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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 March 31, 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 17,108,165
at April 30, 1997.
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NETWORK COMPUTING DEVICES, INC.
INDEX
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DESCRIPTION PAGE NUMBER
- -------------------------------------------------------------- -----------
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Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Operations for the Three-
Month Periods Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Three-
Month Periods Ended March 31, 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 7
Part II: Other Information
Item 1: Legal Proceedings 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
2
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NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
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<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,596 $ 23,832
Short-term investments 12,854 11,839
Accounts receivable, net 20,483 21,549
Inventories 11,237 9,776
Refundable and deferred income tax assets 7,490 8,287
Other current assets 4,938 3,652
--------- ---------
Total current assets 82,598 78,935
Property and equipment, net 5,293 4,895
Other assets 1,966 1,863
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Total assets $ 89,857 $ 85,693
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--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,241 $ 4,383
Accrued expenses 9,835 8,977
Income taxes payable 36 360
Current portion of capital lease obligations 581 748
Deferred revenue 3,243 3,486
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Total current liabilities 20,936 17,954
Long-term portion of capital lease obligations 253 314
Shareholders' equity:
Undesignated preferred stock - -
Common stock 68,608 68,217
Retained earnings (accumulated deficit) 60 (792)
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Total shareholders' equity 68,668 67,425
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Total liabilities and shareholders' equity $ 89,857 $ 85,693
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</TABLE>
See accompanying notes.
3
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
Net revenues:
Hardware products and services $ 22,927 $ 24,907
Software licenses and services 8,137 5,532
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Total net revenues 31,064 30,439
Cost of revenues:
Hardware products and services 15,069 20,662
Software licenses and services 2,992 1,438
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Total cost of revenues 18,061 22,100
----------- ----------
Gross margin 13,003 8,339
Operating expenses:
Research and development 3,444 4,120
Marketing and selling 7,141 9,557
General and administrative 1,665 2,509
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Total operating expenses 12,250 16,186
----------- ----------
Operating income (loss) 753 (7,847)
Interest income, net 468 439
Other income 200 -
Gain on sale of product line - 6,959
----------- ----------
Income (loss) before income taxes 1,421 (449)
Provision for income taxes (income tax benefit) 569 (189)
----------- ----------
Net income (loss) $ 852 $ (260)
----------- ----------
----------- ----------
Net income (loss) per share $ 0.05 $ (0.02)
----------- ----------
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Shares used in per share computations 18,889 16,260
----------- ----------
----------- ----------
See accompanying notes.
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
Cash flows from operations:
Net income (loss) $ 852 $ (260)
Reconciliation to cash provided by
(used in) operations:
Depreciation and amortization 776 1,090
Gain on sale of product line - (6,959)
Refundable and deferred income taxes 797 -
Changes in:
Accounts receivable, net 1,066 2,036
Inventories (1,461) (5,304)
Other current assets and other (1,286) (1,202)
Accounts payable 2,858 1,620
Income taxes payable (324) (398)
Accrued expenses 858 (454)
Deferred revenue (243) 167
----------- -----------
Cash provided by (used in) operations 3,893 (9,664)
Cash flows from investing activities:
Short-term investments, net (1,015) 6,078
Proceeds from sale of product line - 7,300
Changes in other assets (103) 109
Property and equipment purchases, net (1,174) (1,064)
----------- -----------
Cash provided by (used in) investing
activities (2,292) 12,423
Cash flows from financing activities:
Principal payments on capital lease
obligations (228) (373)
Repurchases of stock - (80)
Proceeds from issuance of stock, net 391 1,195
----------- -----------
Cash provided by financing activities 163 742
----------- -----------
Increase in cash and equivalents 1,764 3,501
Cash and equivalents:
Beginning of period 23,832 13,364
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End of period $ 25,596 $ 16,865
----------- -----------
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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-month period ended March 31, 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):
March 31, December 31,
1997 1996
---- ----
Purchased components and sub-assemblies $ 8,593 $ 8,396
Work in process 406 240
Finished goods 2,238 1,140
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$11,237 $ 9,776
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------- -------
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease liabilities,
were $22,000 and $24,000 for the first three months of 1997 and 1996,
respectively. Income tax payments were $53,600 for the first three months of
1997. There were no income tax payments for the first quarter of 1996.
6
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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 above results notwithstanding, 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 funded a portion of the Company's development efforts
through the first 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 to IBM's customer base (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 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
7
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NETWORK COMPUTING DEVICES, INC.
