.
The Company's common stock price has been and will continue to be subject to
significant volatility. For any given quarter, a shortfall in the Company's
announced revenues or earnings from the levels expected by securities analysts
could have an immediate and adverse effect on the trading price of the Company's
common stock. The Company may not learn of, nor be able to confirm, revenue or
earnings shortfalls until late in the quarter, or following the end of the
quarter. In addition, the Company participates in a very dynamic, high
technology industry, which can result in significant fluctuations in the
Company's common stock price at any time based on factors that may be unrelated
to the Company's operating performance.
In addition, the Company believes that changes in any of the following areas
could have a negative impact on the Company in terms of its future financial
position or results of operations: general economic conditions affecting
industry demand for computer products; the timing and market acceptance of new
product introductions by the Company; the timing of significant orders from and
shipments to large customers; fundamental underlying technology related to the
X-Terminal market; competition including, but not limited to, pricing and
products or product features; the timely sourcing of component supplies such as
video monitors, integrated circuits (particularly memory, microprocessors and
ASICs) and electronic subassemblies, some of which require substantial order
lead times; the Company's success in developing and introducing new products,
the product and customer mix comprising the Company's revenues base, the
Company's success in entering the personal-computer-based software business, and
its ability to develop and maintain strategic business alliances; turnover of
key management and other key personnel; and litigation and other claims against
the Company, including, but not limited to, securities or patent claims.
The Company's operating results have been affected by significant competition
from other X-Terminal manufacturers, suppliers of workstations and personal
computers, and software developers. Competition within the X-Terminal 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 expects that overall market demand for X-Terminal
products may continue to decline in the future.
The Company relies significantly on independent distributors and resellers for
the marketing and distribution of its products, especially for its software
product lines. There can be no assurance that these 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 competitors. A reduction in sales efforts 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
10
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NETWORK COMPUTING DEVICES, INC.
Company's ability to retain its existing distributors and resellers, or the
Company's ability to add distributors and resellers in the future. Although
the Company monitors its distributors and resellers, there can be no
assurance that they will not encounter problems of this type in the future.
Any significant problems with distributors or resellers could lead to reduced
sales and could adversely affect the Company's operating results.
The Company's distributors and resellers have historically maintained limited
inventory levels, and the Company has not experienced any significant product
returns. The Company does not believe that this is likely to change in the
future. However, in the event the Company's distributors and resellers were to
change their inventory stocking practices with respect to the Company's
products, the Company could face an increased risk of product returns or stock
rotation from its distribution channels. Such activity could have a material
adverse effect on the Company's results of operations.
The Company has historically operated with a small backlog. Revenues and
operating results, therefore, generally depend on the volume and timing of
orders received, which are difficult to forecast and may occur
disproportionately during any given quarter or year. The Company has continued
to experience an increasingly disproportionate amount of shipments occurring in
the last month of the quarter. This trend increases the risk of material
quarter to quarter fluctuations in the Company's revenues and operating results.
The Company typically experiences reduced orders during the first and third
quarters of each calendar year due to buying patterns common in the computer
industry.
The majority of the Company's international sales are denominated in U.S.
dollars, and an increase or decrease in the value of the U.S. dollar relative to
foreign currencies could reduce the Company's price-competitiveness in those
markets. Significant portions of net revenues have been derived from sales to a
single customer in the United Kingdom and were denominated in pounds sterling.
Sales denominated in a foreign currency, which may increase in the future, are
subject to exchange rate fluctuations that could affect the Company's financial
results negatively or positively, depending on the value of the U.S. dollar in
comparison to the transaction currency. Where the Company believes foreign-
currency denominated sales create significant financial exposure, the Company
acquires forward exchange contracts to minimize the related risks.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the third quarter of 1995 were $33.5 million,
representing a decrease of 15% when compared with $39.4 million for the same
period of 1994, and a decrease of 4% compared to the second quarter of 1995.
Total net revenues for the first nine months of 1995 declined by 11% compared to
the same period in 1994. The proportion of international revenues to total net
revenues has remained relatively comparable for the periods presented. Revenues
to related parties, and the proportion that such revenues bear to revenues
derived from unrelated parties, is presented in the following table:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1995 1994 1995 1994
------- ------- -------- --------
Revenues from unrelated parties $31,644 $35,051 $ 97,948 $107,896
Revenues from related parties 1,863 4,371 8,118 10,865
------- ------- -------- --------
Total net revenues $33,507 $39,422 $106,066 $118,761
------- ------- -------- --------
------- ------- -------- --------
Revenues to related parties consisted of sales to Motorola, Inc., which is
deemed a related party due to its ownership of approximately ten percent of the
Company's common stock as of September 30, 1995 and 1994.
