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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
____________ to ____________
Commission File Number 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (Zip Code)
(415) 694-0650
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
28, 1997, as reported on the NASDAQ National Market System, was approximately
$215,342,075. Shares of Common Stock held by each officer, director and
holder of 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 1997, 17,090,820 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders of
Network Computing Devices, Inc. (the "Proxy Statement") scheduled to be held
on May 28, 1997, are incorporated by reference in Part III of this Report on
Form 10-K.
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NETWORK COMPUTING DEVICES, INC.
PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
FUTURE PERFORMANCE AND RISK FACTORS" AND ELSEWHERE IN THIS REPORT, THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
CURRENTLY ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF.
ITEM 1. BUSINESS.
GENERAL
The Company provides network computer hardware and software that delivers
high-performance, easy-to-manage, simultaneous access to any application on
an enterprise network from any desktop. The Company's product lines include
the EXPLORA and HMX families of Universal Network Computers, WINCENTER
PRO-TM- multi-user WINDOWS NT-Registered Trademark- application server
software, and PC-XWARE-Registered Trademark- network computer software for
PCs. The Company's network computing products provide businesses and other
enterprises with an open systems approach to network computing based on the
Company's Network Computing Architecture ("NCA"). The Company's network
computers offer graphical multiwindow interfaces for users in various
operating system environments using industry-standard communication
protocols. They provide a cost-effective, high-performance alternative to
networked workstations and personal computers and offer significant
performance advantages over "dumb" terminals used in traditional mainframe or
minicomputer-based systems, particularly with respect to windowing and
graphics capabilities. Since introducing its first product in 1989, the
Company has shipped over 300,000 network computers to approximately 6,000
customers worldwide. With the recent introduction of the Company's WINCENTER
PRO Windows application server software and new, lower-priced network
computers, the Company now offers network computing systems that provide
users access to a broad range of applications and services, including
Microsoft Windows applications. The Company also develops and markets
information access software, including its line of PC connectivity products
which interconnect PCs and integrate PCs into networking.
Network Computing Devices, Inc. was incorporated in California in February
1988. Unless the context otherwise requires, the terms "the Company" and
"NCD" refer to Network Computing Devices, Inc. and its consolidated
subsidiaries.
INDUSTRY BACKGROUND
NETWORK COMPUTING SYSTEMS
Computing environments made a pendulum-like swing from the highly centralized
mainframe and minicomputer systems of the 1970s to the fully distributed
personal computer- and workstation-based systems of the 1980s. While the
earlier approach benefited from centralized system administration and
security, users had to compete for under-powered, centralized processors on a
timesharing basis, using low-performance, character-based "dumb" terminals.
During the 1980s, microprocessor-based systems improved in price and
performance, and graphical user interfaces ("GUIs") with easy-to-use windows,
menus and icons became widely available. User groups within large
organizations began implementing their own solutions, using personal
computers and workstations on the desktop to give each individual user a
dedicated computing resource. The need to interconnect these computing
resources led to the development of local area networks ("LANs"), which
resulted in processing, data and applications being spread across many
desktops. This approach brought with it new problems: the high cost of
installing, maintaining and upgrading a computer on every desktop;
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under-utilization of individual computing resources; and complex system
management requiring large MIS staffs.
As the 1990s approached, a new computing environment evolved: "network
computing" combines the cost-effectiveness, manageability and security of the
original centralized model with the performance, GUIs and network
accessibility of the later distributed model.
The key technology behind the original development of the network computing
approach was the X Window System, or X, a graphical windowing system. X
software runs over a TCP/IP (Transmission Control Protocol/Internet Protocol)
network that allows full use of network computing resources. Unlike
operating systems designed for stand-alone personal computers, X is an open
system, not tied to any particular hardware or operating system, allowing the
development of applications that can run on multi-vendor products on a common
network. This multi-vendor capability is possible because the X architecture
separates windowing into two distinct parts: the graphical display function
on the user's desk; and the computing function, which executes the
applications, at shared "compute servers" (personal computers, workstations,
or larger computers) anywhere on the network. This model, which the Company
refers to as NCA, addresses both the individual's need for an advanced GUI
and the organization's need for reduced system management overhead and better
utilization of computing resources. Users of network computing systems can
simultaneously access multiple applications running on separate compute
servers on the network, and view and manipulate these applications in
separate windows on their screens. Network computing systems also allow the
organization to keep up with advances in computing technologies while
protecting existing equipment investments. Rather than replacing every
desktop system when the industry attains new price/performance points, the
organization can simply add new computing resources to the network; the
desktop devices stay in place.
Although X-based network computing systems have been deployed in a wide range
of network environments, particularly in UNIX and other large computer-based
applications, these systems require the availability of X protocol support
from the vendors of host operating systems software and application software
developers. Until the mid-1990's, the absence of support by 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.
Over the last several years, a number of important developments occurred
which expanded the potential markets for network computing systems. First,
the availability of the powerful Pentium microprocessor enabled the
development of large Windows-based systems. Second, Microsoft NT Server
software, combined with Microsoft-authorized multi-user software, became
available to support multi-user Windows applications. Third, the rapid
growth of the Internet and Internet-based computing has popularized the
concept of remote computing and created new interest in the network computing
model.
NCD was founded initially to design, manufacture and market a family of
X-based network computing systems including desktop devices, referred to as
"network computers" or "X terminals." Since the introduction of the
Company's first X terminal products in 1989, the Company has continually
enhanced its network computer product line and added a wide range of
functionality independent of the X Window System. With the introduction in
1995 of its WINCENTER PRO multi-user Windows application server software and
new, lower-priced network computers, the Company now offers network computing
systems that provide users access to a broader range of applications and
services including Windows applications, as well as UNIX and other host-based
applications.
INFORMATION ACCESS SOFTWARE
The market for enterprise information access software is large and comprised
of a number of segments, many of which are expanding rapidly. Segments of
this market include: PC-based TCP/IP software stacks and applications,
including X access software; electronic mail software; and Internet access
software.
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With the continuing proliferation of increasingly powerful and low-cost PCs
in large organizations, NCD identified a demand for software products to
enable DOS-based and Windows-based PCs to emulate X terminals for use in
predominantly UNIX environments. In order to address this market, the
Company, in 1992, acquired Graphic Software Systems, a pioneer in the
development of PC X software. In 1993, the Company introduced PC-XWARE, its
initial PC-UNIX integration software product. PC-XWARE is based on the
Company's NCDWARE X terminal software and provides network connectivity using
an NCD-developed TCP/IP software stack. NCD now offers versions of PC-XWARE
for WINDOWS 3.1, WINDOWS 95-Registered Trademark- and WINDOWS NT users.
In an effort to enhance its position in the information access market, the
Company, in February 1994, acquired Z-Code Software Corp. ("Z-Code"), a
developer of electronic mail and messaging application products for
multivendor open system environments. Following the Z-Code acquisition, the
Company developed and introduced e-mail products, including Z-MAIL-Registered
Trademark-for Windows and Macintosh operating systems. However, due to
insufficient operating results, intensifying competition in this market and
other factors, the Company sold its Z-MAIL product line during June 1996.
Taking advantage of its expertise in TCP/IP-based networking software, the
Company in 1995 developed MARINER, an Internet access and navigation tool.
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 determined in late 1995 to sell the MARINER product
line and focus its attention on its core business of providing desktop
information access solutions for network computing environments. The MARINER
product line was sold in the first quarter of 1996. See "Recent
Developments."
RECENT DEVELOPMENTS
During 1996, the Company underwent significant changes to its operations,
including changes in senior management, product focus, and business unit
organization. During the first half of the year, the Company initiated and
completed the disposition of two software product lines, MARINER and Z-MAIL.
Also during the first half of 1996, the Company recorded operating losses of
$18.3 million, and combined cash and short-term investments had declined from
$36.2 million at December 31, 1995 to $26.4 million at June 30, 1996. By the
end of the second quarter, the Company announced that it had appointed a new
President and Chief Executive Officer, Robert G. Gilbertson, and a new
Executive Vice President of Operations & Finance and Chief Financial Officer,
Rudolph G. Morin. Shortly thereafter, Doug Klein, a founder of the Company,
was appointed to Senior Vice President & Chief Technology Officer and
Lorraine Hariton, the Vice President of Business Development, was added to
the senior management team. In September 1996, Cecil M. Dye was appointed
Senior Vice President of Sales & Marketing. This new senior management team
initiated a "turnaround" program that included recombining its Systems and
Software business units, spending and hiring controls, significant
reorganization of the Research & Development and Sales & Marketing functions
and asset management initiatives. By the end of the second half, profitable,
cash-flow positive operations had been achieved. The above results
nothwithstanding, there is no assurance that this trend toward profitability
will continue into the future. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations --Future
Performance and Risk Factors."
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 (the "IBM
Agreement"), IBM has funded, and will continue to fund through the first
quarter of 1997, a portion of the Company's development efforts. The Company
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 related product development
effort, including satisfaction of certain design and manufacturing
requirements, the IBM Agreement provides for IBM to purchase a substantial
portion of its requirements for such products from the Company 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 products. The agreement provides for IBM
to purchase certain minimum order quantities of product through December
1998, and also provides for an
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option to renew the agreement for an additional two years. If IBM does not
fulfill its minimum order commitment, the Company may impose a per-unit
charge for the number of units represented by any shortfall in orders,
payable subsequent to December 31, 1998. If IBM fulfills its product orders
from a supplier other than the Company, then the Company is entitled to
charge a per-unit royalty for each unit supplied to IBM by a party other than
the Company. Notwithstanding the foregoing provisions, a material shortfall
in IBM's orders from the quantity levels anticipated by the Company for any
period will have a material adverse effect on the Company's operating
results. See "Item 7. Management's Discussion and Analysis of Financial
Position and Results of Operations -- Future Performance and Risk Factors
- --Fluctuations in Operating Results."
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.
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. 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 the
fourth quarter of 1996, the Company substantially concluded such
restructuring activities, and an amount of $1.1 million in related accruals
was determined to be in excess of amounts required. As a result, the Company
recognized a $1.1 million credit for business restructuring during the fourth
quarter of 1996. The credit relates primarily to lease obligations that were
exited or subleased at dates or rates more favorable than those anticipated
at the time of the initial restructuring plan.
MARKETS AND APPLICATIONS
NETWORK COMPUTING SYSTEMS
NCD's network computing systems are used in a broad range of industries for a
wide variety of applications. Historically, the Company's X-based systems
have been sold primarily into three types of computing environments as: (1)
an upgrade to ASCII and 3270 "dumb" terminals in mainframe and minicomputer
transaction processing environments; (2) a lower cost desktop alternative to
workstations in distributed environments; and (3) an enhancement or
alternative to personal computer networks.
TERMINAL REPLACEMENT. A principal market for X-based network computers is
replacement of the installed base of approximately 25 million ASCII and 3270
terminals. Many commercial users in transaction processing applications are
upgrading their centralized systems in order to obtain the productivity
advantages of GUIs and windowing and the flexibility of "open" systems based
on industry-standard operating systems such as UNIX. The Company's NCA
provides these users with a three-tiered X-based network computing
environment in which: (1) existing applications and corporate-wide databases
remain on the central mainframe or minicomputer; (2) departmental-level
applications are run on UNIX, RISC-based compute servers; and (3) network
computers on each user's desk provide simultaneous access to applications and
data on the mainframe, minicomputers and compute servers.
WORKSTATION ENVIRONMENTS. Many of the early buyers of X terminals were also
early users of workstation technology and viewed X-based network computers
primarily as a low-cost alternative for expanding their workstation networks.
In these environments, X terminals can access the excess processing power of
existing workstations, supplying users with a GUI at a considerably lower
cost than a workstation with
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equivalent display characteristics. Thus, organizations can provide
windowing and graphics for uses that previously could not justify the cost of
a full workstation. Many users of X terminals in UNIX and VMS workstation or
minicomputer environments have developed an optimized configuration of
workstations and X terminals. In these environments, rather than providing
some users with workstations and others with X terminals, every user is given
an X terminal, and compute servers based on high-performance workstations
(without monitors) are shared among all users. The organization thereby
realizes cost advantages by centralizing processing, memory and disk
requirements into fewer, high-performance servers.
PERSONAL COMPUTER ENVIRONMENTS. Until recently, users of X terminals in
predominantly UNIX-based environments who needed access to DOS or Windows
applications could access these applications using an X terminal running on a
Windows emulation system on a compute server. Although these emulation
systems met the needs of the occasional user of these applications, a more
robust, high performance means of executing Windows applications in large
UNIX-based network environments has become an increasing market requirement
over the past several years. The recent introductions of the Company's
WINCENTER PRO Windows application server software, running on Pentium-based
server hardware, and the Company's new, lower-priced EXPLORA network
computers, were intended to address this requirement. In addition WINCENTER
PRO software and EXPLORA network computers are now being marketed to users of
Windows who recognize the benefit of the network computing model.
INTRANET ENVIRONMENTS. With the popularization of the Internet and the
availability of low cost Internet software and authoring tools, many
companies are utilizing the Internet for internal electronic communications
systems. These systems are being used to facilitate employee collaboration
and distribute company information in an easy to manage, low cost manner.
NCD network computers are being used as a means of providing low cost, easy
maintenance access to the Internet in these "Intranet" applications. Many of
the software systems used to implement corporate Intranets, including
worldwide web ("WWW") browsers, WWW servers, e-mail clients, e-mail servers
and database servers, can run on the WINCENTER PRO and can be accessed from
NCD network computers and other X-capable devices such as a UNIX workstation,
a competing brand of X terminal, or a personal computer with X display server
software.
SOFTWARE PRODUCTS
PC CONNECTIVITY SOFTWARE. Personal computer users who wish to obtain access
to UNIX or VMS applications, but who also desire to maintain local DOS or
Windows application processing, are potential customers for the Company's PC
X software. A PC running X Window System software can match the performance
of a low-end X-based network computer, and can be useful for PC users who
need less frequent access to network computing resources.
