<PAGE>
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 June 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 15,826,983
at July 31, 1995.
<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
June 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations
for the Three- and Six-Month Periods Ended
June 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
for the Six-Month Periods Ended June 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 9
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security
Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
Signature 18
2
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NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
June 30, December 31,
-------- ------------
1995 1994
------- --------
(UNAUDITED)
Current assets:
Cash and cash equivalents $4,687 $7,407
Short-term investments 28,531 23,813
Accounts receivable, net 25,884 31,743
Inventories 18,877 23,622
Prepaid expenses and other 3,283 1,325
Deferred income taxes 1,861 2,535
------- --------
Total current assets 83,123 90,445
Property and equipment, net 6,666 6,052
Other assets 5,041 4,532
------- --------
Total assets $94,830 $101,029
------- --------
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $11,496 $17,636
Current portion of capital lease obligations 1,190 1,346
Income taxes payable 867 833
Accrued expenses 9,112 7,828
------- --------
Total current liabilities 22,665 27,643
Long-term portion of capital lease obligations 1,330 1,497
Shareholders' equity:
Common stock 61,975 63,420
Retained earnings 8,860 8,469
------- --------
Total shareholders' equity 70,835 71,889
------- --------
Total liabilities and shareholders' equity $94,830 $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)
<TABLE>
Quarter Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1995 1994 1995 1994
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenues $35,031 $41,157 $72,559 $ 79,339
Cost of revenues 22,049 27,924 45,435 53,060
------- ------- ------- --------
- ------
Gross profit margin $12,982 $13,233 $27,124 $ 26,279
------- ------- ------- --------
Operating expenses:
Research and development 2,971 2,383 5,990 4,718
Marketing and selling 8,202 9,164 17,148 16,855
General and administrative 2,032 1,638 4,014 3,191
Charge for acquired in-process research and development - - - 15,031
------- ------- ------- --------
Total operating expenses 13,205 13,185 27,152 39,795
------- ------- ------- --------
Operating income (loss) (223) 48 (28) (13,516)
Other income, net 343 232 615 7,720
------- ------- ------- --------
Income (loss) before income taxes and cumulative
effect of accounting change 120 280 587 (5,796)
Provision for income taxes 35 98 198 3,232
------- ------- ------- --------
Net income (loss) $ 85 $ 182 $ 389 $ (9,028)
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per share $ 0.00 $ 0.01 $ 0.02 $ (0.54)
------- ------- ------- --------
------- ------- ------- --------
Weighted average common shares and equivalents - primary 17,003 17,327 16,797 16,619
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) for fully diluted per share calculations $ 85 $(6,847) $ 389 $(15,912)
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per share - fully diluted $ 0.00 $ (0.38) 0.02 $ (0.92)
------- ------- ------- --------
------- ------- ------- --------
Weighted average common shares and equivalents - fully diluted 17,003 17,883 16,797 17,212
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
See accompanying notes.
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
Six Months Ended June 30,
-------------------------
1995 1994
------- -------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ 389 $(9,028)
Reconciliation to cash provided (used) by operations:
Acquired in-process research and development - 15,031
Gain on sale of NetManage, Inc. common stock - (7,237)
Depreciation and amortization 2,594 1,918
Changes in:
Accounts receivable, net 5,859 (242)
Inventories 4,745 (2,601)
Prepaid expenses and other (1,958) (1,248)
Accounts payable (6,140) 5,262
Income taxes payable 34 (356)
Accrued expenses 1,284 (223)
------- -------
Cash provided by operations 6,807 1,276
------- -------
Cash flows from investing activities:
Short-term investments, net (4,718) (9,932)
Changes in other assets (146) (323)
Capitalization of software costs (445) (897)
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 (1,968) (1,391)
------- -------
Cash used by investing activities (7,277) (6,410)
------- -------
Cash flows from financing activities:
Principal payments on capital lease obligations (805) (705)
Repurchases of stock (2,373) -
Proceeds from issuance of stock, net of issuance costs 928 662
------- -------
Cash used by financing activities (2,250) (43)
------- -------
Decrease in cash and equivalents (2,720) (5,177)
Cash and equivalents:
Beginning of period 7,407 6,879
------- -------
End of period $ 4,687 $ 1,702
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE PERIOD:
Interest $ 148 $ 152
------- -------
------- -------
Income taxes $ 164 $ 3,588
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF 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
lease obligations $ 482 $ 132
------- -------
------- -------
</TABLE>
See accompanying notes.
