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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
California 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 North Bernardo Avenue, Mountain View, California 94043
(Address of principal executive offices and zip code)
Registrant's telephone number: (415) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the Registrant's Common Stock was
17,008,123 at June 30, 1997.
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NETWORK COMPUTING DEVICES, INC.
INDEX
DESCRIPTION PAGE NUMBER
- ----------------------------------------------------------- -----------
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three-and Six-Month Periods Ended
June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the Six-Month Periods Ended June 30, 1997
and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 6: Exhibits and Reports on Form 8-K 17
Signature 18
2
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NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
June 30, December 31,
1997 1996
----------- -----------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 14,356 $ 23,832
Short-term investments 22,306 11,839
Accounts receivable, net 25,295 21,549
Inventories 10,602 9,776
Refundable and deferred income tax assets 4,259 8,287
Other current assets 3,113 3,652
--------- ---------
Total current assets 79,931 78,935
Property and equipment, net 4,868 4,895
Other assets 1,757 1,863
--------- ---------
Total assets $ 86,556 $ 85,693
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,557 $ 4,383
Accrued expenses 8,755 9,337
Current portion of capital lease obligations 373 748
Deferred revenue 3,697 3,486
--------- ---------
Total current liabilities 19,382 17,954
Long-term portion of capital lease obligations 205 314
Shareholders' equity:
Undesignated preferred stock - -
Common stock 66,212 68,217
Retained earnings 757 (792)
--------- ---------
Total shareholders' equity 66,969 67,425
--------- ---------
Total liabilities and shareholders' equity $ 86,556 $ 85,693
--------- ---------
--------- ---------
See accompanying notes.
3
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Hardware products and services $ 26,889 $ 22,193 $ 49,816 $ 47,100
Software licenses and services 7,473 7,135 15,610 12,667
--------- --------- --------- ---------
Total net revenues 34,362 29,328 65,426 59,767
Cost of revenues:
Hardware products and services 18,767 20,609 33,836 41,271
Software licenses and services 1,550 2,193 4,542 3,631
--------- --------- --------- ---------
Total cost of revenues 20,317 22,802 38,378 44,902
--------- --------- --------- ---------
Gross margin 14,045 6,526 27,048 14,865
Operating expenses:
Research and development 3,527 4,019 6,971 8,139
Marketing and selling 8,229 9,402 15,370 18,959
General and administrative 1,677 3,527 3,342 6,036
--------- --------- --------- ---------
Total operating expenses 13,433 16,948 25,683 33,134
--------- --------- --------- ---------
Operating income (loss) 612 (10,422) 1,365 (18,269)
Interest income, net 549 385 1,017 824
Other income - - 200 -
Gain (loss) on sale of product lines - (27) - 6,932
--------- --------- --------- ---------
Income (loss) before income taxes 1,161 (10,064) 2,582 (10,513)
Provision for income taxes (income tax benefit) 464 (4,017) 1,033 (4,206)
--------- --------- --------- ---------
Net income (loss) $ 697 $ (6,047) $ 1,549 $ (6,307)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share:
Primary $ 0.04 $ (0.37) $ 0.08 $ (0.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted $ 0.04 $ (0.37) $ 0.08 $ (0.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share computations:
Primary 18,820 16,504 18,857 16,382
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted 18,821 16,504 18,858 16,382
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ 1,549 $ (6,307)
Reconciliation to cash provided (used) by operations:
Depreciation and amortization 1,616 1,799
Gain on sale of product lines - (6,932)
Deferred income taxes 1,026 -
Changes in:
Accounts receivable, net (3,746) 5,293
Inventories (826) (1,074)
Refundable income taxes 3,002 -
Other current assets and other 539 (2,881)
Accounts payable 2,174 (6,506)
Accrued expenses (582) (2,629)
Deferred revenue 211 664
--------- ---------
Cash provided (used) by operations 4,963 (18,573)
Cash flows from investing activities:
Short-term investments, net (10,467) 7,289
Proceeds from sale of product lines - 8,625
Changes in other assets 106 973
Property and equipment purchases, net (1,589) (1,599)
--------- ---------
Cash provided (used) by investing activities (11,950) 15,288
Cash flows from financing activities:
Principal payments on capital lease obligations (484) (735)
Repurchases of common stock (3,402) (89)
Proceeds from issuance of common stock, net 1,397 1,728
--------- ---------
Cash provided (used) by financing activities (2,489) 904
Decrease in cash and equivalents (9,476) (2,381)
Cash and equivalents:
Beginning of period 23,832 13,364
--------- ---------
End of period $ 14,356 $ 10,983
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of Network
Computing Devices, Inc. (the "Company") furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. This Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report on Form 10-K. The consolidated
results of operations for the three- and six-month periods ended June 30,
1997 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 1997. Certain
financial statement amounts from 1996 have been reclassified to conform to
the current year's presentation.
