<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
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
16,777,590 at October 31, 1996.
<PAGE>
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, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
Three- and Nine-Month Periods Ended September 30,
1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 6: Exhibits and Reports on Form 8-K 16
Signature 17
2
<PAGE>
NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,722 $ 13,364
Short-term investments 12,526 22,786
Accounts receivable, net 18,957 28,591
Inventories 13,786 14,398
Prepaid expenses and other 12,267 6,863
------------- ------------
Total current assets 76,258 86,002
Property and equipment, net 5,565 6,749
Other assets 2,160 4,786
------------- ------------
Total assets $ 83,983 $ 97,537
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,167 $ 13,893
Accrued expenses 8,548 7,429
Income taxes payable 343 2,666
Current portion of capital lease obligations 835 1,246
Deferred revenue 4,087 3,298
------------- ------------
Total current liabilities 18,980 28,532
Long-term portion of capital lease obligations 365 991
Shareholders' equity:
Undesignated preferred stock -- --
Common stock 66,485 63,543
Unrealized gain on available-for-sale securities -- 31
Retained earnings (1,847) 4,440
------------- ------------
Total shareholders' equity 64,638 68,014
------------- ------------
Total liabilities and shareholders' equity $ 83,983 $ 97,537
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Net revenues:
Hardware products and services $ 22,642 $ 23,858 $ 69,742 $ 84,195
Software licenses and services 5,309 9,649 17,976 21,871
-------- --------- --------- --------
Total net revenues 27,951 33,507 87,718 106,066
Cost of revenues:
Hardware products and services 14,875 20,457 55,592 64,211
Software licenses and services 1,779 1,197 5,964 2,878
-------- --------- --------- --------
Total cost of revenues 16,654 21,654 61,556 67,089
-------- --------- --------- --------
Gross margin 11,297 11,853 26,162 38,977
Operating expenses:
Research and development 3,207 3,515 11,346 9,505
Marketing and selling 6,181 8,366 25,140 25,514
General and administrative 2,219 2,121 8,255 6,135
Charge for business restructuring -- 4,832 -- 4,832
-------- --------- --------- --------
Total operating expenses 11,607 18,834 44,741 45,986
-------- --------- --------- --------
Operating loss (310) (6,981) (18,579) (7,009)
Other income, net 343 335 1,167 950
Gain on sale of product lines -- -- 6,932 --
-------- --------- --------- --------
Income (loss) before income taxes 33 (6,646) (10,480) (6,059)
Provision for income taxes (income
tax benefit) 13 (1,927) (4,193) (1,729)
-------- --------- --------- --------
Net income (loss) $ 20 $ (4,719) $ (6,287) $ (4,330)
-------- --------- --------- --------
-------- --------- --------- --------
Net income (loss) per share:
Primary $ 0.00 $ (0.30) $ (0.38) $ (0.27)
-------- --------- --------- --------
-------- --------- --------- --------
Fully diluted $ 0.00 $ (0.30) $ (0.38) $ (0.27)
-------- --------- --------- --------
-------- --------- --------- --------
Shares used in per share computations:
Primary 17,122 15,851 16,460 15,783
-------- --------- --------- --------
-------- --------- --------- --------
Fully diluted 17,700 15,851 16,460 15,783
-------- --------- --------- --------
-------- --------- --------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operations:
Net loss $ (6,287) $ (4,330)
Reconciliation to cash provided (used) by operations:
Noncash restructuring charges -- 6,588
Depreciation and amortization 3,227 3,564
Gain on sale of product lines (6,932) --
Deferred income taxes (2,563) 559
Other, net 526 --
Changes in:
Accounts receivable, net 9,634 9,574
Inventories 445 6,505
Prepaid expenses and other (1,945) (3,055)
Accounts payable (8,726) (8,543)
Income taxes payable (2,323) (833)
Accrued expenses 375 (352)
Deferred revenue 1,179 4,607
----------- ----------
Cash provided (used) by operations (13,390) 14,284
Cash flows from investing activities:
Short-term investments, net 10,229 (1,536)
Proceeds from sale of product lines 8,625 --
Capitalization of software costs -- (392)
Changes in other assets 249 (1,056)
Property and equipment purchases, net (2,105) (2,743)
----------- ----------
Cash provided (used) by investing activities 16,998 (5,727)
Cash flows from financing activities:
Principal payments on capital lease obligations (1,037) (1,162)
Repurchases of stock (89) (4,026)
Proceeds from issuance of stock, net 2,876 1,721
----------- ----------
Cash provided (used) by financing activities 1,750 (3,467)
Increase in cash and equivalents 5,358 5,090
Cash and equivalents:
Beginning of period 13,364 7,407
----------- ----------
End of period $ 18,722 $ 12,497
----------- ----------
----------- ----------
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ -- $ 482
----------- ----------
----------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
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, 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 1995 Annual Report on Form 10-K. The consolidated
results of operations for the three- and nine-month periods ended September
30, 1996 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 1996. Certain
financial statement amounts from 1995 have been reclassified to conform with
current year methods of presentation.