5
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 and its subsidiaries'
consolidated financial position, the results of their operations, and their 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 quarter and six-month periods ended June 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.
(2) NET INCOME (LOSS) PER SHARE
Net income (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.
(3) FINANCIAL STATEMENT COMPONENTS
REVENUES
Net revenues consisted of (in thousands):
Quarter Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1995 1994 1995 1994
------- ------- ------- -------
Revenues $31,422 $38,184 $66,289 $72,847
Related party revenues 3,609 2,973 6,270 6,492
------- ------- ------- -------
$35,031 $41,157 $72,559 $79,339
------- ------- ------- -------
------- ------- ------- -------
Related party revenues consisted of sales to Motorola, Inc., a related party by
virtue of its holding approximately 10% and 8% of the Company's common stock as
of June 30, 1995 and 1994, respectively.
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):
June 30, December 31,
1995 1994
------- -------
Purchased components and sub-assemblies $11,384 $17,282
Work in process 1,191 1,121
Finished goods 6,302 5,219
------- -------
$18,877 $23,622
------- -------
------- -------
6
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SHORT-TERM INVESTMENTS
For the periods presented, all short-term investments were classified as
"available-for-sale securities" and reflected in the balance sheet as "Short-
term investments." The differences in actual cost and fair value as of June 30,
1995 and December 31, 1994 were not significant. Short-term investments
consisted of the following (in thousands):
June 30, December 31,
1995 1994
------- -------
Tax exempt money market fund $ 0 $ 24
Municipal notes/bonds 16,431 10,458
Corporate equity securities 12,100 12,233
Commercial paper - 1,098
------- -------
$28,531 $23,813
------- -------
------- -------
The cost and estimated fair value of available-for-sale debt securities, by
contractual maturity, consisted of the following (in thousands):
June 30, December 31,
1995 1994
------- -------
Due in one year or less $21,255 $22,101
Due within one to five years 7,276 1,712
------- -------
$28,531 $23,813
------- -------
------- -------
(4) 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 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 & 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.
7
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 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.
(IN THOUSANDS, EXCEPT PER SHARE DATA) Six Months Ended June 30, 1994
------------------------------
Net revenues $79,550
-------
-------
Net income $ 5,628
-------
-------
Primary net income per share $ 0.32
-------
-------
Fully diluted net income per share $ 0.31
-------
-------
(5) SALE OF NETMANAGE COMMON STOCK
The Company acquired approximately five percent of the outstanding capital stock
(297,768 shares after a 3-for-1 stock split in August 1993) of NetManage, Inc.
in March 1993 for a cash investment of $2 million. In September 1993, NetManage
concluded the initial public offering of its common stock, and on February 17,
1994, the Company sold all of its shares of NetManage common stock in an
underwritten public offering for net proceeds of $9.2 million.
(6) BUSINESS RESTRUCTURING
In July 1995, the Company determined to undertake a strategic restructuring
program to realign and consolidate its software businesses and intended to
reduce operating expenses and improve the operating performance of its X-
Terminal operations in reaction to intense competition and slowness in the X-
Terminal market. The Company plans to streamline its X-Terminal operations by
reducing its work force, consolidating facilities, and reserving for the
impairment of various other assets. The restructuring will involve a reduction
of approximately 40% of the Company's leased facilities, and in excess of 20% of
the Company's employees. This plan will result in a one-time, pre-tax charge to
earnings currently estimated to be between $5.5 million and $7.5 million. Such
charge will result in a net loss for the quarter ending September 30, 1995 and
could result in a net loss for the year ending December 31, 1995.