WINDOWS SERVER SOFTWARE. Users of network computers, UNIX workstations, and
older PCs, who desire the ability to run the latest Windows applications on
their existing hardware, comprise the target market for WINCENTER PRO, the
Company's Windows application server software. This product is an
enterprise-oriented solution designed to accommodate growth in large,
heterogeneous computing environments.
PRODUCTS
NETWORK COMPUTING SYSTEMS
The Company offers a broad line of network computing products that provide
businesses and other enterprises with an open systems approach to network
computing based on the Company's Network Computing Architecture. The
Company's network computing systems include NCD network computers, NCDWARE
operating system software and WINCENTER PRO, the Company's Windows
application server software.
NETWORK COMPUTERS. The Company's network computer products are desktop devices
that are used to access information and applications residing elsewhere on a
local area or wide area network. The
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Company's network computers offer graphical multi-window interfaces for users
in various operating system environments via the industry-standard X Window
system. Network computers provide a cost-effective high-performance
alternative to network workstations and personal computers. Although the
Company's initial X-based network computers (referred to as "X terminals")
were used primarily in UNIX and other large computer-based environments, the
recent introduction of multi-user versions of the WINDOWS NT operating system
and the Company's WINCENTER PRO Windows application server software allows
network computers to be used in network environments using Windows-based
application software.
The Company's network computer product line includes models with various
screen sizes and a range of software extensions and network interfaces.
Hardware platforms are based on different microprocessors, addressing a wide
range of price/performance requirements. Custom ASICs used in the design of
most NCD products help reduce the cost of connection logic and provide
hardware acceleration for certain graphics functions. NCD's network
computers feature single-board electronics and incorporate current ergonomic
standards in monitor technology. NCD's network computers come with a full
line of peripherals, including mouse and several keyboard options.
The Company's HMX and HMXPRO24 product lines are high-performance network
computers that are targeted at the UNIX workstation market. These products
are based on a 64-bit RISC architecture and can accommodate up to 136
megabytes of random access memory. Two custom ASICs provide high-performance
graphics for multimedia applications. The HMXPRO24 supports up to 24-bit
color and up to 1600-by-1200 pixel screen resolution on 17, 20 and 21-inch
monitors. Suggested list prices for HMX and HMXPRO24 network computers
currently range from $2,095 to $4,920.
The EXPLORA and EXPLORAPRO are the Company's low-end network computers. The
target markets for these products include the PC replacement market (when
sold in conjunction with WINCENTER PRO), the terminal replacement market and
the enterprise Internet access, or "Intranet," market. The EXPLORA is based
on the 32-bit PowerPC RISC processor. The EXPLORA can accommodate up to 36
megabytes of memory, and the EXPLORAPRO can support up to 56 megabytes.
Display resolution is adjustable from 640-by-480 to 1280-by-1024 pixel screen
resolution, with 15, 17 and 20-inch monitors available. EXPLORA and
EXPLORAPRO network computers are packaged in a compact 7.25-by-10 inch
package that is rugged and extremely quiet due to the lack of a
noise-producing fan. Suggested list prices for EXPLORA and EXPLORAPRO
network computers currently range from $695 to $2,920.
NCDWARE. The Company's network computers run NCDWARE, the Company's
proprietary enhanced version of the industry-standard X Window system
software. NCDWARE incorporates extensive enhancements to the basic X server
software to improve performance, system manageability and robustness. The
key component of NCDWARE is the latest version of the X Window display server
protocol. NCDWARE supports a wide variety of communications protocols.
NCDWARE provides Network Audio System for audio applications, capability for
running local window managers and local terminal emulation sessions and
network management capability.
WINCENTER PRO. WINCENTER PRO is Windows application server software that
runs on Intel-based computers, typically Pentium-class systems. WINCENTER
PRO includes Microsoft NT as the base operating system and WINFRAME,
Microsoft-authorized multi-user software which the Company licenses from
Citrix Systems, Inc. ("Citrix"). See "Proprietary Rights and Licenses."
WINCENTER PRO also includes NCD-developed graphics and network features which
make WINCENTER PRO compatible with the X Window protocol supported by NCD
network computers and UNIX workstations. WINCENTER PRO allows a single
server to provide Windows applications to many users simultaneously.
WINCENTER PRO is compatible with off-the-shelf applications software for
WINDOWS 95, WINDOWS NT and WINDOWS 3.1 and can serve up to 100 users,
depending upon server performance, applications and usage. WINCENTER PRO can
be used to add Windows applications to existing UNIX network environments, to
create multi-user Windows systems, or to implement Intranets within
enterprises. Users can access WINCENTER PRO from any NCD network computer
(including older model X terminals), competing brands of X terminals, UNIX
and VAX workstations that support X Windows and personal computers with X
display server software. Suggested list prices for WINCENTER PRO start at
$459 per user with a five-user minimum.
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PC CONNECTIVITY PRODUCTS
MARATHON. MARATHON is a suite of TCP/IP products for Windows-based personal
computers. MARATHON includes important networking functionality that is not
currently available from Microsoft, including graphical client and server
support, Network File System (NFS) client and server support and multiple
terminal emulation modes. Versions of MARATHON are available for WINDOWS
3.1, WINDOWS 95 and WINDOWS NT. The WINDOWS 3.1 version includes NCD's
proprietary TCP/IP stack as well as a dialer for remote TCP/IP applications.
PC-XWARE. PC-XWARE is a family of PC X server software products for Windows
PCs that provide connectivity to X Windows applications running on UNIX and
other multi-user host systems. There are versions of PC-XWARE for WINDOWS
3.1, WINDOWS 95 and WINDOWS NT. PC-XWARE includes all the basic capabilities
of MARATHON and adds high performance X server software. PC-XWARE is based
on the Company's NCDWARE network computing software and offers many of the
same local application and network management features. PC-XWARE also allows
personal computer users to access application software running on the
Company's WINCENTER PRO application server.
PRODUCT DEVELOPMENT
The Company believes that its ability to maintain its position as a major
supplier of network computing systems and expand the market for network
computing and information access products will depend in large part upon its
ability to enhance its existing line of network computer and software
products, and to continue developing new hardware and software products that
incorporate the latest improvements in technology. Accordingly, the Company
is committed to investing significant resources in software and hardware
development activities.
The Company's current research and development programs include:
- Enhancements to its network computing systems to increase
compatibility with Windows environments, including support for
external floppy disk drives and local printers.
- Further enhancement of its network computer product line, particularly
the development of lower cost desktop computers and multimedia
features, in some instances in collaboration with current or potential
future OEM partners.
- Enhancements to WINCENTER PRO software, including multimedia support.
- Enhancements to PC-XWARE and MARATHON software to provide support for
current and prospective Windows-related operating systems.
There can be no assurance that any of these development efforts will result
in the introduction of new products or that any such products will be
commercially successful. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Future Performance and
Risk Factors --New Product Development and Timely Introduction of New and
Enhanced Products."
During 1996, 1995 and 1994, the Company's research and development
expenditures were $14,930,000, $13,119,000 and $10,486,000, respectively.
THE FOREGOING DISCUSSION CONCERNING THE COMPANY'S PRODUCT DEVELOPMENT PROGRAM
INCLUDES FORWARD-LOOKING STATEMENTS. ACTUAL PRODUCT DEVELOPMENT RESULTS MAY
DIFFER SUBSTANTIALLY DEPENDING UPON A
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VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED UNDER "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
FUTURE PERFORMANCE AND RISK FACTORS."
MARKETING AND SALES
The principal objectives of the Company's marketing strategy are to increase
awareness of the benefits of the Company's NCA, maintain the Company's
position as a recognized leader in the network computing industry and
differentiate the Company's hardware and software products from competing
products. The Company's marketing activities include participation in trade
shows, conferences and seminars, advertising and press relations with leading
trade publications, publication of technical articles and a telemarketing
program. In addition, the Company is increasing its focus on the use of
indirect and OEM channels of distribution.
The Company regards its technical support and system engineering personnel as
an integral part of its marketing strategy because of the technical nature of
the sales process. These personnel participate directly in the sales cycle
by educating prospective customers on the advantage of network computing and
assisting in system planning, configuration and integration.
The Company distributes its Hardware products in North America primarily
through direct sales to end-user customers. The Company currently has 13
sales and service offices located throughout North America. The Company
supplements its selling efforts in North America through sales to
distributors, VARs and system integrators who may add software and provide
systems for specific end-user applications, such as hospital information
systems, manufacturing control systems and automobile parts control systems.
The Company also sells its PC connectivity software products by telemarketing.
The Company also sells its products to OEMs who combine the Company's
products with computers and peripherals, add application software and sell
complete computer systems to end-users. OEM sales represented approximately
15%, 15% and 17% of the Company's revenues for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company sells its products internationally primarily through a
distributor channel comprised of approximately 35 distributors and other
resellers who sell and service the products in their respective territories
and who are supported by the Company's direct sales force. The Company has
established local subsidiaries in Australia, France, the United Kingdom,
Germany and Sweden, which provide sales and technical support to the
Company's distributors in those regions.
In July 1990, the Company entered into an agreement with Software Research
Associates, Inc. ("SRA") to form Nihon NCD K.K. ("Nihon NCD"), a Japanese
corporation. The Company owns approximately 19% of the outstanding stock of
Nihon NCD, and SRA owns the remaining outstanding stock. The agreement
contemplates that the Company may make additional investments in Nihon NCD to
increase its ownership to a maximum of 51% of its outstanding stock, although
the terms of any such future investment would be subject to further
agreement. The Company has entered into a Distributorship and OEM Agreement
with Nihon NCD under which Nihon NCD serves as a nonexclusive distributor of
the Company's products in Japan. The term of the agreement is automatically
extended for successive one-year periods, expiring in July of each year,
unless either party gives notice of its intention not to renew at least 90
days prior to the expiration of the term then in effect.
International sales, including sales to foreign OEM customers, represented
approximately 33%, 33% and 31% of the Company's net revenues during 1996,
1995 and 1994, respectively. International sales may be subject to
government controls and other risks, including export licenses, federal
restrictions on the export of critical technology, changes in demand
resulting from currency exchange fluctuations, political instability, trade
restrictions and changes in tariffs. To date, the Company has experienced no
material difficulties due to these factors.
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NETWORK COMPUTING DEVICES, INC.
No single customer of the Company accounted for more than 10% of the
Company's net revenues during any of the last three fiscal years.
SERVICE AND SUPPORT
The Company believes that its ability to provide service and support is and
will continue to be an important element in the marketing of its products.
The Company maintains in-house repair facilities and also provides telephone
and electronic mail access to its technical support staff. The Company's
technical support engineers not only provide assistance in diagnosing
problems but work closely with customers to address system integration issues
and to assist customers in increasing the efficiency and productivity of
their systems. The Company provides system level software support through
its factory-based technical maintenance organization and field system
engineers, and also offers software update services which allow customers to
purchase subsequent releases of its software products. Eurographics
Industries Ltd., a leading European service organization, provides certain
repair services for the Company's European distributors and OEM customers.
The Company typically warrants its products against defects in materials and
workmanship for one year after purchase by the end user, and offers an
extended warranty for up to an additional two years.
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.
The Company is a major supplier of network computing systems and products.
Competitive X-based network computing products are offered by a number of
established computer manufacturers, including Hewlett-Packard Company ("HP"),
which have substantially greater name recognition, engineering, manufacturing
and marketing capabilities and greater financial resources than those
available to the Company. The Company also competes with a number of other
manufacturers of network computing products, including Tektronix, Inc.
("Tektronix") and Wyse Technology, Inc. ("Wyse"). The Company believes that
the principal competitive factors among network computer suppliers include
price, breadth of product line, product performance, software features,
network expertise, service and support, and market presence. Price
competition is particularly intense among suppliers of lower-priced,
lower-margin network computers such as the Company's EXPLORA and EXLORAPRO
models. Workstation manufacturers, like HP, who also offer network computer
products, may have advantages over independent network computer vendors,
including the Company, based on their ability to "bundle" their network
computers, workstations and personal computers in certain large system sales.
The Company and other manufacturers of network computers also face
significant competition from established computer manufacturers whose
personal computer and workstation products offer alternatives to network
computers for most applications. In the high-performance, technical segment
of the desktop computer market, network computers compete with workstation
networks offered by such manufacturers as HP, Digital Equipment Corporation
("DEC"), IBM and Sun Microsystems, Inc. Because network computing does not
require application processing capability on every desktop, network computing
systems compete favorably on a price/performance basis with workstation
networks and offer cost advantages in initial system installation, as well as
subsequent system upgrading and administration. However, the significant
market presence and reputation of the larger workstation manufacturers, and
customer perceptions regarding their need for desktop application processing
capability, constitute obstacles to the penetration of this market segment by
network computer manufacturers.
At the low end of the commercial segment of the desktop computer market, the
Company competes with suppliers of lower cost ASCII and 3270 terminals.
These products do not offer the graphics and windowing capabilities offered
by NCD's network computing systems, but are still appealing to certain price
sensitive
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NETWORK COMPUTING DEVICES, INC.
customers. Moreover, PC networks offer an alternate means of upgrading from
ASCII and 3270 terminal systems in many commercial applications.
Until recently, the absence of X protocol support from Microsoft, combined
with the proliferation of off-the-shelf Windows-based application software,
constituted an obstacle to the expansion of the network computing model into
Windows-based environments. The introduction of the Company's WINCENTER PRO
multi-user Windows application server software and new, lower-priced EXPLORA
network computers have allowed the Company to offer network computing systems
that provide access to Windows applications. Other network computing
companies, including HP, Tektronix and Wyse, currently offer systems
competitive with the Company's. Moreover, a number of other companies are
offering, or have announced their intention to offer, network computing
products and systems based on other technologies. There can be no assurance
that the Company's new network computing products will compete successfully
with competitive network computing products or that the network computing
model will be widely adopted in the rapidly evolving Windows market.