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. The effect of common equivalent shares is not included in earnings
per share calculations during periods in which such 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,
1996 1995
------------- ------------
Purchased components and sub-assemblies $11,930 $ 9,548
Work in process 364 1,814
Finished goods 1,492 3,036
------- -------
$13,786 $14,398
------- -------
------- -------
BUSINESS RESTRUCTURING
In the third quarter of 1995, the Company determined to undertake a strategic
restructuring plan intended to realign and consolidate its software
businesses and reduce operating expenses, and to improve the operating
performance of its hardware operations in reaction to intense competition and
perceived slowness in the X-terminal market. The Company began implementing
this plan during the third quarter of 1995, and terminated approximately
fifty employees associated with such operations.
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 products that were currently yielding, or were anticipated
to yield, profit margins that did not meet certain minimum requirements
of the Company;
6
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-- reducing and consolidating facilities devoted to the conduct of the
business through a combination of sublease activities or negotiating
early exits to existing lease agreements; and
-- reducing the number of employees to a level deemed to be essential to
reengineer the business for improved operating performance.
A description of the types and amounts (in thousands) of accruals made for
restructuring costs in 1995, and the cumulative amounts charged against such
accruals, is presented below.
Initial Sept. 30,
Amounts Asset Cash 1996
Accrued Write-offs Payments Balance
------- ---------- -------- -------
Reserve for the write-down of
phase-out inventories $2,706 ($2,706) $ -- $ --
Employee termination benefits 1,580 -- (1,252) 328
Exiting facilities - related
obligations 2,256 -- (1,296) 960
Asset impairment & other 996 (815) -- 181
------ -------- -------- ------
Total $7,538 ($3,521) ($2,548) $1,469
------ -------- -------- ------
------ -------- -------- ------
It is anticipated that the restructuring plan will continue through 1996.
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease
liabilities, were $98,000 and $173,000 for the first nine months of 1996 and
1995, respectively. Income tax payments were $209,000 and $120,000 for the
first nine months of 1996 and 1995, respectively.
7
<PAGE>
NETWORK COMPUTING DEVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THIS 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. 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."
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 ON FORM 10-Q, 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, 1995, CONTAINED IN THE COMPANY'S 1995 ANNUAL
REPORT ON FORM 10-K.
The Company designs, develops, manufactures and markets network computers and
associated 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 and, initially, its electronic messaging
software and 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, value added
resellers ("VARs") and other resellers. In June 1996, the Company determined
to recombine its Systems and Software business units.
During the third quarter of 1995, the Company created and began implementing
a plan to restructure the business to 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, and a reduction in the number of employees. During the third
quarter of 1995, the Company recognized charges totaling $7.5 million for the
implementation of this plan, which is anticipated to continue through 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.