8
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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 information should be read in conjunction with the unaudited
condensed consolidated interim financial statements and the notes thereto
included in Item 1 of this Quarterly Report on Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of Operations
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 develops and markets a variety of information access software,
including PC-Xware, its line of X server products which integrate PCs into X
Window UNIX environments, and its Z-mail electronic mail and messaging products
for multivendor open applications, and has announced Mariner, an Internet
navigation software tool that provides a unified interface to all Internet
resources. The Company also offers a broad range of X-terminals with graphical
multiwindow interfaces allowing users access to various operating system
environments via the industry-standard X Window system.
The Company currently intends to focus its efforts on the continued growth and
expansion of its software product lines while maintaining its strong market
position in the X-Terminal market by continuing to develop and improve its X-
Terminal product line. The Company anticipates that its software business will
account for an increasingly significant portion of its future net revenues.
The results of operations for the interim periods ended June 30, 1995 are not
necessarily indicative of the results to be expected for the full year or any
future period.
BUSINESS RESTRUCTURING
In July 1995, the Company determined to undertake a strategic restructuring
program to realign and consolidate its software businesses and intended to
reduce operating expenses and improve the operating performance of its X-
Terminal operations in reaction to intense competition and slowness in the X-
Terminal market. The Company plans to streamline its X-Terminal operations by
reducing its workforce, consolidating facilities, and reserving for the
impairment of various other assets.
The restructuring will involve a reduction of approximately 40% of the Company's
leased facilities, and in excess of 20% of the Company's employees. This plan
will result in a one-time, pre-tax charge to earnings in the third quarter of
1995, currently estimated to be between $5.5 million and $7.5 million. Such a
charge will result in a net loss for the quarter ending September 30, 1995 and
could result in a net loss for the year ending December 31, 1995.
ACQUISITION OF Z-CODE SOFTWARE CORP.
In February 1994, the Company acquired all of the outstanding stock of Z-Code
Software Corp. ("Z-Code"), a developer of electronic mail and messaging
application products for open systems environments across heterogeneous computer
architectures, operating systems and networks. The initial consideration for the
acquisition was approximately $3.2 million in cash, shares of the Company's
Common Stock valued at approximately $10.9 million, and other direct acquisition
costs for a total of approximately $15.6 million. Approximately $15 million of
this amount was allocated by the Company to in-process research and
9
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NETWORK COMPUTING DEVICES, INC.
development and charged to operations in the first quarter of 1994, resulting
in a net loss for the quarter and for the six-month period ended June 30,
1994. Z-Code's operating results have been included in the consolidated
financial statements from the date of acquisition. Additional cash and stock
(the "Performance Shares") were contingently issuable to the Z-Code
shareholders and option holders subject to the achievement of certain
financial performance objectives over a 15-month period ending in the second
quarter of 1995. In July 1994, the Company paid approximately $2.5 million to
the former principal shareholder of Z-Code in exchange for his contingent
cash and stock rights. Substantially all of this amount was also allocated to
in-process research and development and charged to operations in the third
quarter of 1994. Based upon operating results through the second quarter of
1995, no additional cash or Performance Shares will be paid or issued to the
remaining holders of such contingent rights.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's condensed
consolidated statements of operations as a percentage of net revenues for the
periods indicated.