The Company also sells its WINCENTER PRO multi-user Windows application
server software on a stand-alone basis to customers who wish to configure
network computing systems using desktop devices offered by other
manufacturers. The Company is experiencing intense competition in this new
and rapidly evolving market from a number of software vendors who have
introduced competitive products. These competitors include products from
Insignia Solutions Inc. and Tektronix, both of which are also based on
software provided by Citrix which enhances WINDOWS NT software. The Company
believes that the principal competitive factors in this new market include
price, performance, features, network compatibility and support.
Competition in the network computing market has intensified over the past
several years, resulting in price reductions, reduced profit margins and loss
of market share, which have adversely affected the Company's operating
results. In addition, intense competition from alternative desktop computing
products, particularly personal computers, has slowed the growth of the
network computing market. The Company expects this intense competition to
continue. 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 PC X software products face direct competition from several
software companies that offer similar products, including Hummingbird
Communications, Ltd., a Canadian company, Visionware, a subsidiary of The
Santa Cruz Operation, Inc., NetManage, Inc., FTP Software, Inc. and Walker,
Ritchie, Quinn, a privately-held company. In addition, several large system
companies, including DEC and IBM, offer PC X server software.
MANUFACTURING AND SUPPLIES
The Company conducts certain network computer production activities at its
Mountain View, California facility. These operations consist primarily of
final assembly and configuration, testing and quality control of material,
components, sub-assemblies and systems. The Company utilizes a manufacturing
control system which includes purchasing, inventory control and cost
accounting functions. The Company tests each network computer in a network
environment using a Company-developed, computer integrated manufacturing
("CIM") system. In addition, the Company employs a statistical process
control system ("SPC") and conducts regular on-site inspections at its
vendors' facilities to maintain quality control.
The Company relies largely on one independent contractor for the sub-assembly
of the Company's network computer products. The Company's reliance on
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 foreign
suppliers also 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
substantially all of the sub-assemblies used for its network computer
products (consisting of all major components except monitors and cables) from
a
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NETWORK COMPUTING DEVICES, INC.
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.
A number of components and parts used in the Company's products, including
certain semiconductor components, also are currently available from single or
limited sources of supply. The Company has no long-term purchase agreements
or other guaranteed supply arrangements with suppliers of these single or
limited source components. The Company has generally been able to obtain
adequate supplies of parts and components in a timely manner from existing
sources under purchase orders and endeavors to maintain inventory levels
adequate to guard against interruptions in supplies. However, the Company's
inability to obtain sufficient supplies of these parts and components from
existing suppliers or to develop alternate supply sources would adversely
affect the Company's operating results.
The Company currently uses one component in its EXPLORA network computer that
is no longer in active production at any supplier. The Company is in the
process of redesigning the product to utilize a more readily available
component part. Although management believes that the Company has adequate
supplies of the discontinued component on hand to meet manufacturing
requirements through the release of a redesigned product, there is no
assurance that such redesign efforts will be successful or that they will be
successful within the time frame required. The Company's inability to
complete the redesign process in a timely manner would result in an
interruption in the Company's sales of EXPLORA computers that could
materially and adversely affect the Company's operating results.
The Company has, from time to time, experienced delays in the receipt of
monitors from certain of its suppliers. In addition, the Company is required
to place orders for monitors 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. Prolonged or repeated delays in
the receipt of monitors could have a material adverse effect on the Company's
operations.
The Company's products incorporate memory components, such as video random
access memory chips ("VRAMs"), that are available from multiple sources but
have been subject to substantial fluctuations in availability and price.
Certain other components, including microprocessors and ASICs, though
generally available from multiple sources, are subject to industry-wide
demand which could result in limited availability or significant fluctuations
in pricing. To date, these fluctuations have not had a material effect on
the Company's operating results and the Company has been able to obtain an
adequate supply of such components. There can be no assurance that the
Company will be able to obtain adequate supplies of these components in the
future or that price fluctuations will not adversely affect the Company's
operating results.
The Company currently outsources the reproduction and packaging of its
software to domestic vendors located in California and Oregon.
BACKLOG
The Company assembles its network computer products based upon its
projections of near-term demand. Orders from large end-users and OEMs are
generally placed by the customer on an as-needed basis, and products are
typically shipped by the Company within 45 days after receipt of a firm
purchase order. The Company does not generally have a significant backlog,
and its backlog at any particular time, or fluctuations in backlog from time
to time, may not be representative of actual sales for any succeeding period.
Because of the ease of manufacturing software products, the Company is able
to effect the manufacture and shipment of these products quickly in response
to customer orders without maintaining significant inventories, and, as a
result, has historically had little, if any, backlog at any particular time.
The Company
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NETWORK COMPUTING DEVICES, INC.
does not, therefore, consider backlog for these products to be a significant
measure of actual sales for any succeeding period.
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, employee and third-party non-disclosure agreements and
other intellectual property protection methods to protect its proprietary
technology. The Company holds six U.S. patents. Although management intends
to pursue a policy of obtaining patents for appropriate inventions, the
Company believes that its success will depend primarily on the innovative
skills, technical competence and marketing abilities of its personnel rather
than upon the ownership of patents. There can be no assurance that patents
will issue from any pending or future patent applications or that any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented, or that any rights
granted thereunder will provide adequate protection to the Company.
Certain technology used in the Company's products is licensed from third
parties on a royalty-bearing basis. The costs associated with such royalties
have increased substantially during 1996, and are now a significant component
of total software cost of sales. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Generally, such
licenses grant to the Company non-exclusive, worldwide rights with respect to
the subject technology and terminate only in the event of material breach.
In March 1996, the Company entered into a license agreement with Citrix
pursuant to which the Company was granted the right to incorporate WINFRAME,
Citrix's Microsoft-authorized multi-user software, into the Company's
WINCENTER PRO Windows application server software and other related products.
The Company is required to pay Citrix a per-copy royalty, subject to certain
specified minimum royalty obligations. Under the license agreement, the
Company was also granted an option to license additional software for
bundling in future WINCENTER products in exchange for the payment of a
one-time license fee. The license agreement has an initial term of two
years, subject to automatic renewal for successive one-year terms unless
notice of nonrenewal is provided 60 days in advance by the Company or six
months in advance by Citrix.
The Company's software products are generally licensed on a right-to-use
basis. The Company relies primarily on "shrink wrap" or "break the seal"
licenses. Certain provisions of such licenses, including provisions
protecting against unauthorized copying and reverse engineering, may not be
enforceable under the laws of some jurisdictions. In addition, the laws of
some foreign countries in which the Company's software products are
distributed do not protect the Company's intellectual property rights to the
same extent as U.S. law.
There can be no assurance that third parties will not assert infringement
claims against the Company or its suppliers with respect to current or future
products. Although the Company has historically been able to resolve all
asserted claims on terms which have not had a material effect on the
Company's operations, there is no assurance that any future claims may not
require the Company to enter into unfavorable royalty arrangements or result
in costly litigation.
EMPLOYEES
As of December 31, 1996, the Company had 321 full-time employees, of whom 77
were primarily engaged in research and development, 39 in technical support,
99 in marketing and sales, 59 in manufacturing and 47 in administration and
finance. None of the Company's employees is represented by a collective
bargaining agent. The Company has experienced no work stoppages and believes
that its employee relations are good.
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NETWORK COMPUTING DEVICES, INC.
Competition for employees in the computer and software industries is intense.
The Company believes that its future success will depend, in part, on its
ability to continue to attract and retain highly skilled technical, marketing
and management personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive
officers of the Company, and their ages as of March 27, 1997:
NAME AGE POSITION
---- --- --------
Robert G. Gilbertson 56 President and Chief Executive Officer
Rudolph G. Morin 59 Executive Vice President, Operations & Finance and
Chief Financial Officer
Cecil M. Dye 56 Senior Vice President, Worldwide Sales
Lorraine J. Hariton 43 Senior Vice President, Marketing and Business
Development
Douglas H. Klein 42 Senior Vice President, Technology
Mr. Gilbertson has served as President and Chief Executive Officer of the
Company since May 1996. Prior to joining the Company, Mr. Gilbertson served
as Chairman of Aviation Systems, Inc., a manufacturer of ATM switching
systems, and also as President and Chief Executive Officer of CMX Systems,
Inc., a manufacturer of precision measurement and positioning products from
1993 to 1996. In 1994, CMX ranked No. 103 on the Inc. Magazine list of the
500 fastest growing privately held companies in the U.S. Prior thereto, he
served as President and Chief Executive Officer of Data Switch Corporation,
which was named turnaround company of the decade by CFO Magazine. Mr.
Gilbertson holds an MBA from the University of Chicago, served as Chairman of
the Board of the American Electronics Association, and was a member of the
faculty of Harvard Business School for five years.
Mr. Morin has served as Executive Vice President, Operations & Finance and
Chief Financial Officer since June 1996. Prior to joining the Company, Mr.
Morin served as Senior Vice President, Finance and Administration for Memorex
Telex Corporation from 1993 to 1996. Prior thereto, he worked with Mr.
Gilbertson at Data Switch, where he was Executive Vice President. Mr.
Morin's background also includes more than ten years with Thyssen Bornemisza
Inc. as head of corporate development and general manager of several of its
subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard.
Mr. Dye has served as Senior Vice President, Worldwide Sales since March 1997
and served as Senior Vice President, Sales and Marketing from September 1996
to March 1997. Prior to joining the Company, Mr. Dye served as the Senior
Vice President of Worldwide Sales and Service for Wyse Technology from 1994
to 1996. Prior thereto, Mr. Dye spent 24 years with Digital Equipment Corp.,
most recently as vice president and general manager of the western region.
Mr. Dye holds an MBA from Xavier University.
Ms. Hariton has served as an executive officer of the Company since September
1993 and was appointed Senior Vice President, Marketing and Business
Development in March 1997. Ms. Hariton joined the Company as Vice President,
Marketing, and in 1996 was appointed to the position of Vice President,
Business Development. From 1992 to 1993, Ms. Hariton was employed by Verifone
Corporation as Director of Marketing. From 1986 to 1992, she was employed by
ROLM Corporation in a variety of sales and marketing positions. Ms. Hariton
holds an MBA from Harvard University.
Mr. Klein was a founder of the Company and served as the Company's Vice
President-Technical Support from 1988 to 1994, as Vice President and General
Manager, X Terminal Division from 1994 to 1995, as
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NETWORK COMPUTING DEVICES, INC.
President of NCD Systems, a wholly owned subsidiary of the Company, from 1995
to 1996, at which time he was appointed to his current position, Senior Vice
President, Technology. From 1984 to 1988, Mr. Klein was employed by Ridge
Computers as Manager of Third-Party Software Applications. Mr. Klein holds a
Masters in Mechanical Engineering from the California Institute of Technology.
ITEM 2. PROPERTIES.
The Company's principal administrative, marketing, manufacturing and research
and development operations are located in adjacent buildings in Mountain
View, California. These facilities consist of approximately 197,000 square
feet and are occupied under leases which expire between February 1999 and
February 2003. Approximately 28,000 square feet in these facilities are
currently being sublet to a third party. The annual gross rent for these
facilities currently approximates $1,700,000. The Company's PC X software
operations are located in a 20,000 square foot facility in Beaverton, Oregon,
under a lease expiring in October 2000, with gross rent of approximately
$232,000 for 1996. The Company's electronic mail operations, which were sold
in June of 1996, were located in a 20,000 square foot facility in Novato,
California, under a lease expiring in July 2001, with annual gross rent of
approximately $485,000. This facility is currently being subleased to third
parties. The Company believes that its existing facilities are adequate for
its present requirements and that suitable additional space will be available
as needed. The Company's field sales and service offices worldwide consist
of leased office space totaling approximately 26,000 square feet, with
current aggregate gross rents of approximately $792,000 for 1996.
ITEM 3. LEGAL PROCEEDINGS.
In April 1996, two purported class action complaints, WOODWARD, ET AL V.
BRADLEY, ET AL and CURLEY, ET AL V. MARINARO, ET AL, were filed in the United
States District Court for the Northern District of California, and a third
purported class action complaint, MAIZEL, ET AL V. MARINARO, ET AL, was filed
in the Superior Court of the State of California for the County of Santa
Clara. In May 1996, a fourth purported class action complaint, CLEVELAND, ET
AL V. MARINARO, ET AL, was filed in the United States District Court for the
Northern District of California. The plaintiffs in the MAIZEL, CURLEY and
CLEVELAND actions claimed to be suing on behalf of a class of persons who
purchased the Company's Common Stock during the period February 2, 1995 to
March 21, 1996; the plaintiffs in the WOODWARD action claimed to be suing on
behalf of a class of persons who purchased the Company's Common Stock during
the period February 1, 1996 to March 21, 1996. Certain named current and
former officers and a director of the Company were named as defendants in the
actions. The MAIZEL complaint also named as defendants Morgan Stanley & Co.
and Stephen Milunovich, an employee of Morgan Stanley & Co. The complaints
alleged, among other things, that the Company issued false and misleading
statements to the public about the Company's financial performance and
prospects, in violation of California and federal securities laws. The
complaint in the MAIZEL action alleged that the officer and director
defendants sold or otherwise disposed of the Company's Common Stock in
violation of California securities laws.
The parties entered a settlement agreement during the first quarter of 1997.
As part of the settlement arrangement, the Company agreed to contribute $1.1
million toward the $12 million in costs to settle all pending securities
litigation. This settlement arrangement is final only upon approval of the
settlement by the settlement class members. However, the Company anticipates
that no further charges related to such settlement will be incurred in the
future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1996.
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NETWORK COMPUTING DEVICES, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE DATA
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "NCDI" since the Company's initial public offering in June
1992. The following table sets forth, for the periods indicated, the high
and low closing sale prices for the Common Stock on such market.