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 original equipment manufacturers ("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"). The
AT&T Agreement provided for total minimum royalties of $15 million through
1998, and contemplated the development of additional Internet access products
by NCD for license to AT&T. In September 1995, the AT&T Agreement was
amended to provide that the additional products would not be developed and
that NCD would be paid fees totaling $9 million through 1996 for development
work completed at the time of the amendment and for a license to evaluate the
Mariner product. In 1995, the Company recognized license fees totaling $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. 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 providing desktop information access solutions for network
computing environments. In February 1996, the Company sold the Mariner
product line to FTP Software, Inc. ("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. The
net gain recognized on this transaction was $7.0 million.
8
<PAGE>
NETWORK COMPUTING DEVICES, INC.
In February 1994, the Company acquired all of the outstanding stock of Z-Code
Software Corp., a developer of electronic mail and messaging application
products for open system environments. The Company's Z-mail electronic
messaging product was a part of the Company's Software business unit. 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. None
of the remaining Performance Shares or contingent cash payments were issued
or paid. In light of disappointing operating results, intensifying
competition in this market, and other related factors, the Company determined
during the second quarter of 1996 to sell or discontinue this product line.
In June 1996, the Company sold its Z-Mail product line to NetManage, Inc. for
a total sales price of $1.3 million. The net loss recognized on this
transaction was $27,000.
In June 1996, the Company announced an agreement with International Business
Machines Corporation ("IBM") for the joint development of a network
application terminal for resale by IBM. Under the agreement, IBM has funded
and will continue to fund a portion of NCD's development efforts. NCD has
completed certain hardware and software deliverables, including the shipment
of certain prototypes of the network application terminal to IBM. Subject to
the successful completion of the development effort, including satisfaction
of certain design and manufacturing requirements, the agreement states that
IBM will purchase a substantial portion of its requirements from NCD during
1997 and 1998, although IBM will be under no obligation to make such
purchases until the development phase has been successfully completed and IBM
has commenced volume shipments of such devices.
RESULTS OF OPERATIONS
As mentioned above under "Overview," the Company determined to recombine its
two former business units (i.e., "Systems" and "Software") into a single
operation in June 1996. Although the Company is now managed as one operating
entity, the Company is reporting hardware and software revenues
independently, as reflected in this Form 10-Q. Revenues, cost of revenues
and gross margins relating to prior operating periods have been conformed to
the current presentation, and the following discussions of net revenues and
gross margins address the revised presentation.
TOTAL NET REVENUES
Total net revenues for the third quarter and first nine months of 1996 were
$28.0 million and $87.7 million, respectively, both representing decreases of
17% when compared with the same periods of 1995. The proportion of
international revenues to total net revenues has increased from 28% for the
third quarter of 1995 to 32% for the third quarter of 1996; this proportion
of international revenues has remained relatively flat when comparing the
nine-month periods presented (32% for 1996 and 31% for 1995).
Sales to Motorola Inc. ("Motorola"), which is deemed to be a related party
due to its ownership of approximately 9% of the Company's common stock,
accounted for 7% and 6% of the Company's total net revenues in the third
quarters of 1996 and 1995, respectively, and 6% and 8% of total net revenues
for the first nine months of 1996 and 1995, respectively. Motorola is the
Company's largest OEM customer, and also purchases the Company's products as
an end user customer. 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 continue to decline during the
balance of 1996, but is unable to predict
9
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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.