Six Months
Quarter Ended Ended
June 30, June 30,
--------------- --------------
1995 1994 1995 1994
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 62.9 67.8 62.6 66.9
----- ----- ----- -----
Gross profit 37.1 32.2 37.4 33.1
----- ----- ----- -----
Operating expenses:
Research and development 8.5 5.8 8.3 5.9
Marketing and selling 23.4 22.3 23.6 21.3
General and administrative 5.8 4.0 5.5 4.0
Non-recurring charge for acquired
in-process research and development .0 .0 .0 19.0
----- ----- ----- -----
Total operating expenses 37.7 32.1 37.4 50.2
----- ----- ----- -----
Operating income (loss) (0.6) 0.1 0.0 (17.1)
Other income, net 1.0 0.5 0.8 9.8
----- ----- ----- -----
Income (loss) before income taxes 0.3 0.6 0.8 (7.3)
Provision for income taxes 0.1 0.2 0.3 4.1
----- ----- ----- -----
Net income (loss) 0.2% 0.4% 0.5% (11.4%)
----- ----- ----- -----
----- ----- ----- -----
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; the timing of
significant orders from and shipments to large customers; periodic changes in
product pricing due to competitive factors; and the availability and pricing of
key components, 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 operating results may
fluctuate in the future as a result of these and other factors, including future
developments in the X-Terminal market, continued growth in the software markets
that the Company's products address, acceptance of the Company's products, the
Company's success in developing and introducing new products, its product and
customer mix, its success in entering the personal computer-based software
business, and its ability to develop and maintain strategic alliances.
10
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NETWORK COMPUTING DEVICES, INC.
The Company's operating results have also 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, and adversely affecting the Company's
operating results. In addition, intense competition from alternative desktop
computing products, particularly personal computers, has also slowed the growth
of the X-Terminal market. The Company expects this intense competition to
continue and expects that overall market demand for X-Terminal products will
continue to decline for the foreseeable 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 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 closely, 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 operates with a small backlog. Sales and operating results,
therefore, generally depend on the volume and timing of orders received, which
are difficult to forecast and may occur disproportionately during a quarter and
the year. The Company has increasingly experienced disproportionate amounts 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 operating
results. Historically, the Company has experienced slowness in orders during the
first and third quarter of each calendar year due to buying patterns common in
the computer industry.
A 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 make the Company's products less or more price-competitive in
those markets. During recent quarters, as much as 9% of net revenues were
derived from sales to a single customer in the United Kingdom and were
denominated in pound sterling. Sales denominated in a foreign currency, which
may increase in the future, 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 large foreign currency-denominated sales could pose significant
exposure to exchange rate fluctuations, the Company acquires forward exchange
contracts to reduce such exposure.
The Company's stock price has been and will continue to be subject to
significant fluctuations, particularly in response to quarterly variations in
the Company's actual or anticipated operating results. Shortfalls in actual
revenues, gross margins or earnings from historical levels or from levels
forecast by securities analysts could have an adverse effect on the trading
price of the Company's 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
11
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NETWORK COMPUTING DEVICES, INC.
immediate and adverse effect on the common stock price. In addition, the
Company participates in a highly dynamic industry, and its common stock price is
subject to significant volatility, often based upon industry factors unrelated
to the Company's operating performance.
NET REVENUES
Net revenues for the second quarter of 1995 were $35.0 million, a decrease of
$6.1million (15%) from the second quarter of 1994. For the six months ended June
30, 1995, net revenues were $72.6 million, a decrease of $6.8 million (9%) from
the comparable 1994 period. While software revenues increased, the overall
decrease in the Company's net revenues was attributable to a slowness in orders
for the Company's X-terminal products.
The Company's X-terminal products accounted for net revenues of $28.8 million
(82% of net revenues) in the second quarter of 1995 compared to $37.5 million
(91% of net revenues) in the second quarter of 1994. For the six-months ended
June 30, 1995, net revenues from X-Terminal products were $61.4 million, a
decrease of $10.5 million (15%) from the comparable 1994 period.