High Low
---- ---
1995:
First Quarter $7.125 $4.00
Second Quarter 9.3125 6.125
Third Quarter 10.875 6.25
Fourth Quarter 10.00 5.25
1996:
First Quarter $8.00 $3.75
Second Quarter 7.00 2.9375
Third Quarter 6.1875 3.125
Fourth Quarter 10.75 6.25
The closing sale price for the Common Stock on February 28, 1997 was
$12.625.
As of February 28, 1997, the Company had approximately 236 holders of record
of its Common Stock and 17,090,820 shares of Common Stock were outstanding.
The market price of the Company's Common Stock has fluctuated significantly
and is subject to significant fluctuations in the future. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Performance and Risk Factors."
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. In addition, the Company is
prohibited by its bank credit agreements from paying cash dividends.
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NETWORK COMPUTING DEVICES, INC.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included in "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues $120,608 $139,328 $160,871 $144,265 120,345
Operating income (loss) (17,241) (7,657) (15,507) 12,925 9,952
Income (loss) before income taxes and
cumulative effect of accounting change (8,721) (6,205) (7,285) 13,758 10,617
Net income (loss) (5,232) (4,029) (10,843) 9,241 6,108
Net income (loss) per share - primary (0.32) (0.25) (0.68) 0.59 0.43
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 35,671 $ 36,150 $ 31,220 $ 35,632 $ 43,535
Working capital 60,981 57,470 62,802 67,481 59,736
Total assets 85,693 97,537 101,029 94,169 91,139
Capital lease obligations, less current
portion 314 991 1,497 1,990 1,916
Total shareholders' equity 67,425 68,014 71,889 76,537 65,129
</TABLE>
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NETWORK COMPUTING DEVICES, INC.
ITEM 7. 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."
Network Computing Devices, Inc. ("the Company") provides network computer
hardware and software that delivers high-performance, easy-to-manage,
simultaneous access to any application on an enterprise network from any
desktop. The Company's product lines include the EXPLORA and HMX families of
Universal Network Computers, WINCENTER PRO-TM- multi-user WINDOWS
NT-Registered Trademark- application server software, and PC-XWARE-Registered
Trademark-network computer software for PCs.
During 1996, the Company underwent significant changes to its operations,
including changes in senior management, product focus, and business unit
organization. During the first half of the year, the Company initiated and
completed the disposition of two software product lines, MARINER and
Z-MAIL-Registered Trademark-. Also during the first half of 1996, the
Company recorded operating losses of $18.3 million, and combined cash and
short-term investments had declined from $36.2 million at December 31, 1995
to $26.4 million at June 30, 1996. By the end of the second quarter, the
Company announced that it had appointed a new President and Chief Executive
Officer, Robert G. Gilbertson, and a new Executive Vice President of
Operations & Finance and Chief Financial Officer, Rudolph G. Morin. Shortly
thereafter, Doug Klein, a founder of the Company, was appointed to Senior
Vice President & Chief Technology Officer and Lorraine Hariton, the Vice
President of Business Development, was added to the senior management team.
In September 1996, Cecil M. Dye was appointed Senior Vice President of Sales
& Marketing. This new senior management team initiated a "turnaround"
program that included recombining its Systems and Software business units,
spending and hiring controls, significant reorganization of the Research &
Development and Sales & Marketing functions and asset management initiatives.
By the end of the second half, profitable, cash-flow positive operations had
been achieved. The above results nothwithstanding, there is no assurance
that this trend toward profitability will continue into the future (see below
under "Future Performance and Risk Factors").
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 (the "IBM
Agreement"), IBM has funded, and will continue to fund through the first
quarter of 1997, a portion of the Company's development efforts. The Company
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 related product development
effort, including satisfaction of certain design and manufacturing
requirements, the IBM Agreement provides for IBM to purchase a substantial
portion of its requirements for such products from the Company 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 products (see below under "Future
Performance and Risk Factors -- Fluctuations in Operating Results").
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.
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. Included in these restructuring charges were
amounts related to the severance of
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NETWORK COMPUTING DEVICES, INC.
personnel, phase-out of certain products, and costs associated with the
termination of lease obligations. In the fourth quarter of 1996, the Company
substantially concluded such restructuring activities, and an amount of $1.1
million in related accruals was determined to be in excess of amounts
required. As a result, the Company recognized a $1.1 million credit for
business restructuring during the fourth quarter of 1996. The credit relates
primarily to lease obligations that were exited or subleased at dates or
rates more favorable than those anticipated at the time of the initial
restructuring plan.
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
for license to AT&T. In September 1995, the AT&T Agreement was amended to
terminate these provisions for additional product development and to provide
instead that the Company 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
other customers 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
determined in late 1995 to sell the MARINER product line and focus its
attention on its core business of providing desktop information access
solutions for network computing environments. In February 1996, the Company
sold the MARINER product line to FTP Software, Inc. ("FTP") for $9.8 million.
The Company paid FTP a one-time license fee of $2.5 million for the right to
incorporate MARINER technology into future versions of the Company's hardware
and software products. The net gain recognized on this transaction was $7.0
million.
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 (collectively, "Z-MAIL") 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. In the second quarter of 1995, the Company determined
that the performance objectives had not been achieved and that, accordingly,
none of the remaining Performance Shares or contingent cash payments would be
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.
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NETWORK COMPUTING DEVICES, INC.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statements of operations as a percentage of net revenues for the periods
indicated. Figures are rounded to the nearest whole percentage, and line
items presenting subtotal and total percentages may therefore differ, due to
rounding, from the sum of the percentages for each line item.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Hardware products and services 79% 79% 88%
Software licenses and services 21% 21% 12%
--- --- ---
Total net revenues 100% 100% 100%
Cost of revenues:
Hardware products and services 60% 59% 65%
Software licenses and services 6% 3% 2%
--- --- ---
Total cost of revenues 67% 62% 67%
--- --- ---
Gross margin 33% 38% 33%
Operating expenses:
Research and development 12% 9% 7%
Marketing and selling 27% 25% 22%
General and administrative 9% 6% 4%
Charge for acquired in-process research and development -- -- 11%
Charge (credit) for business restructuring (1)% 3% --
Litigation settlement 1% -- --
--- --- ---
Total operating expenses 48% 43% 43%
--- --- ---
Operating loss (14)% (5)% (10)%
Non-operating income and gains, net 7% 1% 5%
--- --- ---
Loss before income taxes (7)% (4)% (5)%
Provision for income taxes (income tax benefit) (3)% (2)% 2%
--- --- ---
Net loss (4)% (3)% (7)%
--- --- ---
--- --- ---
</TABLE>
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. 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 1996 were $120.6 million, a decrease of 13% from 1995
net revenues of $139.3 million. Net revenues for 1995 decreased by 13%
compared to 1994 net revenues of $160.9 million. International revenues were
33% of total net revenues for 1996 and 1995, representing a slight increase
from 31% in 1994. No single customer of the Company accounted for more than
10% of the Company's net revenues during any of the last three fiscal years.
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NETWORK COMPUTING DEVICES, INC.
HARDWARE REVENUES
Hardware revenues consist primarily of revenues from the sale of network
computers, related hardware, and to a lesser extent, fees for related service
activities. Hardware revenues were $95.0 million for 1996, a decrease of 13%
compared to revenues of $109.7 million in 1995. Hardware revenues for 1995
decreased 22% compared to revenues of $141.2 million in 1994. 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 the Company's introduction of lower-priced EXPLORA
network computers and pricing 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
WINDOWS NT application server software, PC-XWARE, 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 product line (which was sold
in the first quarter of 1996), and the Z-MAIL product line (which was sold
during the second quarter of 1996). Revenues from software and related
services were $25.6 million for 1996, a decrease of 13% compared to revenues
of $29.6 million in 1995. The decline in 1996 software revenues compared to
1995 resulted from reductions in revenues of $3.9 million related to the
Company's former Z-MAIL product line, and $6.4 million related to the
Company's former MARINER product line. In addition, PC-XWARE revenues
declined by $6.0 million during a period in which its sales force was in
transition. These revenue declines were offset in part by higher WINCENTER
revenues. Revenues related to Z-MAIL were $1.1 million for the first six
months of 1996. No such revenues were recognized during the third and fourth
quarters 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 1996 also included $474,000 associated with the AT&T Agreement. Revenues
from software and related services for 1995 increased 51% compared to
revenues of $19.6 million in 1994. The increase in 1995 software revenues
when compared to 1994 software revenues was primarily due to revenues related
to the AT&T Agreement recognized in 1995.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on Hardware revenues were 23%, 25% and
26% for the years ended December 31, 1996, 1995 and 1994, respectively. The
slight decline in margin in 1996 compared to 1995 is primarily due to
increased sales of lower-priced EXPLORA network computers, which generally
carry lower margins, offset in part by comparatively lower sales discounts
and material costs. Sales discounts during 1996 declined when compared to
1995 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. In 1996, the Company recorded a $3.0 million
charge associated with the reduction of certain inventories to market value.
This compares to a $2.7 million charge to cost of revenues in 1995 associated
with business restructuring activities described above under "Overview."
Exclusive of these charges, the gross margin percentages on Hardware revenues
would have been 27% for both 1996 and 1995. The decline in the gross margin
in 1995 compared to 1994 is primarily related to the $2.7 million
inventory-related charge described above.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on Software revenues were 70%, 88% and
86% for the years ended December 31, 1996, 1995 and 1994, respectively. The
decline in 1996 compared to 1995 was due primarily to a higher mix of
WINCENTER revenues in 1996, which carry a lower margin because of higher
third-party royalty costs, and reduced revenues of other software products,
including revenues associated with Z-MAIL and MARINER (including the AT&T
Agreement). Certain technology used in the Company's products is licensed
from third parties on a royalty-bearing basis. The costs associated with
such royalties have increased substantially during 1996, and are now a
significant component of total software cost of sales. The slight increase
in gross margin percentage in 1995 compared to 1994 was primarily related to
higher margin revenue associated with the AT&T Agreement recognized during
1995.
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NETWORK COMPUTING DEVICES, INC.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $14.9 million, $13.1 million
and $10.5 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Despite the absence of R&D expenses related to the MARINER
product line beyond the first quarter of 1996 and the absence of R&D expenses
related to the Z-MAIL product line beyond the second quarter of 1996, total
R&D expenses have increased in 1996 compared to 1995 due to additional
spending related to network computing products. Included in R&D expenses in
1996 was $0.7 million in costs and expenses associated with the IBM Agreement
for the joint development of a network application terminal. The increase in
R&D expenses in 1995 compared to 1994 was largely related to increased
product development efforts for both the MARINER and Z-MAIL product lines.
Included in R&D expenses in 1995 was $2.1 million in costs and expenses
associated with the AT&T Agreement. As a percentage of net revenues, R&D
expenses were 12%, 9% and 7% for 1996, 1995 and 1994, respectively,
reflecting the impact of increased spending and lower net revenues. The
Company plans to increase its investment in research and development in the
area of network computing products through 1997.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $32.1 million, $34.1 million and $34.7
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The decreases in 1996 compared to the previous year reflect increased
efficiencies related to the reconsolidation of the Company's remaining
business units, which commenced in June of 1996. The slight decrease in 1995
compared to 1994 was primarily related to lower payroll costs associated with
reduced permanent and contract personnel, in addition to lower costs
associated with commissions and other performance-related compensation. As a
percentage of net revenues, marketing and selling expenses were 27%, 25% and
22% for 1996, 1995 and 1994, respectively, resulting from the combined impact
of lower net revenues and decreased spending.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $10.3 million, $8.5 million
and $6.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in 1996 over 1995 was primarily related 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 "Overview," in June of 1996, the
Company determined to recombine its remaining business units. The increase
in 1995 over 1994 was primarily related to higher consulting costs and
compensation expenses. As a percentage of net revenues, G&A expenses were
9%, 6% and 4% for 1996, 1995 and 1994, respectively, reflecting the combined
impact of increased spending and lower net revenues.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's acquisition of Z-Code in February 1994,
approximately $15.0 million of the initial consideration was allocated to the
value of in-process research and development. This in-process research and
development had not achieved technological feasibility at the time of the
acquisition and, therefore, did not qualify for capitalization under
generally accepted accounting principles. Accordingly, the portion of the
purchase price allocated to the value of in-process research and development
was charged to operations in the first quarter of 1994.
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.
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.
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 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
21
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NETWORK COMPUTING DEVICES, INC.
charges totaling $7.5 million for the implementation of this plan. 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 the fourth quarter of 1996, the Company
substantially concluded such restructuring activities and an amount of $1.1
million in related accruals was determined to be in excess of amounts
required. As a result, the Company recognized a $1.1 million credit for
business restructuring during the fourth quarter of 1996. The credit relates
primarily to lease obligations that were exited or subleased at dates or
rates more favorable than those anticipated at the time of the initial
restructuring plan. See "Business Restructuring" in Note 4 of the "Notes to
Consolidated Financial Statements" contained herein.
LITIGATION SETTLEMENT
The $1.1 million charge for litigation settlement represents the Company's
voluntary contribution toward a total of $12 million in costs to settle all
pending securities litigation. The settlement agreement was executed by all
parties during February 1997, and the Company anticipates that no further
charges related to such settlement will be incurred in the future.
INTEREST INCOME, NET
Interest income, net of interest expense, was $1.6 million, $1.4 million and
$0.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increases were primarily due to higher average balances in
interest-earning accounts in addition to lower interest expense related to
declining capital lease obligations. This was partially offset by declining
interest rates across the periods presented.
OTHER INCOME, NET
Other income includes non-operating income, net of non-operating expense.
Other income in 1994 consisted primarily of gains realized on the Company's
sale of all of its shares of NetManage, Inc. common stock in an underwritten
public offering in February 1994. No significant other income was produced
during 1995 or 1996.
GAIN ON SALE OF PRODUCT LINES
The gain on sale of product lines in 1996 represents the net gain on the sale
of the MARINER product line in February 1996, offset by a slight loss on the
sale of the Z-MAIL product line in June 1996. (See "Overview.")