11
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NETWORK COMPUTING DEVICES, INC.
NET SYSTEMS REVENUES
Systems revenues consist primarily of revenues from the sale of X-Terminals and
the licensing of related software, in addition to revenues derived from the sale
of ongoing customer support agreements. Such revenues were $24.4 million for
the third quarter of 1995, compared to $34.6 million for the third quarter of
1994 and $28.8 million for the second quarter of 1995. Systems revenues for the
first nine months of 1995 were $85.8 million compared to $106.6 million for the
same period during 1994. Declines in Systems revenues were due to a combination
of conditions, including a decline in the overall market demand for X-Terminal
products during the first half of 1995, new product offerings by certain of the
Company's competitors, and a shortfall in the availability of certain products
to ship to customers.
There can be no assurance that declines in the X-Terminal market will not
continue in the future, nor that the Company will be able to stock adequate
inventories to meet the demands that the X-Terminal market creates.
NET SOFTWARE REVENUES
Software revenues consist primarily of revenues for PC-to-UNIX connectivity
software, electronic mail and messaging software, and Internet connectivity
software. Such revenues were $9.1 million for the third quarter of 1995, an
increase of 91% compared to the third quarter of 1994, and an increase of 47%
compared to the second quarter of 1995. Software revenues for the first nine
months of 1995 were $20.2 million, an increase of 66% compared to the same
period for 1994. The growth in software revenues was primarily associated with
a software development and licensing agreement with AT&T related to the
Company's Internet connectivity technology. Third quarter 1995 net revenues
related to this agreement were $3.2 million ($4.0 million for the nine months
ended September 30, 1995), while no revenues related to this agreement were
recognized during 1994. The Company anticipates that approximately $2.4 million
in revenues associated with the agreement will be recognized in the fourth
quarter of 1995, and $2.0 million in 1996. Exclusive of AT&T revenues, Software
division revenues would have grown by 9% over the second quarter of this year,
and by 22% compared to the third quarter of 1994.
GROSS MARGIN ON SYSTEMS REVENUES
The gross margin percentages on Systems revenues were 16% and 25%, respectively,
for the three- and nine-month periods ended September 30, 1995. This compares
to 27% for each of the same periods of 1994, and compares to 26% for the second
quarter of 1995. The decline in gross margin percentage was primarily due to a
$2.7 million charge to cost of revenues associated with the restructuring of the
Systems portion of the business. Such charges were related to products in
inventory that are being phased out as part of the business restructuring (see
"BUSINESS RESTRUCTURING"). Exclusive of this charge, the Systems gross margin
percentage would have been 27% and 28%, respectively, for the three- and nine-
month periods ended September 30, 1995.
GROSS MARGIN ON SOFTWARE REVENUES
The gross margin percentage on Software revenues was 88% for both the three- and
nine-month periods ended September 30, 1995. This compares to 83% and 85% for
the same periods of 1994, and to 88% for the second quarter of 1995. The
improvement in gross margin percentage on Software revenues was primarily
related to the above-mentioned AT&T revenues, as such revenues carry a higher
margin than other software revenues of the Company.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $3.5 million and $9.5 million for
the third quarter and first nine months of 1995, respectively, representing
increases of $0.8 million and $2.1 million (or 31% and 28% for each of the
respective periods) over the comparable periods of 1994. The increases were
attributable to increased software product development efforts. Included in R&D
expenses in the third quarter of 1995 was $0.8 million in costs and expenses
associated with the software development and licensing agreement with AT&T. As
a percentage of net revenues, R&D spending increased to 10% for the third
quarter of 1995 from 7% for the third quarter of 1994, and increased to 9% of
net revenues for the first nine months of 1995 compared to 6% for the same
period of 1994, reflecting the combined impact of increased spending and lower
revenues. The Company plans to continue investing in research and development
in order to improve its competitive position in the market. However, as a
percentage of revenue such expenses may fluctuate.
MARKETING AND SELLING
Marketing and selling expenses were $8.4 million and $25.5 million for the third
quarter and first nine months of 1995, respectively, representing decreases of
$0.5 million (6%) and $0.2 million (1%), respectively, over the same periods of
1994.