The Company's software products accounted for net revenues of $6.2 million (18%
of net revenues) in the second quarter of 1995 compared to $3.6 million (9% of
net revenues) in the second quarter of 1994. For the six months ended June 30,
1995, net revenues from software products were $11.1 million, an increase of
$3.7 million (51%) from the comparable 1994 period. The Company anticipates that
software products will continue to account for an increasingly significant
portion of its revenues in future periods.
Hardware revenues decreased in 1995 over 1994 due primarily to increased
competition in the marketplace from other X-Terminal manufacturers, suppliers of
workstations and alternative desktop computing devices, particularly personal
computers.
Software revenues increased in 1995 over 1994 primarily due to a new version of
PC-Xware, the Company's PC-UNIX integration software, which was introduced in
July 1994, as well as the addition of revenues from Z-Code's e-mail products
subsequent to the Z-Code acquisition in February 1994.
International sales (sales to customers outside North America) accounted for 30%
and 29% of net revenues in the second quarter of 1995 and 1994, respectively,
and 35% and 32% of net revenues for the six-month periods ended June 30, 1995
and 1994, respectively. The Company expects that international sales will
continue to represent a significant portion of its net revenues, although the
percentage of international revenues derived from software products may differ
significantly from historic rates for the Company's X-Terminal products.
Sales to Motorola, Inc., the Company's largest OEM customer and a related party
by virtue of its ownership of approximately 10% of the Company's common stock,
represented approximately 10% and 7% of net revenues in the second quarter of
1995 and 1994, respectively, and 9% and 8% for the six month periods ended June
1995 and 1994, respectively. The Company does not have a long-term sales
contract with Motorola, Inc., which purchases the Company's products on an as-
needed basis to satisfy the requirements of its own customers. Accordingly, the
Company is unable to predict future levels of sales to Motorola, Inc.
Significant reductions in such sales levels from their historic rate could have
a material adverse effect on the Company's operating results.
GROSS PROFIT
Cost of revenues consists primarily of materials, manufacturing overhead,
freight and warranty costs for X-Terminal products, and the cost of duplication
for software products. The Company's gross profit margins were 37.1% and 32.2%
for the second quarter of 1995 and 1994, respectively, and 37.4% and 33.1% for
the six months ended June 30, 1995 and 1994, respectively. The increase in gross
margin was due to the shift in product mix toward the Company's higher margin
software products.
12
<PAGE>
NETWORK COMPUTING DEVICES, INC.
The Company expects its X-Terminal product transition cycle to be extremely
important in 1995 as it introduces a number of new and enhanced products across
its product line. The introduction of new or enhanced X-Terminal products
requires the Company to manage the transition from older, displaced products in
order to minimize disruption in customer ordering patterns, avoid excess levels
of older product inventories, which may need to be disposed of at substantially
reduced margins, and ensure that adequate supplies of new products can be
delivered on a timely basis to meet customer demand. Because the Company is
continuously engaged in this product development and transition process, its
operating results may be subject to considerable fluctuation, particularly on a
quarterly basis.
The Company, like many computer system vendors, relies on single or limited
source suppliers for the components and subassemblies used in its X-Terminal
products. The Company has, from time to time, experienced delays in the receipt
of components and subassemblies from certain of these suppliers. In addition,
the Company is required to place orders for certain components and subassemblies
several months in advance of its anticipated requirements, and its ability to
react to short-term increases or decreases in customer demand is, therefore,
limited. Although to date the Company has generally been able to obtain an
adequate supply of such components and subassemblies and endeavors to maintain
inventory levels adequate to guard against interruptions in supplies, there can
be no assurance that it will be able to obtain adequate supplies in the future.
The Company's inability to develop alternative sources of supply in the future,
or to obtain sufficient components from existing suppliers as required, could
adversely affect the Company's gross margin. Certain other components, such as
integrated circuits - particularly memory, microprocessors and ASICs - though
generally available from multiple sources of supply, are subject to computer
industry-wide demand which could result in limited availability or significant
fluctuations in pricing. This could affect the Company's ability to obtain
adequate materials and/or subject the Company to significantly higher costs than
it has historically experienced. In addition, the Company's gross margins have,
from time to time, been adversely affected by costs incurred to expedite receipt
of key components, primarily to meet unexpected increases in demand for the
Company's products and unexpected variations in product mix and customer type.
