This document consists of 16 pages, of which this is page number 1. The index
to exhibits is located at page 15.
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, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
------ ------
Commission file number: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
California 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 North Bernardo Avenue, Mountain View, California 94043
(Address of principal executive offices and zip code)
Registrant's telephone number: (415) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---- ----
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 16,420,434 at April 30, 1996.
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 March 31,
1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
Three-Month Periods Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
Three-Month Periods Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1: Legal Proceedings 15
Item 6: Exhibits and Reports on Form 8-K 15
Signature 16
2
NETWORK COMPUTING DEVICES, INC.
Part I: Financial Information
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
March 31, December 31,
1996 1995
---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 16,865 $ 13,364
Short-term investments 16,684 22,786
Accounts receivable, net 26,555 28,591
Inventories 19,702 14,398
Prepaid expenses and other 8,065 6,863
---------- ----------
Total current assets 87,871 86,002
Property and equipment, net 6,673 6,749
Other assets 4,487 4,786
---------- ----------
Total assets $ 99,031 $ 97,537
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,513 $ 13,893
Accrued expenses 7,076 7,429
Current portion of capital lease obligations 1,108 1,246
Income taxes payable 2,268 2,666
Deferred revenue 3,465 3,298
---------- ----------
Total current liabilities 29,430 28,532
Long-term portion of capital lease obligations 756 991
Shareholders' equity:
Undesignated preferred stock - -
Common stock 64,658 63,543
Unrealized gain on available-for-sale securities 7 31
Retained earnings 4,180 4,440
---------- ----------
Total shareholders' equity 68,845 68,014
---------- ----------
Total liabilities and shareholders' equity $ 99,031 $ 97,537
---------- ----------
---------- ----------
See accompanying notes.
3
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited -- in thousands, except per share amounts)
Three Months Ended March 31,
----------------------------
1996 1995
------- -------
Net revenues:
Systems $26,628 $32,599
Software 3,811 4,929
------- -------
Total net revenues 30,439 37,528
Cost of revenues:
Systems 21,266 22,802
Software 834 584
------- -------
Total cost of revenues 22,100 23,386
------- -------
Gross profit 8,339 14,142
Operating expenses:
Research and development 4,120 3,019
Marketing and selling 9,557 8,946
General and administrative 2,509 1,982
------- -------
Total operating expenses 16,186 13,947
------- -------
Operating income (loss) (7,847) 195
Other income, net 439 272
Gain on sale of product line 6,959 --
------- -------
Income (loss) before income taxes (449) 467
Provision for income taxes (income tax benefit) (189) 163
------- -------
Net income (loss) $ (260) $ 304
------- -------
------- -------
Net income (loss) per share:
Primary $ (0.02) $ 0.02
------- -------
------- -------
Fully diluted $ (0.02) $ (0.06)
------- -------
------- -------
Shares used in per share computations:
Primary 16,260 16,575
------- -------
------- -------
Fully diluted 16,260 17,079
------- -------
------- -------
See accompanying notes.
4
NETWORK COMPUTING DEVICES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
Three Months Ended March 31,
----------------------------
1996 1995
---------- ----------
Cash flows from operations:
Net income (loss) $ (260) $ 304
Reconciliation to cash provided (used) by operations:
Depreciation and amortization 1,090 681
Gain on sale of product line (6,959) --
Changes in:
Accounts receivable, net 2,036 4,666
Inventories (5,304) 2,226
Prepaid expenses and other (1,202) (1,452)
Accounts payable 1,620 (3,806)
Income taxes payable (398) 118
Accrued expenses (454) (339)
Deferred revenue 167 2,906
---------- ----------
Cash provided (used) by operations (9,664) 5,304
Cash flows from investing activities:
Short-term investment, net 6,078 (2,143)
Proceeds from sale of product line 7,300 --
Changes in other assets 109 119
Property and equipment purchases (1,064) (835)
---------- ----------
Cash provided (used) by investing activities 12,423 (2,859)
Cash flows from financing activities:
Principal payments on capital lease obligations (373) (317)
Repurchases of stock (80) (564)
Proceeds from issuance of stock, net of issuance costs 1,195 91
---------- ----------
Cash provided (used) by financing activities 742 (790)
Increase in cash and equivalents 3,501 1,655
Cash and equivalents:
Beginning of period 13,364 7,407
---------- ----------
End of period $ 16,865 $ 9,062
---------- ----------
---------- ----------
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ -- $ 59
---------- ----------
---------- ----------
See accompanying notes.
5
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, the results of operations and cash flows for the periods presented.
This Quarterly Report on Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1995 Annual Report on Form 10-K. The consolidated results of operations for the
three-month period ended March 31, 1996 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the entire year ending
December 31, 1996. Certain financial statement amounts from 1995 have been
reclassified to conform with current year methods of presentation.