PER SHARE INFORMATION
Per share information is computed using the weighted-average number of common
and dilutive common equivalent shares outstanding. For primary and fully
diluted earnings per share, common equivalent shares consist of the
incremental shares issuable upon the assumed exercise of dilutive stock
options (using the treasury stock method). The effect of common equivalent
shares is not included in earnings per share calculations during periods in
which such effect would be antidilutive. The Financial Accounting Standards
Board recently issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of
basic earnings per share ("EPS") and, for companies with complex capital
structures, diluted EPS. SFAS No. 128 is effective for annual and interim
periods ending after December 15, 1997. The Company expects that for
profitable periods, basic EPS will be higher than primary earnings per share
as presented in the accompanying consolidated financial statements, and
diluted EPS will not differ materially from fully diluted earnings per share
as presented in the accompanying financial statements. Computations for loss
periods should not change significantly.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
June 30, December 31,
1997 1996
---- ----
Purchased components and sub-assemblies $ 8,407 $ 8,396
Work in process 492 240
Finished goods 1,703 1,140
-------- -------
$ 10,602 $ 9,776
-------- -------
-------- -------
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease
liabilities, were $14,000 and $41,000 for the second quarters of 1997 and
1996, respectively, and $36,000 and $65,000 for the first six months of 1997
and 1996, respectively. Income tax payments were $60,100 for the second
quarter of 1997 and $113,700 for the first six months of 1997, while an
income tax refund of $3.0 million was received during the second quarter of
1997. There were no income tax payments for the second quarter and first six
months of 1996.
1997 STOCK REPURCHASE PROGRAM
In April 1997, the Company's Board of Directors adopted a program to
repurchase, from time to time, at management's discretion, up to 1,000,000
shares of the Company's common stock on the open market during the 12-month
period ending April 30, 1998 at prevailing market prices. Repurchases are
made under the program using the Company's cash and short-
6
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
term investments. Through June 30, 1997, an aggregate of 291,500 shares were
repurchased at prices ranging from $10.75 to $12.00 per share for a total
purchase price of $3.4 million. Additionally, the Company had committed to
repurchase an additional 145,000 shares at prices ranging from $11.63 to
$12.00 per share for a total purchase price of $1.7 million. At June 30,
1997, total shares repurchased, or committed to be repurchased, were 436,500
for a total cost of $5.1 million.
Subsequent to June 30, 1997, the Company has repurchased, or committed to
repurchase, an additional 460,000 shares at prices ranging from $8.38 to
$11.63 for a total cost of $4.7 million. Aggregate repurchases, or
commitments to repurchase, as of July 24, 1997 under the 1997 stock
repurchase program are 896,500 shares for a total cost of $9.8 million.
MAJOR CUSTOMERS AND RELATED ACCOUNTS RECEIVABLE
International Business Machines Corporation ("IBM") accounted for
approximately 23% and 20% of the Company's revenues for the second quarter
and first six months of 1997, respectively. At June 30, 1997, related
accounts receivable due from IBM were approximately $10.3 million, or 41% of
the total accounts receivable balance.
7
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NETWORK COMPUTING DEVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL
PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY
OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS."
THE FOLLOWING DISCUSSION SHOULD BE READ ONLY IN CONJUNCTION WITH THE
UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q,
AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, CONTAINED IN THE COMPANY'S
1996 ANNUAL REPORT ON FORM 10-K.
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 Company's ability to continue this trend is subject to
various risks and uncertainties, however, and 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") and a subsequent letter of intent and funding agreement, IBM
agreed to fund a portion of the Company's development efforts through at
least the second quarter of 1997. The IBM Agreement provides for IBM to
purchase a substantial portion of its requirements for such products from the
Company during 1997 and 1998. In March 1997, IBM commenced shipping
production versions of such products. However, the volume of sales to IBM
under the IBM Agreement may be difficult to predict. 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
8
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NETWORK COMPUTING DEVICES, INC.