The Company expects that it will periodically incur these expediting charges in
the future and that they could adversely affect the Company's gross margins in
future periods. The Company purchases certain of its components and
subassemblies from offshore vendors whose prices, although denominated in U.S.
dollars, are tied to the local currency. Should the U.S. dollar sustain a
weakening exchange rate against these currencies, particularly the Japanese yen,
gross margins could be adversely affected. The reliance upon foreign
manufacturers for components exposes the Company to additional risks, including
trade restrictions and changes in tariffs.
The Company expects intense competition in the desktop computing market to
continue. Competitive pressures, timing of individual large orders and possible
further changes in both hardware and software pricing, could negatively affect
the Company's gross margins. In an effort to lessen the impact of lower X-
Terminal selling prices on its gross margins, the Company is continuing its
efforts to reduce product costs by redesigning its products, developing new
manufacturing processes and emphasizing the growth and expansion of its software
product lines.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by $588,000 (25%) from the second
quarter of 1994 to the second quarter of 1995, and by $1.3 million (27%) from
the first six months of 1994 to the first six months of 1995. These increased
expenditures were primarily attributable to additions to the Company's
engineering staff as a result of increases in its investment in the development
of software products. These increases include the software research and
development expenses of the Z-Code product line (beginning in February 1994) as
well as staffing and contractors fees for certain other software development
projects, net of certain customer development fees received. The increase in
software development costs were partially offset by the capitalization of
certain costs ($218,000 in the quarter ended June 30, 1995 and $445,000 for the
six-month period ended June 30, 1995 and none in the comparable periods in 1994)
incurred in the development of new e-mail products, including Z-Mail for Windows
and Macintosh, and the new versions of PC-Xware and NCDware.
13
<PAGE>
NETWORK COMPUTING DEVICES, INC.
Development of new, high-performance computer products involves a number of
risks, including the accurate anticipation of customer requirements and
technological trends. In addition, software products as complex as those offered
by the Company may contain undetected errors or failures when first introduced
or as new versions are released. There can be no assurance that, despite
significant testing by the Company and by current and potential customers,
errors will not be found in new products after commencement of commercial
shipments. Such errors could result in loss of or delay in market acceptance.
The market for desktop computer products is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The Company believes that its future success will depend, in large part, on its
ability to enhance its existing product line and to continue to develop,
introduce and deliver new products in a timely fashion.
MARKETING AND SELLING
Marketing and selling expenses decreased by $962,000 (10%) from the second
quarter of 1994 to the second quarter of 1995, but increased $293,000 (2%)
from the first six months of 1994 to the first six months of 1995. The second
quarter decrease was largely due to decreased employee headcount and efforts
to reduce marketing and selling costs of X-Terminal products. The Company
intends to continue to invest in software sales and marketing activities and
to expand its recently consolidated software telesales, channel sales and
direct sales activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $394,000 (24%) from the second
quarter of 1994 to the second quarter of 1995, and by $823,000 (26%) from the
first six months of 1994 to the first six months of 1995. These increases were
due to the inclusion, beginning in February 1994, of the general and
administrative costs of the Company's Z-Code product line, as well as other
costs required to support the Company's operations.
OPERATING INCOME
The Company's X-terminal products accounted for an operating loss of $954,000 in
the second quarter of 1995 compared to operating income of $466,000 in the
second quarter of 1994, and an operating loss of $658,000 in the six months
ended June 30, 1995 compared to operating income of $1.5 million in the
comparable period in 1994. Operating expenses associated with the X-terminal
business did not decline proportionately with revenues. The reduction in
operating results is principally due to the decrease in net revenues and
associated operating margins.