HARDWARE REVENUES
Hardware revenues consist primarily of revenues from the sale of network
computers, related hardware, and to a lesser extent, the sale of related
service activities. Hardware revenues were $22.6 million for the third
quarter of 1996, compared to $23.9 million for the third quarter of 1995, and
$69.7 million for the first nine months of 1996, compared to $84.2 million
for the first nine months of 1995. The decline in revenues for all
comparative periods was due to a decline in units shipped and a decline in
the average selling prices ("ASPs") of the Company's hardware products due to
lower-priced network computers and intense competition.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the licensing of
software products and related support services. Current software products
that are generating revenue include WINCENTER,-TM- the Company's multi-user
WindowsNT-Registered Trademark- application server software,
PC-XWARE,-Registered Trademark- the Company's network computer software for
PCs, and NCDWARE,-Registered Trademark- the Company's proprietary network
computer software. Through the first quarter of 1996, Software revenues also
included revenues from the development and licensing of the Company's Mariner
Internet connectivity software (which product line was sold in the first
quarter of 1996), and the Z-Mail product line (which was sold during the
second quarter of 1996). Software revenues were $5.3 million for the third
quarter of 1996, a decrease of 45% compared to the third quarter of 1995, and
$18.0 million for the first nine months of 1996, a decrease of 18% compared
to the same period of 1995. The decline in software revenues for all
comparative periods presented resulted from reduced revenues from the
Company's former Z-Mail and Mariner product lines, in addition to
significantly reduced PC-Xware revenues during a period in which its sales
force was in transition. The declines in the aforementioned revenue streams
were offset to a degree by higher WINCENTER software revenues. Revenues
related to Z-Mail were $352,000 and $1.1 million for the second quarter and
first six months of 1996, respectively. No such revenues were recognized
during the third quarter of 1996, and such revenues will not occur in the
future, as the Z-Mail product line was sold during the second quarter of
1996. Net revenues for the first quarter of 1996 also included $426,000
associated with the AT&T Agreement, while no such revenues were recognized
during the second or third quarters of 1996. The Company will recognize the
remaining $1.3 million in revenues associated with the AT&T Agreement as its
obligations thereunder are satisfied through the filling of orders placed by
AT&T or upon expiration of the Company's obligations under the Agreement in
the third quarter of 1997, whichever is earlier.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin on Hardware revenues was 34% and 14% for the third
quarters of 1996 and 1995, respectively, and 20% and 24% for the first nine
months of 1996 and 1995, respectively. The gross margin for the third
quarter of 1995 reflects a $2.7 million inventory-related charge to cost of
revenues associated with the restructuring that impacted margin for that
quarter. Contributing to higher gross margins in the third quarter of 1996
were comparatively lower sales discounts and material costs. Sales discounts
declined as a result of more stringent pricing controls, and material costs
declined primarily as a result of market declines in the cost of certain
semiconductor components. These positive influences on margin were slightly
offset by increased sales of lower-priced EXPLORA-TM- network computers, which
generally carry lower margins. The slight decrease in the nine-month period
of 1996 compared to the nine-month period of 1995 is due to an increased mix
of lower-priced, lower-margin EXPLORA network computers and decreased
manufacturing efficiencies caused by lower volumes.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin on Software revenues was 66% and 88% for the third
quarters of 1996 and 1995, respectively, and 67% and 87% for the nine-month
periods ended September 30, 1996 and 1995, respectively. The decline was due
primarily to a higher mix of WINCENTER revenues, which carry a lower margin
because of higher third party royalty costs, and reduced revenues of other
software products, including revenues associated with the AT&T Agreement.
10
<PAGE>
NETWORK COMPUTING DEVICES, INC.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $3.2 million and $3.5 million
for the third quarters of 1996 and 1995, respectively, and $11.3 million and
$9.5 million for the first nine months of 1996 and 1995, respectively. The
slight quarter-to-quarter decrease was primarily related to the absence of
Z-Mail and Mariner R&D expenses in the third quarter of 1996, partially
offset by an increase in R&D expenses related to the network computing area.