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 determined that
$1.1 million in related accruals was 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 1996 and the first
six months of 1997, the Company recognized license fees totaling $426,000 and
$1.0 million, respectively. The Company anticipates that revenues of
$167,000 will be recognized in the third quarter of 1997, and that no
additional related revenues will be recognized in the future. 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. 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.
RESULTS OF OPERATIONS
As mentioned above under "Overview," the Company determined to recombine its
two former business units (i.e., "Systems" and "Software") into a single
operation in June 1996. Although the Company is now managed as one operating
entity, the Company is reporting hardware and software revenues
independently. 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 were $34.4 million and $29.3 million for the second
quarters of 1997 and 1996, respectively, representing an increase of
17%, and $65.4 million and $59.8 million for the first six months of
1997 and 1996, respectively, representing an increase of 9%.
International revenues were 35% and 32% of total net revenues for the
second quarters of 1997 and 1996, respectively, and 32% and 33% for
the first six months of 1997 and 1996, respectively. Revenues under
the IBM Agreement accounted for approximately 23% and 20% of the
Company's revenues for the second quarter and first six months of 1997,
respectively. No single customer accounted for greater than 10% of
the Company's revenues in the same periods of 1996.
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 $26.9 million and $22.2 million for the
second quarters of 1997 and 1996, respectively, and $49.8 million and $47.1
million for the first six months of 1997 and 1996, respectively. The
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NETWORK COMPUTING DEVICES, INC.
increases in revenues were due to increased unit volume shipments, including
revenues from IBM related to the IBM Agreement, partially offset by lower
average selling prices.
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, 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. Revenues from software and related
services were $7.5 million and $7.1 million for the second quarters of 1997
and 1996, respectively, and $15.6 million and $12.7 million for the first six
months of 1997 and 1996, respectively. The increase in software revenues
resulted primarily from higher sales of WINCENTER and the related support
revenues, offset in part by declines in revenues related to PC-XWARE and the
absence of revenues related to the former Z-MAIL product line, which was sold
during the second quarter of 1996. Revenues related to the former Z-MAIL
product line of $352,000 and $1.1 million had been recognized in the second
quarter and first six months of 1996, respectively, while no such revenues
were recognized during the second quarter and first six months of 1997. In
addition, revenues related to the AT&T Agreement of $250,000 were recognized
in the second quarter of 1997 while no such revenues were recognized in the
second quarter of 1996. Revenues related to the AT&T Agreement of $1.0
million were recognized in the first six months of 1997 compared to $426,000
in the first six months of 1996. The Company anticipates that $167,000 of
revenues related to the AT&T Agreement will be recognized in the third
quarter of 1997, and that no additional related revenues will be recognized
in the future.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on hardware revenues were 30% and 7%
for the second quarters of 1997 and 1996, respectively, and 32% and 12% for
the first six months of 1997 and 1996, respectively. The dramatic increase
in margin in 1997 compared to 1996 is primarily due to a charge of
approximately $3.0 million incurred in the second quarter of 1996 to reduce
the value of certain inventories to market price. Also benefiting margin
percentages in 1997 were declines in material costs, reflecting declines in
the cost of certain semiconductor and other components. In addition, the
Company benefited from certain volume purchase discounts in association with
the IBM Agreement during the second quarter and first six months of 1997
while no such purchasing benefits were realized in the same periods of 1996.
The Company currently anticipates that the mix of hardware OEM revenues as a
component of total hardware revenues will continue to rise. In addition, the
Company plans to increase the mix of revenues generated through indirect
channels. The anticipated changes in the mix of revenues by sales channel
are likely to result in overall reduced gross margin percentages on hardware
revenues in future periods.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on software revenues were 79% and 69%
for the second quarters of 1997 and 1996, respectively, and 71% for the first
six months of both 1997 and 1996. The increase in the gross margin
percentage for the second quarter of 1997 was primarily due to the impact of
AT&T, as the second quarter of 1997 included revenue that was not included in
the second quarter of 1996, in addition to a reduction of estimated
obligations in the second quarter of 1997 associated with the AT&T Agreement.