The Company's software products accounted for operating income of $0.7 million
in the second quarter of 1995 compared to an operating loss of $418,000 in the
second quarter of 1994. For the six month period ended June 30, 1995, software
products accounted for operating income of $0.6 million compared to an operating
loss from operations of $15 million for the six-month period ending June 30,
1994. The increases are primarily the result of increased net software revenues
and the Company's having incurred a $15 million charge for acquired in-process
research and development in connection with the acquisition of Z-Code in 1994.
The Company's operating expenses are based in part on its expectations of future
revenues and expense levels are generally committed in advance of sales.
Although the Company has taken steps to reduce the operating expenses of its X-
terminal business, the Company is continuing to expand its software organization
and increase its operating expenses in order to generate and support increased
revenue in the future.
14
<PAGE>
NETWORK COMPUTING DEVICES, INC.
OTHER INCOME
Other income, which consists primarily of interest income and realized gains on
the sale of investments, net of interest expense, increased $111,000 (48%) from
the second quarter of 1994 to the second quarter of 1995, and $132,000 (27%)
from the six-month period ended June 30, 1995 compared to the same period in
1994.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes for the second quarter of 1995 was 29%
compared to 35% in the second quarter of 1994, and 34% for the six-month period
ended June 30, 1995 compared to 36% for the comparable period in 1994.
The Company expects to record a tax benefit from the anticipated restructuring
charge in the third quarter of 1995 at the statutory federal and state tax
rates. See "Business Restructuring."
NET INCOME (LOSS)
Net income for the second quarter of 1995 was $85,000, or $.00 per share,
compared to $182,000, or $.01 per share, for the second quarter of 1994. For the
six-month period ended June 30, 1995, net income was $389,000, or $.02 per
share, compared to a net loss of $9.0 million, or $.54 per share, for the
comparable period in 1994. Included in the six month period ending June 30,
1994, are charges totaling $15 million for in-process research and development
related to the February 1994 acquisition of Z-Code and a gain of $4.7 million
(net of income tax) on the Company's sale of the common stock of NetManage, Inc.
LIQUIDITY AND CAPITAL RESOURCES
For the sixth month period ended June 30, 1995, cash equivalents and short-term
investments increased from $31.2 million (31% of total assets) to $33.2 million
(35% of total assets). Net cash provided by operations was $6.8 million for the
first half of 1995. The increase in cash was primarily due to increased
collections of accounts receivable combined with a decrease in inventories which
was partially offset by cash used to repurchase the Company's common stock.
In July 1995, the Company determined to undertake a strategic restructuring
program intended to realign and consolidate its software businesses and to
reduce operating expenses and improve the operating performance of its X-
Terminal operations in reaction to intense competition and slowed growth in the
X-Terminal market. See "Business Restructuring." Cash requirements associated
with the anticipated strategic restructuring will be approximately $1 to $2
million in the second half of fiscal 1995.
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 during the 12-month period
ending October 31,1995, at prevailing market prices. Repurchases are made under
the program using the Company's cash resources. Shares repurchased are restored
to the status of authorized but unissued shares. During the second quarter of
1995, an aggregate of 245,200 shares were repurchased for a total purchase price
of $1.8 million. As of June 30, 1995, the Company had repurchased an aggregate
of 563,600 shares for a total purchase price of $3.3 million.
The Company believes that its existing cash and short-term investments, expected
cash flow from operations and amounts available under its $7 million line of
credit will be sufficient to meet its currently anticipated liquidity and
capital expenditure requirements for the balance of the year. There is no
assurance, however, that cash flows from operations will be positive in future
periods.
15
<PAGE>
NETWORK COMPUTING DEVICES, INC.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective for the Company beginning in fiscal 1996.
Management has not yet determined what impact, if any, adoption will have on its
financial position or results of operations.
16
<PAGE>
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on June 28,
1995.