Included in R&D expenses in the third quarter of 1996 was $0.5 million in
costs and expenses associated with the agreement with IBM for the joint
development of a network application terminal. 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 expenses were 11% and 10% for the third
quarters of 1996 and 1995, respectively, and 13% and 9% for the nine months
ended September 30, 1996 and 1995, respectively, reflecting the impact of
increased spending or lower net revenues. The Company plans to increase its
investment in research and development, primarily in the area of network
computers and related software.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $6.2 million and $8.4 million for the
third quarters of 1996 and 1995, respectively, and $25.1 million and $25.5
million for the first nine months of 1996 and 1995, respectively. The
decreases in 1996 compared to the corresponding periods of the previous year
reflect the reconsolidation of the Company's remaining business units, which
commenced in June of 1996. As a percentage of net revenues, marketing and
selling expenses were 22% and 25% for the third quarters of 1996 and 1995,
respectively, and 29% and 24% for the first nine months of 1996 and 1995,
respectively, and resulted from the combined impact of decreased spending and
lower net revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $2.2 million and $2.1
million for the third quarters of 1996 and 1995, respectively, and $8.3
million and $6.1 million for the first nine months of 1996 and 1995,
respectively. The slight quarter-to-quarter increase was primarily related
to increased legal costs and higher performance-related bonuses, offset by
the decrease in expenses related to Z-Mail, as well as the elimination of
certain redundant functions. The increase in expenses for the nine months
ended September 30, 1996 compared to the same period in 1995 was due to both
severance costs associated with the elimination of certain positions within
the Company and increased personnel costs during early 1996 that resulted
from the division of the Company into two separate business units (Systems
and Software). As mentioned above under "Marketing and Selling," in June of
1996, the Company determined to recombine its remaining business units. As a
percentage of net revenues, G&A expenses were 8% and 6% for the third
quarters of 1996 and 1995, respectively, and 9% and 6% for the nine months
ended September 30, 1996 and 1995, respectively, reflecting the combined
impact of increased expenses and lower net revenues.
BUSINESS RESTRUCTURING
During the third quarter of 1995, the Company created and began implementing
a plan to restructure the business in order to improve the Company's
operating performance potential. The plan included substantial modifications
to the Company's manufacturing processes, phasing out the activities related
to less profitable products, a reduction in facilities, and a reduction in
the number of employees. During the third quarter of 1995, the Company
recognized charges totaling $7.5 million for the implementation of this plan,
which is anticipated to continue through 1996. See "Business Restructuring"
in the Notes to Condensed Consolidated Financial Statements contained in this
Form 10-Q.
OTHER INCOME
Other income primarily includes interest income, net of interest expense.
The slight increase in interest income, net, in the third quarter and first
nine months of 1996 over the comparable periods of 1995 was due primarily to
lower interest expense incurred on declining capital lease obligation
balances.
11
<PAGE>
NETWORK COMPUTING DEVICES, INC.
GAIN ON SALE OF PRODUCT LINES
The gain on the sale of product lines for the first nine months of 1996
represents the net gain on the sale of the Mariner product line in February
1996, offset slightly by the loss on the sale of the Z-Mail product line in
June 1996.
INCOME TAXES
The Company recorded an income tax provision of $13,000 during the third
quarter of 1996. This compared to an income tax benefit of $1.9 million on
pretax losses incurred during the third quarter of 1995.
FINANCIAL CONDITION
Total assets as of September 30, 1996 decreased by $13.6 million, or 14%,
from December 31, 1995. The change in total assets primarily reflected
decreases in combined cash and short-term investments and accounts receivable
of $4.9 million and $9.6 million, respectively. The decline in combined cash
and short-term investments was primarily the result of operating losses,
partially offset by cash received from the sale of product lines. The
reduction in accounts receivable was primarily caused by a reduction in sales
volumes coupled with increased customer collection efforts during the
quarter. The aforementioned decreases were partially offset by an increase
in prepaid and other expenses of $5.4 million which was primarily related to
deferred income tax assets generated by net operating losses.
Total liabilities as of September 30, 1996 decreased by $10.2 million, or
34%, from December 31, 1995. The decrease was primarily associated with
lower accounts payable and income taxes payable balances. The reduction in
accounts payable was associated with lower inventory receipts, while the
reduction in income taxes payable was caused by significant operating losses
during 1996.
LIQUIDITY
As of September 30, 1996, the Company had combined cash and equivalents and
short-term investments totaling $31.2 million, with no significant debt. 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.