This was offset slightly by a higher mix of WINCENTER revenues in 1997,
which carry a lower margin due to higher third-party royalty costs, and
reduced revenues of other higher margin software products, including revenues
associated with the former Z-MAIL product line. The gross margin percentage
for the first six months of 1997 remained unchanged from the same period of
1996 due to the increase in the gross margin percentage due to AT&T as
discussed above, offset by reduced margin from increased WINCENTER sales and
the absence of sales of higher margin Z-MAIL products and the reduction of
PC-XWARE sales. Certain technology used in the Company's products is
licensed from third parties on a royalty-bearing basis. The costs associated
with such royalties increased substantially during 1996, and will continue to
be a significant component of total software cost of sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $3.5 million and $4.0 million
for the second quarters of 1997 and 1996, respectively, and $7.0 million and
$8.1 million for the first six months of 1997 and 1996, respectively.
Decreases in 1997 are primarily due to the absence of R&D expenses related to
the MARINER and Z-MAIL product lines in the second quarter and first six
months of 1997 while spending on such product line development was a
significant component of R&D expenses during the same periods of 1996. As a
percentage of net revenues, R&D expenses were 10% and 14% for the second
quarters of
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NETWORK COMPUTING DEVICES, INC.
1997 and 1996, respectively, and 11% and 14% for the first six months of 1997
and 1996, respectively. 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 $8.2 million and $9.4 million for the
second quarters of 1997 and 1996, respectively, and $15.4 million and $19.0
million for the first six months of 1997 and 1996, respectively. The
decreases reflect lower labor and other employee-related expenses due to
decreased headcount from the sale of the Z-MAIL and MARINER product lines.
The Company also experienced increased efficiencies in these areas resulting
from the reconsolidation of the Company's remaining business units, which
commenced in June of 1996. As a percentage of net revenues, marketing and
selling expenses were 24% and 32% for the second quarters of 1997 and
1996, respectively, and 23% and 32% for the first six months of 1997 and
1996, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $1.7 million and $3.5
million for the second quarters of 1997 and 1996, respectively, and $3.3
million and $6.0 million for the first six months of 1997 and 1996,
respectively. The decreases were primarily related to cost containment
measures implemented by new senior management, including reductions in legal
costs and outside consulting fees and the reconsolidation of separate
business units into a single operating entity. G&A expenses for the second
quarter and first six months of 1996 included increased expense related to
both the severance costs associated with the elimination of certain positions
within the Company and to increased personnel costs that resulted from the
division of the Systems and Software businesses into separate business units.
As a percentage of net revenues, G&A expenses were 5% and 12% for the second
quarters of 1997 and 1996, respectively, and 5% and 10% for the first six
months of 1997 and 1996, respectively.
INTEREST INCOME
Interest income, net of interest expense, was $549,000 and $385,000 for the
second quarters of 1997 and 1996, respectively, and $1.0 million and $824,000
for the first six months of 1997 and 1996, respectively. The increase was
primarily due to higher average balances in interest-bearing accounts.
OTHER INCOME
Other income for the first six months of 1997 includes the receipt of
insurance proceeds for certain legal expenses incurred in association
with securities litigation costs.
GAIN (LOSS) ON SALE OF PRODUCT LINES
The loss on the sale of the product line for the second quarter of 1996
represents the net loss on the Company's sale of the Z-MAIL division. The
gain on the sale of product lines for the first six months of 1996
represents the net gain recognized on the sale of the Company's MARINER
product line in February 1996, offset slightly by the net loss on the sale of
Z-MAIL in June 1996.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax provision of $0.5 million and $1.0
million for the second quarter and first six months of 1997, respectively,
and an income tax benefit of $4.0 million and $4.2 million for the second
quarter and first six months of 1996, respectively.