(b) The following five persons nominated by management were elected as
directors at the meeting:
Edward L. Marinaro
Philip Greer
Stephen A. MacDonald
Peter Preuss
Edward F. Staiano
(c) A proposal to approve the Company's Outside Directors Stock Option Plan
was approved by a vote of 12,152,189 shares for, 364,050 shares
against, and 356,942 shares abstaining.
ITEM 5. OTHER INFORMATION
In July 1995, the Company determined to undertake a strategic restructuring
program intended to realign and consolidate its software businesses and to
reduce operating expenses and improve the operating performance of its X-
Terminal operations. The Company plans to streamline its X-Terminal operations
by reducing its work force, consolidating facilities, and reserving for the
impairment of various other assets. The restructuring will involve a reduction
of approximately 40% of the Company's leased facilities and in excess of 20% of
the Company's employees. The plan will result in a one-time, pre-tax charge to
earnings in the third quarter of 1995, currently estimated to be between $5.5
million and $7.5 million. Such a charge will result in a net loss for the
quarter ending September 30, 1995 and could result in a net loss for the year
ending December 31, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11.1 Statement Regarding Computations of Net Income (Loss)
Per Share.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
17
<PAGE>
NETWORK COMPUTING DEVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETWORK COMPUTING DEVICES, INC.
Date: August 22, 1996 By: /s/ RUDOLPH G. MORIN
---------------------------------
Rudolph G. Morin
Title: Executive Vice President,
Operations and Finance
18
<PAGE>
EXHIBIT 11.1
NETWORK COMPUTING DEVICES, INC.
STATEMENT RE: COMPUTATIONS OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS )
(UNAUDITED)
<TABLE>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1995 1994 1995 1994
------- ------- ------- --------
<S> <C> <C> <C> <C>
PRIMARY
Net income (loss)---- primary....... $ 85 $ 182 $ 389 $ (9,028)
------- ------- ------- --------
------- ------- ------- --------
Weighted average common shares
during the period................. 15,652 16,699 15,598 16,305
Common stock options, treasury
stock method...................... 1,351 628 1,199 314
------- ------- ------- --------
Shares used in computing primary
net income (loss) per share....... 17,003 17,327 16,797 16,619
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per share -
primary........................... $ .00 $ .01 $ .02 $ (.54)
------- ------- ------- --------
------- ------- ------- --------
FULLY DILUTED
Net income (loss)--- fully diluted.. $ 85 $(6,847) $ 389 $(15,912)
------- ------- ------- --------
------- ------- ------- --------
Weighted average common shares
during the period................. 15,652 16,700 15,598 16,305
Weighted average common shares
contingently payable.............. -- 1,183 -- 907
Common stock options, treasury
stock method...................... 1,351 -- 1,199 --
------- ------- ------- --------
Shares used in computing primary
net income (loss) per share....... 17,003 17,883 16,797 15,630
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per share -
fully diluted..................... $ 0.00 $ (0.38) $ 0.02 $ (0.92)
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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 QUALIFIELD IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,687
<SECURITIES> 28,531
<RECEIVABLES> 28,399
<ALLOWANCES> 2,515
<INVENTORY> 18,877
<CURRENT-ASSETS> 83,123
<PP&E> 22,067
<DEPRECIATION> 15,401
<TOTAL-ASSETS> 94,830
<CURRENT-LIABILITIES> 22,665
<BONDS> 1,330
0
0
<COMMON> 61,975
<OTHER-SE> 8,860
<TOTAL-LIABILITY-AND-EQUITY> 94,830
<SALES> 72,559
<TOTAL-REVENUES> 72,559
<CGS> 45,435
<TOTAL-COSTS> 45,435
<OTHER-EXPENSES> 27,152
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> (615)
<INCOME-PRETAX> 587
<INCOME-TAX> 198
<INCOME-CONTINUING> 389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 389
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