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax benefit of $3.5 million and $2.2 million
in 1996 and 1995, respectively, compared to an income tax provision of $3.6
million in 1994. The provision for income taxes in 1994 was made, despite a
pre-tax loss, as a result of the charges for in-process research and
development associated with the Z-Code acquisition. Since the acquisition
was a tax-free reorganization, the related charges were not deductible for
income tax purposes.
FINANCIAL CONDITION
Total assets as of December 31, 1996 decreased by $11.8 million, or 12%, from
December 31, 1995. The change in total assets primarily reflected decreases
in accounts receivable, inventories and other assets of $7.0 million, $4.6
million and $2.9 million, respectively, partially offset by an increase of
$3.2 million in tax-related assets. The reduction in accounts receivable
was primarily caused by a reduction in sales volumes coupled with increased
customer collection efforts, while the reduction in inventories was primarily
related to improved inventory management during 1996. The reduction in other
assets was primarily related to decreases in long-term deferred taxes,
long-term deposits, prepaid royalties and capitalized software costs related
to Z-MAIL. Increases in tax-related assets resulted primarily from tax
benefits recognized on net operating losses recorded during the year.
Total liabilities as of December 31, 1996 decreased by $11.3 million, or 38%,
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 operating losses incurred
during 1996.
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NETWORK COMPUTING DEVICES, INC.
CAPITAL REQUIREMENTS
Capital spending requirements for 1997 are estimated at approximately $2.9
million, and at December 31, 1996, the Company had commitments for capital
expenditures of approximately $400,000. These commitments are primarily
related to information technology and facilities.
LIQUIDITY
As of December 31, 1996, the Company had combined cash and equivalents and
short-term investments totaling $35.7 million, with no significant debt. The
Company terminated its line of credit agreement during the third quarter of
1996. The Company believes that its existing sources of liquidity, including
cash generated from operations, will be sufficient to meet operating cash
requirements and capital lease repayment obligations at least through the
next twelve months.
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NETWORK COMPUTING DEVICES, INC.
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 NT 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.
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.
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, licensing costs, the level of competition which
it experiences and its ability to develop and maintain strategic business
alliances.
The Company has committed significant resources, including research and
development, manufacturing and sales and marketing resources, to the
execution of the IBM Agreement (see "Overview"). To date, IBM has not begun
shipments of related product in commercial quantities. The production cycle
of related product requires the Company to rely on IBM to provide accurate
product requirement forecasts, which have in the past and will in the future,
be subject to changes by IBM. Should the Company commence production of
related product based on provided forecasts that are subsequently reduced,
the Company bears the risk of increased levels of unsold inventories. Should
the expected business volumes associated with the IBM Agreement not occur, or
occur in volumes below management's expectations, there would be a material,
adverse effect on the Company's operating results.
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NETWORK COMPUTING DEVICES, INC.
The Company currently anticipates that the mix of hardware revenues as a
component of total revenues may rise as a result of potential OEM
relationships for the Company's network computers. This condition would
likely lead to overall reduced gross margins on total revenues. 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.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
The Company relies substantially on independent distributors and resellers,
particularly in European markets, 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
some level 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.
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
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NETWORK COMPUTING DEVICES, INC.
(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. Although the Company is
currently planning to develop alternative locations in different countries
from which to obtain sub-assemblies, there is no assurance that the Company
will be successful in this pursuit. 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.
INTERNATIONAL SALES
A majority of the Company's international sales are denominated in U.S.
dollars, and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in those
markets. Over the past two years, a significant portion of international
revenues have been derived from sales to a customer in the United Kingdom
that have been denominated in pound sterling and sales denominated in foreign
currencies may increase in the future. These sales are subject to exchange
rate fluctuations which could affect the Company's operating results
negatively or positively, depending on the value of the U.S. dollar against
the other currency. Where the Company believes foreign currency-denominated
sales could pose significant exposure to exchange rate fluctuations, the
Company acquires forward exchange contracts in an effort to reduce such
exposure. International sales and operations may also be subject to risks
such as the imposition of governmental controls, export license requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the
laws of certain countries do not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that these factors will not have an
adverse effect on the Company's future international sales and, consequently,
on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees. 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 & Finance and Chief Financial Officer. 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.
26
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NETWORK COMPUTING DEVICES, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1996 and 1995 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 30
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 32
Notes to Consolidated Financial Statements 33
Supplementary Data: Quarterly Financial Data (Unaudited) 44
27
<PAGE>
NETWORK COMPUTING DEVICES, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Network Computing Devices, Inc.
We have audited the accompanying consolidated balance sheets of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Jose, California
January 28, 1997
28
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- -------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $23,832 $13,364
Short-term investments 11,839 22,786
Accounts receivable, net of allowances of $2,603 and
$1,976 as of December 31, 1996 and 1995, respectively 21,549 28,591
Inventories 9,776 14,398
Refundable and deferred income tax assets 8,287 5,501
Other current assets 3,652 1,362
------- -------
Total current assets 78,935 86,002
Property and equipment, net 4,895 6,749
Other assets 1,863 4,786
------- -------
Total assets $85,693 $97,537
------- -------
------- -------
Liabilities and Shareholders' equity:
Current liabilities:
Accounts payable $ 4,383 $13,893
Accrued expenses 8,977 7,429
Deferred revenue 3,486 3,298
Income taxes payable 360 2,666
Current portion of capital lease obligations 748 1,246
------- -------
Total current liabilities 17,954 28,532
Long-term portion of capital lease obligations 314 991
Commitments and contingencies
Shareholders' equity:
Undesignated preferred stock: 3,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value: 30,000,000 shares authorized;
17,037,369 and 16,118,800 shares issued and outstanding as of
December 31, 1996 and 1995, respectively 68,217 63,543
Net unrealized gain on securities - 31
Retained earnings (accumulated deficit) (792) 4,440
------- -------
Total shareholders' equity 67,425 68,014
------- -------
Total liabilities and shareholders' equity $85,693 $97,537
------- -------
------- -------
</TABLE>
See accompanying notes.
29
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Hardware products and services $ 94,973 $109,723 $141,249
Software licenses and services 25,635 29,605 19,622
-------- -------- --------
Total net revenues 120,608 139,328 160,871
Cost of revenues:
Hardware products and services 72,715 82,778 104,463
Software licenses and services 7,769 3,607 2,656
-------- -------- --------
Total cost of revenues 80,484 86,385 107,119
-------- -------- --------
Gross profit 40,124 52,943 53,752
Operating expenses:
Research and development 14,930 13,119 10,486
Marketing and selling 32,117 34,147 34,653
General and administrative 10,270 8,502 6,668
Charge for acquired in-process research and development - - 17,452
Charge (credit) for business restructuring (1,052) 4,832 -
Litigation settlement 1,100 - -
-------- -------- --------
Total operating expenses 57,365 60,600 69,259
-------- -------- --------
Operating loss (17,241) (7,657) (15,507)
Interest income 1,656 1,557 1,198
Interest expense (68) (198) (290)
Other income, net - 93 7,314
Gain on sale of product lines 6,932 - -
-------- -------- --------
Loss before income taxes (8,721) (6,205) (7,285)
Provision for income taxes (income tax benefit) (3,489) (2,176) 3,558
-------- -------- --------
Net loss $ (5,232) $ (4,029) $(10,843)
-------- -------- --------
-------- -------- --------
Primary earnings per share:
Net loss per share $ (0.32) $ (0.25) $ (0.68)
-------- -------- --------
-------- -------- --------
Shares used in per share computations 16,579 15,832 15,908
-------- -------- --------
-------- -------- --------
Fully diluted earnings per share:
Net loss per share $ (0.32) $ (0.25) $ (0.77)
-------- -------- --------
-------- -------- --------
Shares used in per share computations 16,579 15,832 16,039
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
30
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Stock Net Unrealized Earnings Total
------------------------ Gain (Loss) on (Accumulated Shareholders'
Shares Amount Securities Deficit) Equity
------ ------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1993 15,052 $57,225 $ - $ 19,312 $76,537
Issuance of common stock for the
acquisition of Z-Code 1,547 10,833 - - 10,833
Repurchase of common stock from
principal Z-Code shareholder (1,362) (5,022) - - (5,022)
Repurchase of common stock (219) (946) - - (946)
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 619 1,330 - - 1,330
Net loss - - - (10,843) (10,843)
------- ------- --- -------- --------
Balances as of December 31, 1994 15,637 63,420 - 8,469 71,889
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 1,053 4,150 - - 4,150
Repurchase of common stock (571) (4,027) - - (4,027)
Net unrealized gain on securities - - 31 - 31
Net loss - - - (4,029) (4,029)
------- ------- --- -------- --------
Balances as of December 31, 1995 16,119 63,543 31 4,440 68,014
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 928 4,763 - - 4,763
Repurchase of common stock (10) (89) - - (89)
Net unrealized loss on securities - - (31) - (31)
Net loss - - - (5,232) (5,232)
------- ------- --- -------- --------
Balances as of December 31, 1996 17,037 $68,217 $ - $ (792) $67,425
------- ------- --- -------- --------
------- ------- --- -------- --------
</TABLE>
See accompanying notes.
31
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating actitivites:
Net loss $(5,232) $ (4,029) $ (10,843)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Acquired in-process research and development - - 17,452
Gain on sale of NetManage, Inc. common stock - - (7,237)
Gain on sale of product lines (6,932) - -
Non-cash restructuring charges (credit) (1,052) 2,474 -
Depreciation and amortization 4,559 4,505 4,334
Refundable and deferred income taxes (3,166) (2,227) -
Changes in:
Accounts receivable, net 7,042 3,152 (2,502)
Inventories 4,455 9,224 (8,763)
Other current assets and other (378) (1,450) 322
Accounts payable (9,510) (3,743) 9,155
Income taxes payable (1,446) 2,856 (128)
Accrued expenses 1,856 (1,900) (444)
Deferred revenue 578 2,325 973
------- --------- ----------
Net cash provided by (used in) operating activites (9,226) 11,187 2,319
Cash flows from investing activities:
Purchases of short-term investments (3,684) (192,090) (364,950)
Sales and maturities of short-term investments 14,600 193,148 369,890
Changes in other assets (58) (200) (490)
Capitalization of software costs - (436) (945)
Acquisition of Z-Code Software Corp., net of cash acquired - - (3,104)
Proceeds from sale of NetManage, Inc. common stock - - 9,237
Net proceeds from sale of product lines 8,625 - -
Property and equipment purchases, net (2,273) (3,217) (2,736)
------- --------- ----------
Net cash provided by (used in) investing activities 17,210 (2,795) 6,902
Cash flows from financing activities:
Principal payments on capital lease obligations (1,175) (1,535) (1,497)
Repurchases of common stock (89) (4,027) (8,388)
Proceeds from issuance of stock, net 3,748 3,127 1,192
------- --------- ----------
Net cash provided by (used in) financing activities 2,484 (2,435) (8,693)
Increase in cash and cash equivalents 10,468 5,957 528
Cash and cash equivalents:
Beginning of year 13,364 7,407 6,879
------- --------- ----------
End of year $23,832 $ 13,364 $ 7,407
------- --------- ----------
------- --------- ----------
Noncash investing and financing activities:
Common stock issued for and accrued direct
expenses of Z-Code acquisition $ - $ - $ 10,833
------- --------- ----------
------- --------- ----------
Property and equipment acquired under capital leases $ - $ 929 $ 1,022
------- --------- ----------
------- --------- ----------
Income tax benefit from employee stock transactions $ 860 $ 1,023 $ 138
------- --------- ----------
------- --------- ----------
</TABLE>
See accompanying notes.
32
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Network Computing Devices, Inc. ("the Company") was
incorporated on February 17, 1988. The Company provides network computer
hardware and software that delivers high-performance, easy-to-manage,
simultaneous access to any application on an enterprise network from any
desktop. The Company's product lines include the EXPLORA and HMX families of
Universal Network Computers, WINCENTER PRO multi-user
WINDOWS NT application server software, and PC-XWARE network computer software
for PCs.
CONSOLIDATION The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The Company has
invested in a joint venture in Japan (Nihon NCD), which is accounted for at
cost. The functional currency for the Company and its subsidiaries is the U.S.
dollar. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with a maturity date of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS The Company has classified all of its short-term
investments as "available-for-sale" securities. The carrying value of such
securities is adjusted to fair market value, with unrealized gains and losses,
net of deferred taxes, being excluded from earnings and reported as a separate
component of shareholders' equity. Cost is determined by specific
identification for purposes of computing realized gains or losses.
INVENTORIES Inventories are stated at the lower of standard cost, which
approximates actual cost on a first-in, first-out basis, or market (net
realizable value).
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment
under capital leases is stated at the lower of fair value or the present value
of the minimum lease payments at the inception of the lease. Depreciation is
computed using the straight-line method. Useful lives of three to five years
are used for equipment and furniture; demonstration equipment is depreciated
over an 18-month period. Leasehold improvements and equipment under capital
leases are amortized over the shorter of the lease term or the useful lives of
the respective assets.
REVENUE RECOGNITION Revenues on the sale of hardware products and from the
licensing of software products are generally recognized upon shipment, provided
that no significant obligations remain and collection of the resulting
receivable is deemed probable. Product warranty costs and an allowance for
sales returns are accrued at the time the related revenues are recognized.
Service contract revenues are recognized ratably over the contract period.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to
engineering expense when incurred. Costs incurred in the development of new
software products and enhancements to existing software products are also
expensed as incurred until the technological feasibility of the product has
been established. After technological feasibility has been established, any
additional costs are capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86. Capitalized software technology is
amortized to cost of goods sold over eighteen months to three years, based on
the expected life of the product.