FINANCIAL CONDITION
Total assets as of June 30, 1997 increased by $0.9 million, or 1%, from
December 31, 1996. The change in total assets reflected increases in
accounts receivable of $3.7 million and in cash and short-term investments of
$1.0 million, partially offset by a decrease of $4.0 million in refundable
and deferred income tax assets. The increase in accounts receivable was
primarily related to increased sales volumes related to the IBM Agreement,
which has increased the Company's days sales outstanding. The increase in
cash and equivalents and short-term investments was primarily related to the
receipt of income tax refunds, offset partially by repurchases of the
Company's common stock. The decrease in refundable and deferred income taxes
was primarily related to income tax refunds received.
11
<PAGE>
NETWORK COMPUTING DEVICES, INC.
Total liabilities as of June 30, 1997 increased by $1.3 million, or 7%, from
December 31, 1996. This increase was primarily due to an increase of $2.2
million in accounts payable which was primarily related to increased
inventory receipts.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 1997 are estimated at
approximately $1.5 million, and at June 30, 1997, the Company had commitments
for capital expenditures of approximately $250,000, primarily related to
manufacturing tooling.
LIQUIDITY
In April 1997, the Company's Board of Directors adopted a program to
repurchase from time to time at management's discretion up to 1,000,000
shares of the Company's common stock on the open market during the 12-month
period ending April 30, 1998 at prevailing market prices. Repurchases are
made under the program using the Company's cash resources. Shares
repurchased will be available for the issuance under the Company's stock
plans and for other corporate purposes. Through June 30, 1997, an aggregate
of 291,500 shares were repurchased at prices ranging from $10.75 to $12.00
per share for a total purchase price of $3.4 million. Additionally, the
Company had committed to repurchase an additional 145,000 shares at prices
ranging from $11.63 to $12.00 per share for a total purchase price of $1.7
million. At June 30, 1997, total shares repurchased, or committed to be
repurchased, were 436,500 for a total cost of $5.1 million. Subsequent to
June 30, 1997, the Company has repurchased, or committed to repurchase, an
additional 460,000 shares at prices ranging from $8.38 to $11.63 for a total
cost of $4.7 million. Aggregate repurchases, or commitments to repurchase,
as of July 24, 1997 under the 1997 stock repurchase program are 896,500
shares for a total cost of $9.8 million.
As of June 30, 1997, the Company had combined cash and equivalents and
short-term investments totaling $36.7 million, with no significant debt. 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.
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. See "Item 1. Business - Industry Background" and "Business -
Markets and Applications" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
12
<PAGE>
NETWORK COMPUTING DEVICES, INC.
COMPETITION
The desktop computer and information access markets are characterized by
rapidly changing technology and evolving industry standards. The Company
experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations and software
developers. Competition within the network computing market has intensified
over the past several years, resulting in price reductions and reduced profit
margins. The Company expects this intense competition to continue, and there
can be no assurance that the Company will be able to continue to compete
successfully against current and future competitors as the desktop computer
market evolves and competition increases. The Company's software products
also face substantial competition from software vendors that offer similar
products, including several large software companies. See "Item 1. Business
- - Competition" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
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 that
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
implementation of the IBM Agreement (see "Overview"). 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.
The Company currently anticipates that the mix of hardware revenues as a
component of total revenues may rise as a result of the IBM Agreement and the
Company's current efforts to develop other OEM relationships for its network
computers. In addition, the Company plans to increase its revenues generated
through indirect sales. This change in the mix of revenues by product type
and by sales channel is likely to result in overall reduced gross margin
percentages on hardware revenues and 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
13
<PAGE>
NETWORK COMPUTING DEVICES, INC.