12
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NETWORK COMPUTING DEVICES, INC.
The decreases were primarily related to lower labor costs associated with
reduced permanent and contract personnel, in addition to lower costs associated
with commissions and other performance-related compensation. As a percentage of
total net revenues, marketing and selling expenses increased from 22% to 25%
when comparing the third quarter of 1994 with the third quarter of 1995, and
increased from 22% to 24% when comparing the first nine months of 1994 with the
same period in 1995, reflecting the effect of lower revenues. As a percentage
of revenue, such expenses may fluctuate from quarter to quarter.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses were $2.1 million and $6.1 million
for the third quarter and first nine months of 1995, respectively, representing
increases of $0.4 million (25%) and $1.2 million (25%), respectively, over the
same periods of 1994. This increase was primarily related to higher insurance
costs related to director and officer insurance policies, higher professional
fees, and higher consulting costs associated with the realignment and
reengineering of the business for greater profitability. As a percentage of net
revenues, G&A expenses increased to 6% for both the third quarter and first nine
months of 1995, compared to 4% for the third quarter and first nine months of
1994, respectively, reflecting the combined impact of increased spending and
decreased revenues. As a percentage of net revenues, such expenses may
fluctuate from quarter to quarter.
BUSINESS RESTRUCTURING
During the third quarter of 1995, the Company created and began implementing a
plan to restructure the Systems portion of the business in order to improve the
operating performance potential for that business segment. The plan included
substantial modifications to the Company's manufacturing processes, phasing out
the activities related to less profitable products, a reduction in the
facilities devoted to the conduct of the Systems portion of the business, and a
reduction in the number of employees engaged in Systems business activities.
During the third quarter, the Company recognized charges totaling $7.5 million
for the implementation of this plan, which is anticipated to continue through
the first quarter of 1996. Included in restructuring charges were amounts
related to the severance of personnel, reductions of inventory related to phase-
out products, and costs associated with exiting the lease obligations relating
to certain facilities used in Systems operations. See "BUSINESS RESTRUCTURING,"
in the Notes to Condensed Consolidated Financial Statements contained in this
document. The charge for business restructuring caused a net loss from
operations for the three- and nine-month periods ended September 30, 1995, and
it is likely to cause a net operating loss for the year ending December 31,
1995.
OTHER INCOME
Other income, which consists primarily of interest income and realized gains on
the sales of investments, net of interest expense, increased by $104,000 from
the third quarter of 1994 to the third quarter of 1995. Other income decreased
by $7.0 million from the nine-month period ended September 30, 1994 to the same
period in 1995, primarily related to gains recognized on the sale of NetManage,
Inc. common stock in an underwritten public offering during February 1994.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax benefit on net losses before income
taxes during the three- and nine-month periods ended September 30, 1995.
This compares to provisions for income taxes made during the comparable
three- and nine-month periods of 1994, despite net losses before income taxes
of $2.2 million and $8.0 million for each of the respective periods. The
provisions made during the periods of pre-tax losses for 1994 related to
one-time charges for in-process research and development associated with the
acquisition of Z-Code Software Corporation. The acquisition was a tax-free
reorganization, and the related charges were therefore not deductible for
income tax purposes.
FINANCIAL CONDITION
Total assets as of September 30, 1995 decreased by $8.5 million, or eight
percent, from December 31, 1994. The change in total assets reflects the
decrease in accounts receivable of $9.6 million, attributable primarily to lower
business volumes, and the decrease in inventory levels, due in part to the
restructuring-related charge and in part to lower business volumes. Such
decreases were partially offset by growth in combined cash and short-term
investments of $6.6 million generated from operations.
Total liabilities as of September 30, 1995 decreased by $1.9 million, or seven
percent, from December 31, 1994. The decrease was primarily associated with
lower accounts payable balances related to reduced business volumes, partially
offset
13
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NETWORK COMPUTING DEVICES, INC.
by an increase in deferred revenue, which was due to deferred revenues
associated with a software development and licensing agreement with AT&T (see
above, under "NET SOFTWARE REVENUES"), and an increase in accrued expenses,
primarily due to accruals related to restructuring the business (see above,
under "BUSINESS RESTRUCTURING").