INCOME TAXES Under the asset and liability method of SFAS No. 109, "Accounting
for Income Taxes," deferred tax assets and liabilities are established to
recognize the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES Management of the Company has made a number of estimates and
assumptions relating to the valuation and reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
33
<PAGE>
NETWORK COMPUTING DEVICES, INC.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's cash
and cash equivalents, short-term investments, accounts receivable, and accounts
payable approximate their respective fair values.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1,
1996. This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the
Company's consolidated financial position or results of operations.
PER SHARE INFORMATION Per share information is computed using the
weighted-average number of common and dilutive common equivalent shares
outstanding. For primary and fully diluted earnings per share, common
equivalent shares consist of the incremental shares issuable upon the assumed
exercise of dilutive stock options (using the treasury stock method). For 1994,
common equivalent shares in the fully diluted calculation were adjusted by
assuming that all financial performance objectives had been achieved, the
maximum number of performance shares (see Note 5) had been issued, and the
maximum amount of cash contingently payable had been paid, with a significant
portion of the cash and the value of the performance shares allocated to
in-process research and development and charged to operations at the beginning
of the year. The effect of common equivalent shares is not included in earnings
per share calculations during periods in which such effect would be
antidilutive.
STOCK PLANS The Company accounts for its stock option and employee stock
purchase plans in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provision of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair
value-based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
RECLASSIFICATION Certain items in the accompanying 1995 and 1994 consolidated
financial statements have been reclassified in order to conform to the current
year's presentation.
34
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTE 2. SHORT-TERM INVESTMENTS
Short-term investments consisted of the following as of December 31, 1996 (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Corporate debt securities $ 5,355 $ -- $ -- $ 5,355
Commercial paper 4,808 -- -- 4,808
Certificates of deposit 1,676 -- -- 1,676
------- ----- ----- -------
$11,839 $ -- $ -- $11,839
------- ----- ----- -------
------- ----- ----- -------
The maturities of available-for-sale securities as of December 31, 1996 were as
follows (in thousands):
Within One to
One Year Two Years
-------- ---------
Corporate debt securities $5,355 $ --
Commercial paper 4,808 --
Certificates of deposit -- 1,676
------ ------
$10,163 $1,676
------- ------
------- ------
Short-term investments consisted of the following as of December 31, 1995 (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Corporate debt securities $11,486 $37 $ -- $11,523
Municipal notes/bonds 4,016 -- -- 4,016
Commercial paper 4,200 -- -- 4,200
U.S. Treasury Notes 3,040 7 -- 3,047
------- --- ----- -------
$22,742 $44 $ -- $22,786
------- --- ----- -------
------- --- ----- -------
NOTE 3. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
1996 1995
---- ----
Inventories as of December 31 consisted of (in thousands):
Purchased components and sub-assemblies $8,396 $ 9,548
Work in process 240 1,814
Finished goods 1,140 3,036
------ -------
$9,776 $14,398
------ -------
------ -------
35
<PAGE>
1996 1995
---- ----
Property and equipment as of December 31
consisted of (in thousands):
Office equipment $11,700 $10,551
Machinery and equipment 4,936 5,346
Demonstration equipment 3,756 3,933
Furniture and fixtures 2,064 2,210
Leasehold improvements 1,778 1,683
------- -------
24,234 23,723
Less accumulated depreciation
and amortization 19,339 16,974
------- -------
$ 4,895 $ 6,749
------- -------
------- -------
Included in property and equipment is approximately $1,840,000 and $3,072,000 of
equipment under capital leases as of December 31, 1996 and 1995, respectively.
Accumulated amortization related to this equipment is approximately $1,674,000
and $1,360,000 as of December 31, 1996 and 1995, respectively.
1996 1995
---- ----
Accrued expenses as of December 31
consisted of (in thousands):
Payroll-related costs $3,472 $3,533
Royalties 1,887 178
Restructuring -- 2,474
Warranty 495 510
Other accrued expenses 3,123 734
------ ------
$8,977 $7,429
------ ------
------ ------
Income taxes paid were $223,000, $204,000 and $3,828,000 for 1996, 1995 and
1994, respectively. Interest paid was $119,000, $46,000 and $294,000 for 1996,
1995 and 1994, respectively.
NOTE 4. 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 included:
- 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;
- 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.
The costs associated with restructuring the business were accrued during the
third quarter of 1995, the period in which the restructuring plan was finalized
by the Company's management. Such costs have been segregated into two
fundamentally different classifications within the consolidated statements of
operations for the year ended December 31, 1995: cost of hardware revenues, and
operating expenses. Included in cost of hardware revenues is $2.7 million
36
<PAGE>
NETWORK COMPUTING DEVICES, INC.
related to products in inventory that are being phased out as part of the
business restructuring. Included in 1995 operating expenses under the caption,
"Charge (credit) for business restructuring" is $4.8 million related to
severance of employees, the write-down of assets impaired by the restructuring
plan, and exit costs for leased facility obligations.
In the fourth quarter of 1996, the Company determined that the restructuring
plan was substantially complete, and an operating credit of $1.1 million was
recorded during that period, as shown in the Statements of Operations under the
caption "Charge (credit) for business restructuring."
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.
<TABLE>
<CAPTION>
Initial Re-classes December 31,
Amounts Asset Cash to other Credit 1996
Accrued Write-offs Payments Accruals Recognized Balance
------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Reserve for the write-down of
phase-out inventories $2,706 ($2,706) $ -- $ -- $ -- $ --
Employee termination benefits 1,580 -- (1,327) (171) (82) --
Exiting facilities-related
obligations 2,256 -- (1,341) (126) (789) --
Asset impairment & other 996 (815) -- -- (181) --
------ ------- ------- ----- ------- ------
Total $7,538 ($3,521) ($2,668) ($297) ($1,052) $ --
------ ------- ------- ----- ------- ------
------ ------- ------- ----- ------- ------
</TABLE>
NOTE 5. SHAREHOLDERS' EQUITY
PREFERRED STOCK Prior to June 1992, the Company was authorized to issue
9,023,636 shares of preferred stock, all of which were outstanding. Upon
closing of the Company's initial public offering of 2,500,000 shares of common
stock in June 1992, all outstanding shares of preferred stock automatically
converted into shares of common stock on a one-for-one basis. Thereafter, the
Company's Articles of Incorporation were amended to increase the total number of
authorized shares of common stock to 30,000,000 and to authorize 3,000,000
shares of undesignated preferred stock.
STOCK REPURCHASE PROGRAM In October 1994, the Company's Board of Directors
adopted a program to repurchase from time to time at management's discretion up
to 1,500,000 shares of the Company's common stock on the open market at
prevailing market prices during the twelve-month period ending October 31, 1995.
As of December 31, 1996, the Company had repurchased 790,000 shares for a total
cost of $4,973,000 under this program.
STOCK PURCHASE PLAN In 1992, the Company established the 1992 Employee Stock
Purchase Plan and has reserved 1,150,000 shares of common stock for issuance
thereunder. The plan permits eligible employees to purchase common stock
through payroll deductions of up to 10 percent of their base earnings. The
purchase price of the stock is equal to the lesser of 85% of the fair market
value of such shares at the beginning of each six-month offering period (or the
commencement of the employee's participation, if later) or the end of such
offering period. As of December 31, 1996, 899,118 shares have been issued under
this plan, of which 223,249 were issued in 1996.
The per share weighted-average fair value of employee stock purchases during
1996 and 1995 was $2.18 and $2.82, respectively, on the date of grant using the
Black-Scholes model with the following weighted-average assumptions: 1996 -
dividend yield of 0%, expected volatility of 77%, risk-free interest rate of
between 5.0% and 5.74%, and an expected life of 1 year; 1995 - dividend yield
of 0%, expected volatility of 73%, risk-free interest rate of between 5.43% and
5.92%, and an expected life of 1 year.
STOCK OPTION PLANS As of December 31, 1996, the Company had reserved 5,405,850
shares and 200,000 shares of common stock for issuance under its 1989 Stock
Option Plan and the 1994 Outside Directors' Stock Option Plan, respectively
("the Plans"). Under the 1989 Stock Option Plan, options are granted to
employees, officers, directors and consultants to purchase shares of the
Company's common stock at not less than the fair market value of common
37
<PAGE>
NETWORK COMPUTING DEVICES, INC.
stock at the grant date (for incentive stock options) or 85% of the fair market
value of such common stock (for nonstatutory stock options). Options generally
vest and become exercisable to the extent of 25% one year from grant date with
the remainder vesting ratably over the 36-month period thereafter. Prior to
August 1994, the options generally expired five years from grant date. Since
August 1994, the options expire ten years from grant date. Under the 1994
Outside Directors' Stock Option Plan, options are granted to outside directors
to purchase shares of the Company's common stock at not less than the fair
market value of common stock at the grant date. Options vest and become
exercisable to the extent of 25% on the first anniversary of the grant date with
the remainder vesting 25% on each of the following three anniversary dates. As
of December 31, 1996, 778,469 options were exercisable under the Plans.
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $2.39 and $3.41, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1996 - dividend yield of 0%, expected volatility of 77 %,
risk-free interest rate of between 5.27% and 6.65%, and an expected life of
between 3 and 5.25 years; 1995 - dividend yield of 0%, expected volatility of
73%, risk-free interest rate of between 5.25% and 7.89%, and an expected life of
between 2.5 and 9 years.
The Company applies APB Opinion No. 25 in accounting for its Stock Option and
Stock Purchase Plans and, accordingly, no compensation cost has been recognized
for its stock plans in the accompanying consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
dates for its stock plans under SFAS No. 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below:
1996 1995
---- ----
Net loss (in thousands):
As reported $(5,232) $(4,029)
Pro forma (7,222) (5,045)
Primary loss per share:
As reported $ (0.32) $ (0.25)
Pro forma (0.44) (0.32)
Fully diluted loss per share:
As reported $ (0.32) $ (0.25)
Pro forma (0.44) (0.32)
The effects of applying SFAS No. 123 in this pro forma disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
does not apply to awards prior to 1995, and additional awards in future years
are anticipated.
In November 1994, upon approval by the Board of Directors, the Company repriced
1,257,250 options originally issued at prices ranging from $4.00 to $17.75. The
options were repriced at $3.875, the then current market value of the Company's
stock. The 1994 cancellations and grants in the summary below include the
1,257,250 options.
38
<PAGE>
NETWORK COMPUTING DEVICES, INC.
A summary of option transactions under the Plans follows:
Weighted-
Options Average
Available Options Exercise
for Grant Outstanding Price
--------- ----------- ---------
Balances as of December 31, 1993 881,581 1,739,611 $6.13
Options authorized 1,500,000 -- --
Options granted (3,613,875) 3,613,875 4.82
Options forfeited or expired 2,238,962 (2,238,962) 7.33
Options exercised -- (366,898) .70
---------- ---------- -----
Balances as of December 31, 1994 1,006,668 2,747,626 4.15
Options authorized 200,000 -- --
Options granted (1,295,000) 1,295,000 5.16
Options forfeited or expired 565,194 (565,194) 5.01
Options exercised -- (693,278) 3.27
---------- ---------- -----
Balances as of December 31, 1995 476,862 2,784,154 4.66
Options authorized 1,265,000 -- --
Options granted (2,339,570) 2,339,570 3.78
Options forfeited or expired 1,170,090 (1,170,090) 4.55
Options exercised -- (717,426) 3.95
---------- ---------- -----
Balances as of December 31, 1996 572,382 3,236,208 $4.23
---------- ---------- -----
---------- ---------- -----
The following table summarizes information about options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- -------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Contractual Life Price Number Price
- -------- ------ ------------------ --------- ------ -----
<S> <C> <C> <C> <C> <C>
$3.50 1,676,313 9.43 years $ 3.50 267,713 $ 3.50
3.56 to 3.81 25,100 6.74 3.68 9,357 3.62
3.88 858,197 8.34 3.88 323,296 3.88
4.00 to 6.00 316,909 8.75 5.11 54,588 5.07
6.25 to 7.63 307,389 8.54 7.09 97,956 7.01
8.31 to 17.75 52,300 5.73 11.29 25,559 14.07
--------- ---- ------ ------- ------
$3.50 to 17.75 3,236,208 8.91 $ 4.23 778,469 $ 4.56
--------- -------
--------- -------
</TABLE>
In February 1994, the Company acquired all of the outstanding stock of Z-Code
Software Corp. (see Note 9). All options that had been issued under Z-Code's
1992 Stock Option Plan were converted to the Company's options at a rate of one
Z-Code share converted to 0.2054 of the Company's options, $1.00 of Z-Code share
price converted to $0.2054 of the Company's share price. Options to purchase
269,174 shares of common stock were assumed in association with this
transaction, and are excluded from the option table above. Grant prices ranged
from $0.48685 to $0.97371. A provision in the agreement stated that when an
employee terminated from the Z-Code Division, any unvested shares forfeited were
regranted to the original two owners of Z-Code Software Corp. Upon termination
of one owner in July 1994 (see Note 9), all forfeited shares were then regranted
to the remaining original owner. Options to purchase 59,919, 22,003 and 69,732
shares of common stock were forfeited and regranted to the
39
<PAGE>
NETWORK COMPUTING DEVICES, INC.
remaining original owner in 1994, 1995 and 1996, respectively. Options to
purchase 72, 28 and 93,507 shares of common stock were canceled in 1994, 1995
and 1996, respectively. Options to purchase 5,674, 39,993 and 129,900 shares of
common stock were exercised in 1994, 1995 and 1996, respectively. Options to
purchase 263,428 and 223,407 shares of common stock associated with this
transaction remained unexercised as of December 31, 1994 and 1995, respectively,
and no options remained unexercised as of December 31, 1996.