PER SHARE INFORMATION
Per share information is computed using the weighted average number of common
and dilutive common equivalent shares outstanding. For primary and fully
diluted earnings per share, common equivalent shares consist of the
incremental shares issuable upon the assumed exercise of dilutive stock
options (using the treasury stock method). For the first quarter of 1995,
common equivalent shares were adjusted to assume that all financial
performance objectives had been achieved, the maximum number of contingently
issuable shares had been issued, and the maximum amount of cash contingently
payable had been paid in connection with the Z-Code acquisition. In the
second quarter of 1995, the Company determined that none of such shares or
cash payments are issuable or payable. The effect of common equivalent shares
is not included in earnings per share calculations during periods in which
such effect would be antidilutive.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
March 31, December 31,
1996 1995
--------- ---------
Purchased components and sub-assemblies $15,004 $ 9,548
Work in process 1,419 1,814
Finished goods 3,279 3,036
--------- ---------
$19,702 $ 14,398
--------- ---------
--------- ---------
BUSINESS RESTRUCTURING
In the third quarter of 1995, the Company determined that it was appropriate to
undertake a strategic restructuring plan to realign and consolidate its software
businesses and reduce operating expenses, and intended to improve the operating
performance of its X-Terminal, or "Systems," operations in reaction to intense
competition and slowness in the X terminal market. The Company began
implementing this plan during the third quarter of 1995, and has streamlined its
Systems operations as a result, including the termination of approximately fifty
employees associated with such operations.
6
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The plan's major components include:
- modifying the method of manufacturing and materials management to a
"build-to-order" paradigm in order to increase the efficiency with
which the Company receives product orders and manufactures and
delivers products to its customers;
- phasing out X-Terminal products that were currently yielding, or were
anticipated to yield, profit margins that did not meet certain minimum
requirements of the Company;
- reducing and consolidating facilities devoted to the conduct of the
Systems business through a combination of sublease activities or
negotiating early exits to existing lease agreements; and
- reducing the number of employees engaged in Systems business
activities to a level deemed to be essential to reengineer the
business for improved operating performance.
A description of the types and amounts (in thousands) of accruals made for
restructuring costs in 1995, and the cumulative amounts charged against such
accruals, is presented below.
Initial March 31,
Amounts Asset Cash 1996
Accrued Write-offs Payments Balance
------- ---------- -------- ---------
Reserve for the write-down of
phase-out inventories $2,706 ($2,706) $ - $ -
Employee termination benefits 1,580 - (1,009) 571
Exiting facilities-related
obligations 2,256 - (985) 1,271
Asset impairment & other 996 (815) - 181
----------------------------------------
Total $7,538 ($3,521) ($1,994) $2,023
----------------------------------------
----------------------------------------
It is anticipated that the restructuring plan will continue through 1996.
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease
liabilities, were $24,000 and $67,000 for the first three months of 1996 and
1995, respectively. Income tax payments were $34,000 for the first three
months of 1995. There were no income tax payments for the first quarter of
1996.
7
NETWORK COMPUTING DEVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS,
INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND
RISK FACTORS."
The following discussion should be read in conjunction with the unaudited
condensed consolidated interim financial statements and notes thereto included
in Part I -- Item 1 of this Quarterly Report and the audited consolidated
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1995 contained in the Company's 1995 Annual Report on Form 10-K.
OVERVIEW
The Company designs, develops, manufactures and markets hardware and software
products that provide information access to networks of heterogeneous computers.
During 1995, the Company took various actions to reorganize the two basic
components of its business into two separate business units: the Systems
business, consisting of the Company's network computers and related software;
and the Software business, consisting of its lines of PC connectivity software,
electronic messaging software and, initially, 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 began implementing a plan to
restructure its Systems 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
devoted to the conduct of the Systems business, and a reduction in the number of
employees engaged in Systems business activities. During the third quarter of
1995, the Company recognized charges totaling $7.5 million for the
implementation of this plan, which will continue into 1996. Included in these
restructuring charges were amounts related to the severance of personnel, phase-
out of certain products, and costs associated with the termination of lease
obligations.
In 1994, the Company began the development of Mariner, an Internet access and
navigation tool which it intended to market to large enterprises, as well as to
original equipment manufacturers ("OEMs") and VARs. In January 1995, the Company
entered into a software development and licensing agreement with AT&T to develop
a custom version of Mariner for AT&T (the "AT&T Agreement").The AT&T Agreement
provided for total minimum royalties of $15 million through 1998, and
contemplated the development of additional Internet access products by NCD for
license to AT&T. In September 1995, the AT&T Agreement was amended to provide
that the additional products would not be developed and that NCD would be paid
fees totaling $9 million through 1996 for development work completed at the time
of the amendment and for a license to evaluate the Mariner product. In 1995, the
Company recognized license fees totaling $6.8 million under the AT&T Agreement
and received $500,000 in fees for non-recurring engineering costs that offset
research and development expenses. In 1995, the Company also recognized revenues
of $300,000 from customers other than AT&T related to the Mariner product line.