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. 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 for the first quarter of 1997 were $31.1 million, an
increase of 2% when compared to net revenues of $30.4 million for the same
period of 1996. International revenues were 29% and 35% of total net
revenues for the three months ended March 31, 1997 and 1996, respectively.
Revenues under the IBM Agreement accounted for approximately 17% of the
Company's revenues for the three months ended March 31, 1997. No single
customer accounted for greater than 10% of the Company's revenues in the
first quarter 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 $22.9 million for the first quarter of
1997, a decrease of 8% when compared to revenues of $24.9 million for the
same period of 1996. The decline in revenues was primarily due to a 27%
decline in the unit volume of the Company's HMX product line when compared to
the same period in 1996. In addition, in the first quarter of 1997, average
selling prices ("ASPs") of the Company's EXPLORA network computers declined
by 15% when compared to the same period of 1996. These declines were
partially offset by first quarter 1997 revenues from IBM related to the IBM
Agreement, as no such revenues occurred during the same period of 1996.
8
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NETWORK COMPUTING DEVICES, INC.
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 $8.1 million for the first quarter of 1997, an increase of 47%
compared to software revenues of $5.5 million for the first quarter of 1996.
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 $784,000 had been
recognized in the first quarter of 1996 while no such revenues were
recognized during the first quarter of 1997. In addition, revenues related
to the AT&T Agreement of $797,000 were recognized in the first quarter of
1997 compared to $426,000 in the first quarter of 1996.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on hardware revenues were 34% and 17%
for the first quarters of 1997 and 1996, respectively. The dramatic increase
in margin in 1997 compared to 1996 is primarily due to lower material costs.
Material costs decreased primarily as a result of market declines in the cost
of certain semiconductor components. In addition, the Company benefited from
certain volume purchase discounts in association with the IBM Agreement
during the first quarter of 1997 while no such purchasing benefits were
realized in the same quarter of 1996. The Company currently anticipates that
the mix of hardware OEM revenues as a component of total hardware revenues
will 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 the mix of revenues generated through indirect
sales. 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 63% and 74%
for the quarters ended March 31, 1997 and 1996, respectively. The decline in
1997 compared to 1996 was due primarily to a higher mix of WINCENTER revenues
in 1997, which carry a lower margin because of higher third-party royalty
costs, and reduced revenues of other higher margin software products,
including revenues associated with the former Z-MAIL product line. 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 $3.4 million and $4.1 million
for the quarters ended March 31, 1997 and 1996, respectively. Decreased
spending is primarily due to the absence of R&D expenses related to the
MARINER and Z-MAIL product lines in the first quarter of 1997 while spending
on such product line development was a significant component of R&D expenses
during the first quarter of 1996. Such decreases were partially offset by
increased spending related to network computer development. As a percentage
of net revenues, R&D expenses were 11% and 14% for the quarters ended March
31, 1997 and 1996, respectively. Absent expenses for MARINER and Z-MAIL, R&D
expenses as a percentage of net revenues for the quarter ended March 31, 1996
would have been 9%. 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 $7.1 million and $9.6 million for the
quarters ended March 31, 1997 and 1996, respectively. The decrease in the
first quarter of 1997 compared to the first quarter of 1996 reflects 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 via 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 23% and 31%
for the quarters ended March 31, 1997 and 1996, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $1.7 million and $2.5
million for the quarters ended March 31, 1997 and 1996, respectively. The
decrease was primarily related to cost containment measures implemented by
new senior management, including reductions in legal costs and outside
consulting fees. As a percentage of net revenues, G&A expenses were 5% and
8% for the quarters ended March 31, 1997 and 1996, respectively.