NOTE 6. INCOME TAXES
The components of the Company's provision for income taxes as of December 31 are
as follows (in thousands):
1996 1995 1994
---- ---- ----
Current
Federal $(4,210) $ (972) $2,246
State and other 301 -- 1,174
------- ------ ------
Total current (3,909) (972) 3,420
------- ------ ------
Deferred
Federal (440) (2,036) --
State and other -- (191) --
------- ------ ------
Total deferred (440) (2,227) --
------- ------ ------
Charge in lieu of income taxes
associated with the exercise
of stock options 860 1,023 138
------- ------ ------
$(3,489) $(2,176) $3,558
------- ------ ------
------- ------ ------
Total income tax expense (benefit) differs from the expected tax expense
(computed by applying the U.S. federal income tax rate of 34% to loss before
income taxes) as follows (in thousands):
Tax benefit at federal statutory rate $(2,967) $(2,110) $(2,477)
State income taxes, net of federal
benefit 24 -- 510
Tax exempt investment income (364) (136) (176)
In-process research and development
charge -- -- 5,934
Research and experimental credit -- -- (423)
Other (182) 70 190
------- ------ ------
$(3,489) $(2,176) $3,558
------- ------ ------
------- ------ ------
40
<PAGE>
NETWORK COMPUTING DEVICES, INC.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities as of December 31 are as follows (in
thousands):
1996 1995
---- ----
Net deferred tax assets:
Accruals, allowances and reserves $5,552 $5,501
Property and equipment, principally due to differences
in depreciation and capitalized leases 792 466
------ ------
Total gross deferred tax assets 6,344 5,967
Less valuation allowance -- --
------ ------
Net deferred tax assets 6,344 5,967
------ ------
Net deferred tax liabilities:
Software development costs, principally due to
capitalization and amortization -- (205)
Other (142) --
------ ------
Total gross deferred tax liabilities (142) (205)
------ ------
$6,202 $5,762
------ ------
------ ------
Based on the Company's expected operating results, management believes that it
is more likely than not that the Company will realize the benefit of the
deferred tax assets recorded and, accordingly, has established no asset
valuation allowances.
NOTE 7. CUSTOMERS AND CREDIT CONCENTRATIONS
No sales to any one customer accounted for greater than 10% of net revenues for
the years ended December 31, 1996, 1995 and 1994.
Export sales to the Company's international customers outside North America,
primarily Europe, comprised approximately 33%, 33% and 31% of net revenues for
the years ended December 31, 1996, 1995 and 1994, respectively.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents, short-term investments and
trade receivables. The Company places its cash equivalents and short-term
investments with high-credit qualified financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across many different industries and geographies.
The identifiable assets, operating income, and net income of the Company's
foreign subsidiaries are not significant to the Company's consolidated financial
statements.
NOTE 8. SALE OF PRODUCT LINES
In February 1996, the Company sold its MARINER product line to FTP Software
("FTP") for $9.8 million. The Company paid FTP a one-time license fee of $2.5
million for the right to incorporate MARINER technology into future versions of
the Company's hardware and software products. The net gain recognized on this
transaction was $7.0 million.
41
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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.
NOTE 9. ACQUISITION OF Z-CODE SOFTWARE CORP.
In February 1994, the Company purchased all of the outstanding stock of Z-Code
Software Corp. ("Z-Code"), a developer of electronic mail and messaging
software. The initial consideration for the acquisition was approximately $3.2
million in cash and 3,000,000 shares of the Company's common stock (including
approximately 269,000 shares issuable upon exercise of options). Of these
shares, approximately 1,183,000 (the "Performance Shares") were held in escrow
and subject to release, in whole or in part, only upon the achievement of
certain financial performance objectives over a 15-month period ending in 1995.
Additional cash of up to $3.2 million was contingently payable based on the
achievement of these objectives.
The acquisition was accounted for using the purchase method and, accordingly,
the operating results of Z-Code are included in the consolidated financial
statements of the Company from the date of acquisition. The initial cash
payment, $1.5 million of direct expenses and the value of the stock (excluding
the Performance Shares) were allocated as follows (in thousands):
Net liabilities assumed $ (245)
Research and development in-process 15,031
Purchased software technology and other intangibles 1,084
Deferred income tax liability (293)
-------
$15,577
-------
-------
The amounts allocated to purchased software technology and other intangibles are
being amortized over five years. The research and development in-process was
written off and charged to operations in the first quarter of 1994.
In July 1994, the Company repurchased 1,361,802 shares of its common stock at
fair market value from the former principal shareholder of Z-Code for
approximately $5.0 million and paid approximately $2.5 million in exchange for
his contingent rights to an additional 1,041,378 Performance Shares that were
held in escrow as well as his contingent right to receive up to approximately
$2.5 million in cash. Substantially all of the payment for the contingent stock
and cash rights was allocated to in-process research and development acquired in
the Z-Code acquisition and was charged to operations in the third quarter of
1994. The approximately 142,000 Performance Shares and $700,000 in cash which
remained contingently issuable to the other former Z-Code shareholder and option
holders were not earned due to lack of achievement of the performance objectives
in 1995.
The following pro forma combined results of operations for the year ended
December 31, 1994 are presented as if the acquisition had occurred at the
beginning of the period. The charges associated with in-process research and
development have not been reflected in the following pro forma summary as they
are non-recurring. This pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and Z-Code had
constituted a consolidated entity during such periods.
(Unaudited)
(In thousands, except per share data) December 31,
1994
------------
Net revenues $161,083
--------
--------
Net income $ 6,227
--------
--------
Primary net income per share $ 0.38
--------
--------
Fully diluted net income per share $ 0.37
--------
--------
42
<PAGE>
NETWORK COMPUTING DEVICES, INC.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company leases its principal facilities under noncancellable operating lease
agreements that expire between 1997 and 2003. The Company also leases office
facilities in several locations in the United States, and one location each in
Australia, Canada, France, Germany, Japan, Sweden and the United Kingdom, which
are used as sales offices. Rent expense was approximately $2,832,000,
$3,083,000 and $3,075,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company also leases certain equipment under capital leases. As of December
31, 1996, minimum lease payments under all noncancellable lease agreements were
as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
Year Ending December 31,
1997 $ 783 $ 3,120
1998 159 2,900
1999 93 2,673
2000 69 2,096
Thereafter -- 1,799
------ -------
Total minimum lease payments 1,104 $12,588
-------
-------
Less amounts representing interest 42
------
Present value of minimum lease payments 1,062
Less current portion 748
------
Long-term capital lease obligations $ 314
------
------
The above future operating lease payments are anticipated to be offset by the
following sublease contract income:
1997 $699
1998 803
1999 820
2000 664
Thereafter 288
------
Total sublease income $3,274
------
------
The Company terminated its line of credit agreement with a U.S. bank during
1996.
NOTE 11. SUBSEQUENT EVENT
During the first quarter of 1997, the Company reached an agreement-in-principle
to settle all pending securities litigation. Under the agreement-in-principle,
the Company's insurance carriers established a settlement fund of approximately
$11.0 million, and the Company contributed $1.1 million to resolve all related
outstanding claims. Such costs are included in the Statements of Operations
for the year ended December 31, 1996, under the caption "Litigation settlement."
43
<PAGE>
NETWORK COMPUTING DEVICES, INC
QUARTERLY FINANCIAL DATA
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
1996 -------------------------------------------------------
- -----
<S> <C> <C> <C> <C>
Hardware products and services $24,907 $22,193 $22,642 $25,231
Software licenses and services 5,532 7,135 5,309 7,659
--------- --------- --------- --------
Total net revenues 30,439 29,328 27,951 32,890
Gross margin 8,339 6,526 11,297 13,962
Operating income (loss) (7,847) (10,422) (310) 1,338
Income (loss) before income taxes (449) (10,064) 33 1,759
Net income (loss) (260) (6,047) 20 1,055
Net income (loss) per share:
Primary (0.02) (0.37) 0.00 0.06
Fully diluted (0.02) (0.37) 0.00 0.06
Shares used in per share computations:
Primary 16,260 16,504 17,122 18,404
Fully diluted 16,260 16,504 17,700 18,660
1995
- ----
Hardware products and services $32,085 $28,252 $23,858 $25,528
Software licenses and services 5,443 6,779 9,649 7,734
--------- --------- --------- --------
Total net revenues 37,528 35,031 33,507 33,262
Gross margin 14,142 12,982 11,853 13,966
Operating income (loss) 195 (223) (6,981) (648)
Income (loss) before income taxes 467 120 (6,646) (146)
Net income (loss) 304 85 (4,719) 301
Net income (loss) per share:
Primary 0.02 0.00 (0.30) 0.02
Fully diluted (0.06) 0.00 (0.30) 0.02
Shares used in per share computations:
Primary 16,575 17,003 15,851 17,149
Fully diluted 17,079 17,003 15,851 17,154
</TABLE>
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
45
<PAGE>
PART III
Certain information required by Part III is omitted from this report because the
Registrant will file a definitive proxy statement within 120 days after the end
of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its
annual meeting of shareholders to be held May 28, 1997, and the information
included therein is incorporated herein by reference to the extent detailed
below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors of the Registrant is incorporated by
reference to the information under the caption "Election of Directors -
Nominees" in the Registrant's Proxy Statement.
Information with respect to executive officers of the Registrant is set forth in
"Item 1. Business - Executive Officers of the Company" in this Annual Report on
Form 10-K.
Information required by Item 405 of Regulation S-K is incorporated by reference
to the information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
information under the captions "Executive Compensation - Summary of Cash and
Certain Other Compensation," "Executive Compensation - Stock Option Grants,"
"Executive Compensation - Option Exercises and Year-End Holdings," "Executive
Compensation - Compensation of Directors," "Executive Compensation - Employment,
Severance and Change of Control Arrangements" and "Executive Compensation -
Compensation Committee Interlocks and Insider Participation" contained in the
Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information under the caption "Principal Shareholders and Share Ownership by
Management" contained in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the caption "Executive Compensation - Employment, Severance
and Change of Control Agreements" and "Executive Compensation - Compensation
Committee Interlocks and Insider Participation" contained in the Registrant's
Proxy Statement.
The Company's Bylaws provide that the Company shall indemnify its directors and
officers to the full extent permitted by California law. The Company has
entered into indemnification agreements with its officers and directors
containing provisions that may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified and to obtain directors' and officers' insurance if
available on reasonable terms. The Company maintains insurance policies
covering officers and directors under which the insurer has agreed to pay the
amount of any claim made against the officers or directors of the Company for
wrongful acts that such officers or directors may otherwise be required to pay
or for which the Company is required to indemnify such officers and directors,
subject to certain exclusions.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements:
See Index to Consolidated Financial Statements at page 27 of this
Report.
(2) Financial Statement Schedule:
Page Schedule Title
---- -------- -----
S-1 II Valuation and Qualifying Accounts and
Reserves
S-2 Independent Auditors' Report on Schedule
All other financial statement schedules are omitted because they are
not applicable or not required, or because the required information is
included in the Consolidated Financial Statements and Notes thereto
which are included herein.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as
part of, or are incorporated by reference into, this Report.
(b) Reports on Form 8-K during the quarter ended December 31, 1996:
None.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NETWORK COMPUTING DEVICES, INC.
By: /s/ Robert G. Gilbertson
----------------------------------------
Robert G. Gilbertson, President and
Chief Executive Officer
Dated: March 21, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert G. Gilbertson his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities to sign any and
all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Robert G. Gilbertson President, Chief Executive Officer March 20, 1997
- ----------------------------- and Director (Principle Executive Officer)
Robert G. Gilbertson
/s/ Rudolph G. Morin Executive Vice President, Operations & March 25, 1997
- ----------------------------- Finance, and Chief Financial Officer
Rudolph G. Morin (Principal Financial and Accounting
Officer)
/s/ Peter Preuss Chairman of the Board of Directors March 21, 1997
- -----------------------------
Peter Preuss
/s/ Philip Greer Director March 21, 1997
- -----------------------------
Philip Greer
/s/ Paul R. Low Director March 21, 1997
- -----------------------------
Paul R. Low
/s/ Stephen A. MacDonald Director March 21, 1997
- -----------------------------
Stephen A. MacDonald
</TABLE>
48
<PAGE>
SCHEDULE II
NETWORK COMPUTING DEVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Additions
------------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts - Deductions - at End
of Period Expenses Describe Describe of Period
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1996
- ----
Allowance for doubtful accounts 1,976 645 - 18 (1) 2,603
Warranty reserve 510 791 - 806 (2) 495
1995
- ----
Allowance for doubtful accounts 1,224 1,100 - 348 (1) 1,976
Warranty reserve 834 729 - 1,053 (2) 510
1994
- ----
Allowance for doubtful accounts 961 337 10 (3) 84 (1) 1,224
Warranty reserve 654 1,633 - 1,453 (2) 834
</TABLE>
(1) Accounts written off.
(2) Warranty costs incurred.
(3) Balance acquired through purchase of Z-Code in 1994.
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
Network Computing Devices, Inc.
Under date of January 28, 1997, we reported on the consolidated balance sheets
of Network Computing Devices, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, which are listed in the accompanying index. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule in the annual
report on Form 10-K. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG PEAT MARWICK LLP
San Jose, California
January 28, 1997
S-2
<PAGE>
Exhibit
Number Description
- ------- -----------
2.1 (1)+ Agreement and Plan of Reorganization dated January 26, 1994, as
amended, among Registrant, ZIP Acquisition Corporation, a wholly-
owned subsidiary of Registrant ("Sub"), Z-Code Software Corp. ("Z-
Code") and the shareholders of Z-Code (the "Plan of
Reorganization"), together with the Agreement Not to Compete, dated
February 11, 1994, among Registrant, Sub and the shareholders of Z-
Code (Exhibit B to the Plan of Reorganization) and the Employment
Agreement, dated February 11, 1994, among Registrant, Sub and Daniel
Heller (Exhibit C-1 to the Plan of Reorganization).
3.1 (2) Amended and Restated Articles of Incorporation of Registrant.
3.2 (4) Bylaws of Registrant, as amended.
4.1 (1) Stock Rights Agreement dated February 11, 1994, among Registrant and
the shareholders of Z-Code.
4.2 (3) Specimen Common Stock Certificate of Registrant.