LIQUIDITY
At September 30, 1995, the Company's primary sources of liquidity consisted of
combined cash and equivalents and short-term investments of $37.8 million. Cash
payments associated with the business restructuring that occurred during the
third quarter of 1995 totaled approximately $1.0 million, and it is anticipated
that an additional $0.5 million to $1.0 million in related cash outlays will be
required during the fourth quarter of 1995. The Company believes that its
existing sources of liquidity are sufficient to meet operating cash requirements
and capital lease repayment obligations at least through the next twelve months.
CAPITAL RESOURCES
Capital spending requirements for the remainder of 1995 are estimated at
approximately $1.0 million, and at September 30, 1995, the Company had
commitments for material capital expenditures of approximately $150,000. These
commitments are primarily related to information technology and facilities.
14
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NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 10, 1995, the Company announced that Edward L. Marinaro, who has
served as the Company's President and Chief Executive Officer since September
1994, will resign on December 31, 1995. Mr. Marinaro will continue to serve as
a member of the Company's Board of Directors and will be appointed Vice Chairman
of the Board, effective upon his resignation as President and Chief Executive
Officer at the end of the year. The Company has initiated a search for a new
Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.34* Lease agreement by and between the Registrant and
Ravendale Investments, dated September 20, 1995.
Exhibit 11.1 Statement Regarding Computation of Shares Used in
Loss per Share Computations.
Exhibit 27 Financial Data Schedule.
* Previously filed
(b) The Company filed no reports on Form 8-K during the three-month period
ended September 30, 1995.
15
<PAGE>
EXHIBIT 11.1
NETWORK COMPUTING DEVICES, INC.
Statement Regarding Computation of Shares
Used in Loss per Share Computations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1995 1994 1995 1994
------- ------- ------- --------
Primary:
Weighted average common shares
outstanding during the period 15,851 15,638 15,783 16,082
------- ------- ------- --------
------- ------- ------- --------
Net loss ($4,719) ($2,255) ($4,330) ($11,283)
------- ------- ------- --------
------- ------- ------- --------
Primary loss per share ($0.30) ($0.14) ($0.27) ($0.70)
------- ------- ------- --------
------- ------- ------- --------
Fully Diluted:
Weighted average common shares
outstanding during the period 15,851 15,628 15,783 16,016
Common share equivalents:
Weighted average common shares
contingently issuable - 142 - 120
------- ------- ------- --------
Total 15,851 15,770 15,783 16,136
Net loss, adjusted for
fully diluted calculations ($4,719) ($3,537) ($4,328) ($12,430)
------- ------- ------- --------
------- ------- ------- --------
Fully diluted loss per share ($0.30) ($0.22) ($0.27) ($0.77)
------- ------- ------- --------
------- ------- ------- --------
Note: The difference between net income used for primary and fully diluted
earnings per share calculations for the three- and nine-month periods
ended September 30, 1994, is a result of the assumption that all
financial performance objectives have been achieved, the maximum
number of the remaining Performance Shares have been issued, and the
maximum amount of remaining cash contingently payable has 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. There are no differences between primary
and fully diluted computations of net income for the periods
presented for 1995.
16
<PAGE>
Exhibit 24.1
NETWORK COMPUTING DEVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Network Computing Devices, Inc.
(Registrant)
Date: August 22, 1996
By
/s/ Rudolph G. Morin
---------------------------------------
Rudolph G. Morin
Executive Vice President, Operations and
Finance (Duly Authorized and Principal
Financial and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (indentify
specific financial statements here) THE CONSOLIDATED BALANCE SHEETS AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S
FORM 10-Q/A FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 12,497
<SECURITIES> 25,349
<RECEIVABLES> 24,833
<ALLOWANCES> 2,664
<INVENTORY> 14,412
<CURRENT-ASSETS> 80,783
<PP&E> 22,611
<DEPRECIATION> 16,047
<TOTAL-ASSETS> 92,501
<CURRENT-LIABILITIES> 26,163
<BONDS> 1,082
0
0
<COMMON> 61,115
<OTHER-SE> 4,141
<TOTAL-LIABILITY-AND-EQUITY> 92,501
<SALES> 106,066
<TOTAL-REVENUES> 106,066
<CGS> 67,089
<TOTAL-COSTS> 67,089
<OTHER-EXPENSES> 45,984
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> (950)
<INCOME-PRETAX> (6,057)
<INCOME-TAX> (1,729)
<INCOME-CONTINUING> (4,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,330)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