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 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 Corporation ("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
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"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
12
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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 and reduced profit
margins. 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" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
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 DRAMs, 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
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 a 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 ensure 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 - Product Development" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
13
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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 early 1996, the Company experienced significant returns of its
Software products from its distributors. There can be no assurance that the
Company will not experience similar levels of returns in the future. 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" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
RELIANCE ON INDEPENDENT CONTRACTORS
The Company relies on independent contractors for virtually all of 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" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
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.
14
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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. Recently,
the Company experienced turnover of certain senior management positions.
Robert G. Gilbertson was appointed to the position of President and Chief
Executive Officer and Rudolph G. Morin was appointed as Executive Vice
President of Operations and Finance. 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,
procurement, manufacturing, and sales organizations. The Company believes
that its future success will 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 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 Company's common stock.
15
<PAGE>
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to "Item 3. Legal Proceedings" in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 for a description of
litigation pending against the Company and certain of its officers and
directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on July 30, 1996.
(a) The following five persons nominated by management were elected as
directors at the meeting:
Robert G. Gilbertson
Philip Greer
Paul Low
Stephen A. MacDonald
Peter Preuss
(b) A proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 1989 Stock Option Plan by 1,000,000 shares
was approved by a vote of 5,555,106 shares for, 2,119,517 shares
against, 99,881 shares abstaining, and 7,507,490 broker non-votes.
(c) A proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan by 350,000
shares was approved by a vote of 7,508,646 shares for, 1,054,301 shares
against, 104,114 shares abstaining, and 6,614,933 broker non-votes.
(d) A proposal to ratify the selection of KPMG Peat Marwick LLP as
independent auditors of the Company for the current fiscal year was
approved by a vote of 15,189,855 shares for, 47,248 shares against, and
44,891 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 11.1 Statement Regarding Computation of Shares Used in Income
(Loss) Per Share Computations.
Exhibit 27 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the three-month period
ended September 30, 1996.
16
<PAGE>
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: November 12, 1996
By:
/s/ Rudolph G. Morin
------------------------------------------------
Rudolph G. Morin
Executive Vice President, Operations and Finance
(Duly Authorized and Principal Financial and
Accounting Officer)
17
<PAGE>
Exhibit 11.1
NETWORK COMPUTING DEVICES, INC.
Statement Regarding Computation of Shares
Used in Income (Loss) Per Share Computations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares
outstanding during the period 16,615 15,851 16,460 15,783
Common share equivalents:
Dilutive effect of stock options 507 - - -
--------- --------- --------- ---------
Total 17,122 15,851 16,460 15,783
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) $ 20 ($4,719) $ (6,287) ($4,330)
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary income (loss) per share $0.00 ($0.30) ($0.38) ($0.27)
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully Diluted:
Weighted average common shares
outstanding during the period 16,615 15,851 16,460 15,783
Common share equivalents:
Dilutive effect of stock options 1,085 - - -
--------- --------- --------- ---------
Total 17,700 15,851 16,460 15,783
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss), adjusted
for fully diluted calculations $20 ($4,719) ($6,287) ($4,330)
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted income (loss) per share $0.00 ($0.30) ($0.38) ($0.27)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 18,722
<SECURITIES> 12,526
<RECEIVABLES> 22,749
<ALLOWANCES> 3,792
<INVENTORY> 13,786
<CURRENT-ASSETS> 76,258
<PP&E> 24,236
<DEPRECIATION> 18,671
<TOTAL-ASSETS> 83,983
<CURRENT-LIABILITIES> 18,980
<BONDS> 0
0
0
<COMMON> 66,485
<OTHER-SE> (1,847)
<TOTAL-LIABILITY-AND-EQUITY> 83,983
<SALES> 87,718<F1>
<TOTAL-REVENUES> 87,718
<CGS> 61,556<F2>
<TOTAL-COSTS> 61,556
<OTHER-EXPENSES> 44,741
<LOSS-PROVISION> 690
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (10,480)
<INCOME-TAX> (4,193)
<INCOME-CONTINUING> (6,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,287)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
<FN>
<F1>Includes revenues from licensing of software and support services.
<F2>Includes costs from licensing of software and support services.
</FN>
</TABLE>