The Company anticipates that approximately $1.7 million in additional revenues
associated with the AT&T Agreement will be recognized in 1996. In light of the
Company's inability to develop a long-term relationship with AT&T, as well as
other changes in the Internet market, including the development of intense price
competition among vendors of Internet access products, the Company in late 1995
determined to sell the Mariner product line and focus its attention on 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. NCD paid FTP a one-time license fee of
$2.5 million for the right to incorporate Mariner technology into future
versions of NCD's hardware and software products. The net gain recognized on
this transaction was $7.0 million.
In February 1994, the Company acquired all the outstanding stock of Z-Code
Software Corp., a developer of electronic mail and messaging application
products for open system environments. The Company's Z-mail electronic
messaging product line is currently part of the Company's Software business
unit. In light of disappointing recent operating results, intensifying
competition in this market and other factors, the Company is evaluating various
options including the sale or discontinuation of the Z-Mail product line.
8
NETWORK COMPUTING DEVICES, INC.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the first quarter of 1996 were $30.4 million,
representing a decrease of 19% when compared with $37.5 million for the same
period of 1995. The proportion of international revenues to total net revenues
has remained relatively comparable for the periods presented.
Sales to Motorola, Inc. ("Motorola"), which is deemed to be a related party due
to its ownership of approximately 9% of the Company's common stock, accounted
for 6% and 7% of the Company's total net revenues in the first quarters of 1996
and 1995, respectively. Motorola is the Company's largest OEM customer and also
purchases the Company's products as an end user customer. The Company does not
have a long-term sales contract with Motorola, which purchases products on as
as-needed basis to satisfy the requirements of its own customers as well as its
internal requirements. The Company believes that sales to Motorola may decline
further during 1996, but is unable to predict future levels of sales to Motorola
over the longer term. Substantial reductions in such sales levels could have a
material adverse effect on the Company's operating results in future periods.
SYSTEMS REVENUES
Systems revenues consist primarily of revenues from the sale of network
computers, or X terminals, and to a lesser extent, revenues from the licensing
of related network computing system software and the sale of customer support
services. Systems revenues were $26.6 million for the first quarter of 1996,
compared to $32.6 for the first quarter of 1995, and $26.5 million for the
fourth quarter of 1995. The decline in Systems revenues from the first quarter
of 1995 to the first quarter of 1996 was due to a combination of factors,
including a decline in the overall market demand for network computer products
during 1995, a decline in the average selling prices ("ASPs") of the Company's
Systems products due to intense price competition, the introduction of
lower-priced EXPLORA-Registered Trademark- network computers, and new product
introductions by certain of the Company's competitors. The slight increase in
Systems revenues between the fourth quarter of 1995 and the first quarter of
1996 was related to volume. However, the volume increases were substantially
offset by lower ASPs due to changes in product mix reflecting increased sales
of lower-priced Explora network computers. The ASPs of these product are
significantly lower than the ASPs of the Company's other Systems products, and
the proportion of EXPLORA units shipped to total units shipped increased
significantly from the fourth quarter of 1995. The Company believes that this
trend may continue in the future.
SOFTWARE REVENUES
Software revenues consisted primarily of revenues from the licensing of PC
connectivity software and electronic mail and messaging software. Prior to the
first quarter of 1996, Software revenues also included revenues from the
development and licensing of the Company's Mariner Internet connectivity
software (which product line was sold in the first quarter of 1996). Software
revenues were $3.8 million for the first quarter of 1996, a decrease of 23%
compared to the first quarter of 1995, and a decrease of 36% compared to the
fourth quarter of 1995. The decline in software revenues between the first
quarter of 1995 and the first quarter of 1996 was due to significant declines in
shipments across all Software product lines. First quarter 1996 net revenues
included $426,000 associated with the AT&T Agreement, while no revenues related
to the AT&T Agreement were recognized during the first quarter of 1995. The
Company anticipates that approximately $1.3 million in revenues associated with
the AT&T Agreement will be recognized throughout the remainder of 1996.
Although unit shipments of Software products increased from the fourth quarter
of 1995 to the first quarter of 1996, first quarter Software revenues declined
due to a larger proportion of sales to OEMs, which generally carry lower ASPs.