customer ordering patterns, avoid excessive levels of older product
inventories and ensure that adequate supplies of new products can be
delivered to meet customer demand. As the Company is continuously engaged in
this product development and transition process, its operating results may be
subject to considerable fluctuation, particularly when measured on a
quarterly basis. The inability to finance important research and development
projects, delays in the introduction of new and enhanced products, the
failure of such products to gain market acceptance, or problems associated
with new product transitions could adversely affect the Company's operating
results. See "Item 1. Business - Industry Background" and "Business -
Product Development" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
The Company increasingly 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. See "Item
1. Business - Marketing and Sales" in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
RELIANCE ON INDEPENDENT CONTRACTORS
The Company relies on independent contractors for virtually all of the
sub-assembly of the Company's network computer products. The Company's
reliance on these independent contractors limits its control over delivery
schedules, quality assurance and product costs. In addition, a number of the
Company's independent suppliers are located abroad. The Company's reliance
on these foreign suppliers subjects the Company to risks such as the
imposition of unfavorable governmental controls or other trade restrictions,
changes in tariffs and political instability. The Company currently obtains
all of the sub-assemblies used for its network computer products (consisting
of all major components except monitors and cables) from a single supplier
located in Thailand. Any significant interruption in the supply of
sub-assemblies from this contractor would have a material adverse effect on
the Company's business and operating results. 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. See "Item 1. Manufacturing and Supplies"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
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, from time to time, 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
14
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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, particularly
Robert G. Gilbertson, its President and Chief Executive Officer, and Rudolph
G. Morin, its Executive Vice President of Operations & Finance and Chief
Financial Officer. The loss of these individuals or other key management
personnel could have a material adverse effect on the Company's business,
operating results or financial condition. The Company believes that its
future success will depend in large part on its ability to attract and retain
highly-skilled engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, integrating and retaining such
personnel. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, operating results or financial
condition.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock has fluctuated significantly
over the past several years and is subject to material fluctuations in the
future in response to announcements concerning the Company or its competitors
or customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general
conditions in the computer industry, developments in the financial markets
and other factors. In particular, shortfalls in the Company's quarterly
operating results from historical levels or from levels forecast by
securities analysts could have an adverse effect on the trading price of the
common stock. The Company may not be able to quantify such a quarterly
shortfall until the end of the quarter, which could result in an immediate
and adverse effect on the common stock price. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies
and which have been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of the Company's common stock.
15
<PAGE>
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 was approved by the federal court
handling the case at a settlement hearing held on May 2, 1997. A final
judgment and order of dismissal of action was filed on May 2, 1997. 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
The Annual Meeting of Shareholders of the Company was held on May 28, 1997.
(a) The following five persons nominated by management were elected as
directors at the meeting:
Robert G. Gilbertson
Philip Greer
Paul Low
Stephen A. MacDonald
Peter Preuss
(b) A proposal to increase the number of shares of Common Stock reserved
for issuance under the Company's 1989 Stock Option Plan by 200,000
shares was approved by a vote of 12,497,198 shares for, 3,427,258
shares against, 119,347 shares abstaining, and 130,914 broker
non-votes.
(c) A proposal to increase the number of shares of Common Stock reserved
for issuance under the Company's Employee Stock Purchase Plan by
100,000 shares was approved by a vote of 14,814,006 shares for,
1,190,595 shares against, 66,002 shares abstaining, and 104,114
broker non-votes.
(d) A proposal to increase the number of shares of Common Stock reserved
for issuance under the Company's 1994 Outside Directors' Stock
Option Plan by 50,000 shares was approved by a vote of 12,649,390
shares for, 3,421,675 shares against, 76,752 shares abstaining, and
26,900 broker non-votes.
(e) A proposal to ratify the selection of KPMG Peat Marwick LLP as
independent auditors of the Company for the current fiscal year was
approved by a vote of 16,113,340 shares for, 24,905 shares against,
and 36,472 shares abstaining.
16
<PAGE>
NETWORK COMPUTING DEVICES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.44 IBM Letter of Intent and Funding Agreement.
Exhibit 11.1 Statement Regarding Computation of Shares Used in Income
(Loss) Per Share Computations.
Exhibit 27 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the three-month period
ended June 30, 1997.
17
<PAGE>
NETWORK COMPUTING DEVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Network Computing Devices, Inc.
(Registrant)
Date: July 24, 1997
By: /s/ RUDOLPH G. MORIN
----------------------------------------
Rudolph G. Morin
Executive Vice President, Operations &
Finance and Chief Financial Officer (Duly
Authorized and Principal Financial and
Accounting Officer)
18
<PAGE>
EXHIBIT 10.44
[IBM LETTERHEAD]
June 5, 1997
Lorraine Hariton
Vice President
Network Computer Devices, Inc.
350 North Bernardo Ave.
Mountain View, CA 94043
RE: LETTER OF INTENT AND FUNDING AGREEMENT
Dear Lorraine:
This Letter of Intent and Funding Agreement ("Letter of Intent") sets forth
the agreement of parties regarding the items described below. This Letter of
Intent shall be considered and Attachment to Article 1 - Development of the
IBM - NCD Alliance Agreement dated June 27, 1996 ("Alliance Agreement"). It
shall be effective upon the last signature of the parties' authorized
representatives.