4.3 Reference is made to Exhibits 3.1 and 3.2.
10.1 (3)* Form of Restricted Stock Purchase Agreement used in connection with
the sale of Common Stock to employees of Registrant.
10.5 (3) Restated Investor Rights Agreement dated May 2, 1990.
10.6 (5) Purchase Agreement dated April 25, 1990, between Registrant and The
Motorola Computer Group and correspondence relating thereto (3) and
Amendment thereto dated August 31, 1993.
10.7 (3) Master Maintenance Agreement dated September 4, 1990, between
Registrant and the Field Service Division of Motorola Inc.'s
Computer Group.
10.8 (3) Lease Agreement dated August 18, 1988, as amended, between
Registrant and Mountain View Industrial Associates for premises at
350-360 North Bernardo Avenue, Mountain View, California.
10.9 (3) Lease Agreement dated September 21, 1989, as amended, between
Registrant and Mountain View Industrial Associates for premises at
380 North Bernardo Avenue, Mountain View, California.
10.11 (6)* 1989 Stock Option Plan, as amended.
10.12 (3)* Form of Stock Option Agreements for use with the 1989 Stock Option
Plan.
10.13 (3)* Employee Stock Purchase Plan (revised).
10.14 (3)* Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.15 (3)* Registrant's 401(k) Retirement Plan.
10.18 (3) Software Agreement dated March 30, 1990, between Registrant and AT&T
Information Systems, Inc.
10.19 (5) Credit Agreement dated March 15, 1994, between Registrant and Union
Bank.
10.20 (3) Lease Agreement dated April 29, 1985, as amended, between Graphic
Software Systems, Inc. and Beaverton-Redmond Tech Properties, a
Joint Venture.
10.21 (3) Agreement to Form New Distribution Company dated July 23, 1990,
between Registrant and Software Research Associates, Inc.
10.22 (3) Distributorship and OEM Agreement and related Trademark License
Agreement, each dated July 23, 1990, between Registrant and Nihon
NCD K.K.
10.23 (3) Form of Registrant's standard purchase order.
10.24 * Registrant's Incentive Bonus Plan.
10.29 (5) Full Service Lease dated October 20, 1993 between Z-Code and Novato
Gateway Associates for premises at 101 Rowland Way, Suite 300,
Novato, California.
10.31 (6)* 1994 Outside Directors Stock Option Plan.
10.32 (6)* Form of Nonstatutory Stock Option Agreement for Outside Directors.
10.33 (7)* Employment Agreement dated January 1, 1995 between Registrant and
Jack A. Bradley.
10.34 (7) Lease agreement by and between Registrant and Ravendale Investments
dated September 20, 1995.
10.35 (7)*+ Confidential Separation Agreement dated November 9, 1995 between
Registrant and Edward L. Marinaro.
10.36 (7)+ Client/Server Software License Agreement dated March 29, 1996
between Registrant and Citrix Systems, Inc.
10.37 (7)+ Software Licensing Agreement dated as of June 30, 1995 between
Registrant and Evans & Sutherland Computer Corporation.
<PAGE>
Exhibit
Number Description
- ------- -----------
10.38 (7)+ License and Development Agreement dated December 18, 1995 between
Registrant and Software.com, Inc.
10.39 (7)+ Cooperative Hardware Marketing Agreement dated November 29, 1995
between Registrant and IBM Corporation ("IBM"), as amended December
20, 1995.
10.40 (7)+ X-Station Terminal Transition Agreement dated November 29, 1995
between Registrant and IBM, as amended December 13, 1995.
10.41 (8)+ Asset Purchase Agreement dated February 20, 1996 by and between the
Registrant and FTP Software, Inc.
10.42 (9)+ Alliance Agreement dated June 27, 1996 by and between the Registrant
and International Business Machines Corporation.
10.43 (9)+ Asset Purchase Agreement dated June 3, 1996 by and between the
Registrant and NetManage, Inc.
11.1 Statement Regarding Computation of Shares Used in Earnings per Share
Computations.
21.1 List of subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney. Reference is made to page 48 of this Report.
27 Financial Data Schedule.
* Constitutes a management contract or compensatory plan or
arrangement required to be filed pursuant to Item 14(c) of
Form 10-K.
+ Confidential treatment has been granted as to a portion of this
exhibit.
(1) Incorporated by reference to identically numbered exhibit to
Registrant's Form 8-K Report dated February 11, 1994.
(2) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1992.
(3) Incorporated by reference to identically numbered exhibit to
Registrant's Form S-1 Registration Statement (No. 33-47246) which
became effective on June 4, 1992 (the "1992 Registration
Statement").
(4) Incorporated by reference to Exhibit 3.3 to the 1992 Registration
Statement.
(5) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1993.
(6) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1994.
(7) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1995.
(8) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-Q Report for the quarter ended March 31, 1996.
(9) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-Q Report for the quarter ended June 30, 1996.
<PAGE>
Exhibit 10.24
May 17, 1996
Robert G. Gilbertson
33 Steward Hill Circle
Fairfield, CT 06430
Dear Bob:
I am pleased to offer you the position of President and Chief Executive Officer
of NCD. You will also be a member of the Board of Directors.
This position will be based in Mountain View, California reporting directly to
the Board and is effective on May 20, 1996.
BASE SALARY
Your base salary in this position will be $12,500 per semi-monthly pay period
($300,000 annualized).
INCENTIVE PAY
You will be eligible to participate in the NCD Management Incentive Plan. The
plan provides for an annual incentive award up to $150,000 (50% of base salary)
at 100% achievement of financial objectives to be determined and agreed upon.
An over achievement award will be paid at 1 1/2% for each 1% achieved in excess
of 100% of those financial objectives. There will be a cap of 300% of base
salary for the over achievement award. You will be provided a copy of the plan.
CHANGE IN OWNERSHIP
In the event the Company is sold within the first six months of your employment,
you will be paid a minimum of $500,000 in compensation.
STOCK OPTIONS
It will be recommended to the Compensation Committee of the Board of Directors
that you be granted the option to purchase 700,000 shares of Common Stock
subject to vesting as follows:
- 25% immediately vested
- 25% to vest on first anniversary of date of employment
- Remaining 50% to vest monthly over the following two years
- Full vesting upon any change in control of the Company after six months
from employment date
RELOCATION EXPENSE
You will be reimbursed, upon submission of adequate documentation, for all
reasonable, out-of-pocket, and ordinary expenses for commuting or relocating to
the Mountain View area and necessary business expenses incurred in performing
services as President and Chief Executive Officer.
TERM OF EMPLOYMENT
This offer of employment will initially be for a two-year period commencing on
May 20, 1996. For the first twelve months of the initial employment period, the
term of employment will decrease by one month for each month of service.
Thereafter, the terms of employment will continue on a one-year basis unless and
until it is terminated by either party. This will be subject to a sixty (60)
day notice period.
SEVERANCE
<PAGE>
In the event you are terminated other than for cause, or if you voluntarily
terminate your employment because of a reduction in title or responsibility, you
will be entitled to receive a severance payment equal to your then-current base
salary for a period equal to the longer of the term of employment remaining
under this agreement or 12 months. Additionally, you will be provided benefit
plan reimbursement with salary continuation payment equivalent to the cost of
extending healthcare base benefits under COBRA for the severance period.
If the Company should decide to terminate this agreement, you will be eligible
to receive outplacement assistance up to $40,000. Please note that no cash
payment will be paid in lieu of the use of outplacement services.
Bob, I am quite pleased to offer you the position as President and Chief
Executive Officer. I look forward to working with you and feel certain your
contribution will add considerable value to the success of NCD.
Please sign the copies of this letter when you have accepted and return one to
me. I look forward to your joining NCD.
Sincerely,
Peter Preuss
Chairman of the Board
<PAGE>
May 24, 1996
Rudolph G. Morin
57 Sawmill Lane
Greenwich, CT 06830
Dear Rudy:
I am pleased to offer you the position of Executive Vice President, Operations
and Finance. This position will include corporate areas of responsibility such
as Purchasing, Manufacturing, Logistics and Quality Control,
Accounting/Controller, Treasury, Financial Planning and Analysis, Management
Information Systems, Human Resources, Corporate Communications and Legal.
This position will be based in Mountain View, California reporting directly to
me and is effective on May 28, 1996.
BASE SALARY
Your base salary in this position will be $10,416.67 per semi-monthly pay period
($250,000 annualized).
INCENTIVE PAY
You will be eligible to participate in the NCD Management Incentive Plan. The
plan provides for an annual incentive award up to $125,000 (50% of base salary)
at 100% achievement of financial objectives to be determined and agreed upon.
An over achievement award will be paid at 1 % for each 1% achieved in excess of
100% of those financial objectives. There will be a cap of 300% of base salary
for the over achievement award. You will be provided a copy of the plan.
STOCK OPTIONS
It will be recommended to the Compensation Committee of the Board of Directors
that you be granted the option to purchase 350,000 shares of Common Stock
subject to vesting as follows:
- 25% immediately vested
- 25% to vest on first anniversary of date of employment
- Remaining 50% to vest monthly over the following two years
- Full vesting upon any change in control of the Company
RELOCATION EXPENSE
You will be reimbursed, upon submission of adequate documentation, for all
reasonable, out-of-pocket, and ordinary expenses for commuting or relocating to
the Mountain View area and necessary business expenses incurred in performing
services as Executive Vice President, Operations and Finance.
TERM OF EMPLOYMENT
This offer of employment will initially be for a two-year period commencing on
May 28, 1996. For the first twelve months of the initial employment period, the
term of employment will decrease by one month for each month of service.
Thereafter, the term of employment will continue on a one-year basis unless and
until it is terminated by either party. This will be subject to a sixty (60)
day notice period.
SEVERANCE
In the event you are terminated other than for cause, or if you voluntarily
terminate your employment because of a reduction in title or responsibility, you
will be entitled to receive a severance payment equal to your then-current base
salary for a period equal to the longer of the term of employment remaining
under this agreement or 12 months. Additionally, you will be provided benefit
plan reimbursement with salary continuation payment equivalent to the cost of
extending healthcare base benefits under COBRA for the severance period.
<PAGE>
If the Company should decide to terminate this agreement, you will eligible to
receive outplacement assistance up to $40,000. Please note that no cash payment
will be paid in lieu of the use of outplacement services.
Rudy, I am quite pleased to offer you the position as Executive Vice President,
Operations and Finance. I look forward to working with you and feel certain
your contribution will add considerable value to the success of NCD.
Please sign the copies of this letter when you have accepted and return one to
me. I look forward to your joining NCD.
Sincerely,
Robert G. Gilbertson
President and Chief Executive Officer
<PAGE>
EXHIBIT 11.1
NETWORK COMPUTING DEVICES, INC.
Statement Regarding Computation of Shares
Used in per Share Computations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Primary:
Weighted average common shares
outstanding during the period 16,579 15,832 15,908
Common share equivalents:
Dilutive effect of stock options -- -- --
------- ------- --------
Total 16,579 15,832 15,908
------- ------- --------
------- ------- --------
Net loss $(5,232) $(4,029) $(10,843)
------- ------- --------
------- ------- --------
Primary loss per share $ (0.32) $ (0.25) $ (0.68)
------- ------- --------
------- ------- --------
Fully Diluted:
Weighted average common shares
outstanding during the period 16,579 15,832 15,908
Common share equivalents:
Dilutive effect of stock options -- -- --
Contingently issuable performance shares -- -- 131
------- ------- --------
Total 16,579 15,832 16,039
------- ------- --------
------- ------- --------
Net loss for fully diluted computation $(5,232) $(4,029) $(12,407)
------- ------- --------
------- ------- --------
Fully diluted loss per share $ (0.32) $ (0.25) $ (0.77)
------- ------- --------
------- ------- --------
</TABLE>
NOTE: The difference between net loss used for primary and fully diluted
earnings per share calculations for the year ended 1994 is a result
of the assumption that all financial performance objectives have
been achieved, the maximum number of Performance Shares have been
issued, and the maximum amount of cash contingently payable has been
paid, with a significant portion of the cash and the value of the
Performance Shares allocated to in-process research and development
and charged to operations.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
ORGANIZATION JURISDICTION NAME
------------ -----------------
NCD Graphic Software Corporation Oregon
NCD Software Corporation California
NCD Systems Corporation California
Network Computing Devices Australia
Australia Pty. Ltd.
Network Computing Devices Canada
(Canada), Inc.
Network Computing Devices England
(UK) Limited
Network Computing Devices France
(France) S.A.R.L.
Network Computing Devices Germany
(Germany) GmbH
Network Computing Devices Sweden
(Scandinavia) AB
NCD International Inc. California
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Network Computing Devices, Inc.
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-51594 and 39-65638) of Network Computing Devices, Inc. of our
reports dated January 28, 1997, relating to the consolidated balance sheets of
Network Computing Devices, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, and the related schedule, which reports appear in the
December 31, 1996, annual report on Form 10-K of Network Computing Devices, Inc.
KPMG PEAT MARWICK LLP
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 23,832
<SECURITIES> 11,839
<RECEIVABLES> 24,152
<ALLOWANCES> 2,603
<INVENTORY> 9,776
<CURRENT-ASSETS> 78,935
<PP&E> 24,234
<DEPRECIATION> 19,339
<TOTAL-ASSETS> 85,693
<CURRENT-LIABILITIES> 17,954
<BONDS> 0
0
0
<COMMON> 68,217
<OTHER-SE> (792)
<TOTAL-LIABILITY-AND-EQUITY> 85,693
<SALES> 120,608<F1>
<TOTAL-REVENUES> 120,608
<CGS> 80,484<F2>
<TOTAL-COSTS> 80,484
<OTHER-EXPENSES> 57,365
<LOSS-PROVISION> 645
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> (8,721)
<INCOME-TAX> (3,489)
<INCOME-CONTINUING> (5,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,232)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
<FN>
<F1>Includes revenues from licensing of software and support services
<F2>Includes costs from licensing of software and support services
</FN>
</TABLE>