9
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NETWORK COMPUTING DEVICES, INC.
INTEREST INCOME
Interest income, net of interest expense, was $468,000 and $439,000 for the
quarters ended March 31, 1997 and 1996, respectively. The increase was due
to higher average balances in interest-bearing accounts.
OTHER INCOME
Other income for the quarter ended March 31, 1997 reflects the receipt of
insurance proceeds for certain legal expenses incurred in association with
securities litigation costs.
GAIN ON SALE OF PRODUCT LINE
The gain on the sale of the product line in the first quarter of 1996
represents the net gain recognized on the sale of the Company's MARINER
product line in February 1996.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax provision of $569,000 for the quarter
ended March 31, 1997 compared to an income tax benefit of $189,000 on pretax
losses incurred during the first quarter of 1996.
FINANCIAL CONDITION
Total assets as of March 31, 1997 increased by $4.2 million, or 5%, from
December 31, 1996. The change in total assets primarily reflected increases
in cash and short-term investments and inventories of $2.8 million and $1.5
million, respectively, partially offset by a decrease of $1.1 million in
accounts receivable. The increase in cash and equivalents and short-term
investments was primarily related to increased customer collections while the
increase in inventories was primarily related to lower than anticipated sales
volumes. The reduction in accounts receivable was primarily caused by a
reduction in sales volumes coupled with increased customer collection efforts.
Total liabilities as of March 31, 1997 increased by $2.9 million, or 16%,
from December 31, 1996. This increase was primarily due to an increase of
$2.9 million in accounts payable which was related to increased inventory
receipts.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 1997 are estimated at
approximately $1.7 million, and at March 31, 1997, the Company had
commitments for capital expenditures of approximately $170,000. These
commitments are primarily related to information technology and facilities.
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 will
be made under the program using the Company's cash resources. Shares
repurchased will be available for the use in funding the Company's stock
compensation plans and other corporate purposes.
As of March 31, 1997, the Company had combined cash and equivalents and
short-term investments totaling $38.5 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.
10
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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. 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.
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 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
11
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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 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 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
12
<PAGE>
NETWORK COMPUTING DEVICES, INC.
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, 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, 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.
13
<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. The Company
anticipates that no further charges related to such settlement will be
incurred in the future.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 11.1 Statement Regarding Computation of Shares Used in
Income (Loss) Per Share Computations.
Exhibit 27 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the three-month period
ended March 31, 1997.
14
<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: May 13, 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)
15
<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)
Three Months Ended March 31,
----------------------------
1997 1996
---------- -----------
Primary and fully diluted:
Weighted average common shares
outstanding during the period 17,089 16,260
Common share equivalents:
Dilutive effect of stock options 1,800 -
--------- --------
Total 18,889 16,260
--------- --------
--------- --------
Net income (loss) $ 852 $ (260)
--------- --------
--------- --------
Income (loss) per share $ 0.05 $ (0.02)
--------- --------
--------- --------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,596
<SECURITIES> 12,854
<RECEIVABLES> 23,196
<ALLOWANCES> 2,713
<INVENTORY> 11,237
<CURRENT-ASSETS> 82,598
<PP&E> 25,406
<DEPRECIATION> 20,113
<TOTAL-ASSETS> 89,857
<CURRENT-LIABILITIES> 20,936
<BONDS> 0
0
0
<COMMON> 68,608
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 68,668
<SALES> 31,064<F1>
<TOTAL-REVENUES> 31,064
<CGS> 18,061<F2>
<TOTAL-COSTS> 18,061
<OTHER-EXPENSES> 12,250
<LOSS-PROVISION> 31
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 1,421
<INCOME-TAX> 569
<INCOME-CONTINUING> 852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 852
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<FN>
<F1>INCLUDES REVENUES FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES.
<F2>INCLUDES COSTS FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES.
</FN>
</TABLE>