In recognition that IBM has and will request NCD to undertake certain tasks
in development of the IBM Network Station and related software that are not
specified in the existing Alliance Agreement, IBM and NCD agree as follows:
1. IBM and NCD agree that for a period of up to 90 days from the effective
date of this Letter of Intent, IBM and NCD will negotiate in good faith for
an amendment to the existing Alliance Agreement that provides for
additional funding and/or an expansion of IBM's commitment to utilize NCD
for the manufacturing of Products through the renewal term of the existing
Alliance Agreement. Such negotiation shall include consideration of NCD's
role in development of Network Station software for the Power PC 603
platform and other development tasks not originally contemplated by the
current Alliance Agreement, including NCD's potential role in development
the IBM network computer on a Java OS platform. Notwithstanding this 90
day period, the parties acknowledge that their goal is to complete such
amendment by June 30, 1997. In the event an amendment is not executed at
the end of the 90-day negotiation period, such period may be extended by
mutual agreement by the parties. Although the parties may exchange
proposals (written or oral), terms sheets, draft agreements, or other
materials, neither party will have any obligation or liability regarding
the matters being negotiated (except those obligations specifically set
forth in this Letter of Intent) unless and until our companies enter into a
more comprehensive written amendment. Neither party will rely on a
successful conclusion of such an amendment, and any business decision made
in anticipation of the conclusion of such an amendment is at the sole risk
of each party. Each party shall be responsible for its own expenses and
costs related to such negotiations.
<PAGE>
Lorraine Hariton
Page 2
June 5, 1997
2. In consideration for IBM's payment obligation as specified below, NCD
agrees to perform development tasks assigned by IBM that are outside the
scope of the existing Alliance Agreement and that are consistent with and
implement the Product Roadmap provided to NCD on May 15, 1997. Such tasks
include but are not limited to:
a. Work in support of the port of the NCD operating system onto a PowerPC
603- version of the Product. This work will include providing and
completing for the PowerPC 603 platform the Deliverables and tasks
currently described in the Development Article of the Alliance
Agreement, as well as completing additional tasks and Deliverables
necessary to support the Power PC 603 platform (including acquisition
and utilization of the appropriate GNU gcc compiler for the PowerPC
603 platform);
b. Support for a second web browser on the Product;
c. Implementation of changes required to incorporate Motif Library and
Motif Window Manager Version 1.2.5 into the Products.
d. Support and integration of IBM-Hursley's version of the Java VM 1.1.2
and Java VM 1.2.X into the Products (rather than the standard Sun
version).
e. Other tasks assigned by IBM and consistent with the referenced Product
Roadmap.
The parties acknowledge and agree that the above list is not intended to be
exhaustive. The parties also agree that nothing in the above list or in this
Letter of Intent relieves or in any way affects either parties' existing
obligations under the Alliance Agreement.
3. For the time period described in paragraph 4, below, IBM shall pay to NCD
an NRE amount of up to $200,000 per calendar month for development work and
resources applied to perform the work described in paragraph 2 above.
Payment of such amount shall be subject to NCD's application of key
resources to accomplish the additional work described in this Letter of
Intent, and reasonable demonstration, if requested by IBM, that its total
additional development work performed pursuant to this Letter of Intent for
the applicable calendar month equaled or exceeded $200,000 in cost (using a
rate of $200,000 per person/year for purposes of this Letter of intent
only). Nothing herein shall require IBM to pay any additional amount for
the work described in this Letter of Intent. NCD may invoice IBM for the
amount described herein no earlier than the final business day of the
calendar month for which the payment was earned, and shall submit with the
invoice documentation supporting the above NRE costs, if requested by IBM.
IBM's payment of the invoice shall be made no later than 30 days after
receipt of the invoice and requested documentation supporting the invoice.
<PAGE>
Lorraine Hariton
Page 3
June 5, 1997
4. The payment described in paragraph 3, above, shall be paid retroactively to
April 1, 1997, in recognition that NCD has been performing certain work
described by this letter during such time period. Such payment shall
continue on a month-to-month basis until the earlier of (i) the parties'
execution of a more comprehensive amendment to the Alliance Agreement as
described in paragraph 1; (ii) IBM's written notice that it no longer
requires or desires such additional work (as described in paragraph 2) to
be performed; or (iii) March 31, 1998. The parties agree that termination
of IBM's obligation to pay the NRE described herein shall not in any way
relieve NCD of its continuing obligations to fulfill the terms of the
Alliance Agreement, regardless of whether or not it is amended.
5. The parties agree that all amounts paid to NCD pursuant to this Letter of
Intent are to be credited against any amount that IBM agrees to pay to NCD
in the comprehensive written amendment to be negotiated pursuant to
paragraph 1 of this Letter of Intent, if such an amendment is concluded.
6. All Materials created and all modifications to Materials made by NCD
pursuant to the development tasks described above shall be considered
Deliverables under the terms of the Alliance Agreement. All warranties and
other applicable terms and conditions of the Alliance Agreement apply to
such Materials.
7. NCD agrees that during the negotiation period described in paragraph 1,
above, it will continue to operate its business in the ordinary course, and
will undertake no commitments nor take any actions that would conflict with
its ability to perform the work described herein and enter into a more
comprehensive amendment as described in paragraph 1.
8. Nothing in this Letter of Intent shall be construed as a waiver of any
claims or rights under the Alliance Agreement or under law, or in any way
eliminates, limits, changes, or otherwise affects either parties' existing
obligations under the Alliance Agreement.
Network Computing Devices, Inc. IBM Corporation
By: /s/ Lorraine Hariton By: /s/ Kenneth R. Johnson
-------------------- ----------------------
Name: Lorraine Hariton Name: Kenneth R. Johnson
Title: Vice President, Network Title: Director of Network Station
Computing Devices, Inc. Development
Date: 6/7/97 Date: 6/10/97
------------------ -------------------
<PAGE>
EXHIBIT 11.1
NETWORK COMPUTING DEVICES, INC.
Statement Regarding Computation of Shares
Used in Income (Loss) Per Share Computations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares
outstanding during the period 17,121 16,504 17,105 16,382
Common share equivalents:
Dilutive effect of stock options 1,699 - 1,752 -
--------- -------- -------- --------
Total 18,820 16,504 18,857 16,382
--------- -------- -------- --------
--------- -------- -------- --------
Net income (loss) $ 697 $ (6,047) $ 1,549 $ (6,307)
--------- -------- -------- --------
--------- -------- -------- --------
Primary income (loss) per share $ 0.04 $ (0.37) $ 0.08 $ (0.38)
--------- -------- -------- --------
--------- -------- -------- --------
Fully Diluted:
Weighted average common shares
outstanding during the period 17,121 16,504 17,105 16,382
Common share equivalents:
Dilutive effect of stock options 1,700 - 1,753 -
--------- -------- -------- --------
Total 18,821 16,504 18,858 16,382
--------- -------- -------- --------
--------- -------- -------- --------
Net income (loss), adjusted
for fully diluted calculations $ 697 $ (6,047) $ 1,549 $ (6,307)
--------- -------- -------- --------
--------- -------- -------- --------
Fully diluted income (loss) per share $ 0.04 $ (0.37) $ 0.08 $ (0.38)
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,356
<SECURITIES> 22,306
<RECEIVABLES> 28,043
<ALLOWANCES> 2,748
<INVENTORY> 10,602
<CURRENT-ASSETS> 79,931
<PP&E> 25,816
<DEPRECIATION> 20,948
<TOTAL-ASSETS> 86,556
<CURRENT-LIABILITIES> 19,382
<BONDS> 0
0
0
<COMMON> 66,212
<OTHER-SE> 757
<TOTAL-LIABILITY-AND-EQUITY> 86,556
<SALES> 65,426<F1>
<TOTAL-REVENUES> 65,426
<CGS> 38,378<F2>
<TOTAL-COSTS> 38,378
<OTHER-EXPENSES> 25,683
<LOSS-PROVISION> 66
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 2,582
<INCOME-TAX> 1,033
<INCOME-CONTINUING> 1,549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,549
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>Includes revenues from licensing of software and support services.
<F2>Includes costs from licensing of software and support services.
</FN>
</TABLE>