Revenues related to the Z-Mail electronic messaging product line, which the
Company is contemplating selling or discontinuing, were $572,000 in the first
quarter of 1996, a 51% decrease from the comparable quarter of 1995 and a 48%
decrease from the fourth quarter of 1995. Exclusive of revenues related to the
AT&T Agreement and the Mariner and Z-mail product lines, Software revenues would
have declined by 25% compared to the first quarter of 1995 and increased by 36%
compared to the fourth quarter of 1995.
GROSS MARGIN ON SYSTEMS REVENUES
The Company's gross profit margin on Systems revenues was 20%, 30% and 30%
for the first quarter of 1996, and the first and fourth quarters of 1995,
respectively. The decline in Systems gross margin was primarily due to
heavier price discounting as a result of intense price competition, the
increased sale of lower priced, lower-margin EXPLORA network computers, and
increases in certain component costs. The Company expects Systems gross
margins to continue to be affected by these factors during the balance of
1996.
9
NETWORK COMPUTING DEVICES, INC.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross profit margin on Software revenues was 78% for the first
quarter of 1996, compared to 88% for the first quarter of 1995 and 87% for the
fourth quarter of 1995, reflecting lower revenues taken over proportionately
greater costs, primarily related to the amortization of capitalized software
development costs.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $4.1 million and $3.0 million for
the first quarters of 1996 and 1995, respectively. The increase represented
increases in personnel and facilities costs for the Company's Software business
units. Fourth quarter 1995 R&D expenses were $3.6 million. The increase from
the fourth quarter of 1995 to the first quarter of 1996 was attributable to
increases in the engineering staff for all Software product lines.
Approximately $525,000 of such expenses related to the Company's former Internet
connectivity business unit that was sold during the first quarter of 1996, and
the expenses incurred related to this business unit will not continue in the
future. As a percentage of net revenues, R&D expenses increased to 14% for the
first quarter of 1996 from 8% for the first quarter of 1995, reflecting the
combined impact of increased spending and lower net revenues. The Company plans
to continue investing in research and development in order to improve its
competitive position in the market. However, the amount of such expenses may
fluctuate in future periods.
MARKETING AND SELLING
Marketing and selling expenses were $9.6 million, $8.9 million, and $8.7 million
for the first quarters of 1996 and 1995, and the fourth quarter of 1995,
respectively. The increases in the first quarter of 1996 were primarily related
to higher staffing costs associated with increased personnel and higher
promotional costs. As a percentage of total net revenues, marketing and selling
expenses were 31%, 24%, and 27% for the first quarters of 1996 and 1995, and the
fourth quarter of 1995, respectively, reflecting the combined impact of
increased spending and lower net revenues.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses were $2.5 million and $2.0 million
for the first quarters of 1996 and 1995, respectively, and $2.4 million for the
fourth quarter of 1995. The increase from the fourth quarter of 1995 to the
first quarter of 1996 were primarily related to the write-off in the first
quarter of 1996 of a note receivable from a customer for approximately $450,000,
which was partially offset by reductions in the use of outside consultants and a
reduction in staffing costs. When compared to the first quarter of 1995, the
increase in first quarter 1996 expenses was due primarily to the aforementioned
write-off of a customer note receivable. As a percentage of net revenues, G&A
expenses increased to 8% in the first quarter of 1996 from 5% in the first
quarter of 1995, and 7% in the fourth quarter of 1995, and resulted from the
combined impact of increased expenses and lower revenues.
OTHER INCOME
Other income includes interest income, net of interest expense. The increase in
first quarter 1996 interest income, net, over first quarter 1995 was due
primarily to lower interest expense incurred on declining capital lease
obligation balances.
GAIN ON SALE OF PRODUCT LINE
The gain on the sale of the product line for the first quarter of 1996
represents the net gain recognized on the Company's sale of the Mariner product
line.
INCOME TAXES
The Company recorded an income tax benefit during the first quarter of 1996
of $189,000 due to a loss incurred during that quarter. This compares to an
income tax provision of $163,000 during the first quarter of 1995.
FINANCIAL CONDITION
Total assets as of March 31, 1996 increased by $1.5 million, or two percent,
from December 31, 1995. The change in total assets principally reflects an
increase in inventories of $5.3 million. The increase in inventories was
partially offset by a decrease in accounts receivable of $2.0 million, and
decreases in the combined balances of cash and short-term investments used for
inventory purchases. Cash balances were positively affected by $7.3 million
related to the sale of the Company's Mariner product line.
10
NETWORK COMPUTING DEVICES, INC.
Total liabilities as of March 31, 1996 increased by $0.7 million, or two
percent, from December 31, 1995. The increase was primarily associated with
higher accounts payable balances related to increased inventories, partially
offset by slight decreases in accrued expenses and capital lease obligations.
LIQUIDITY
At March 31, 1996, the Company's primary sources of liquidity consisted of
combined cash and equivalents and short-term investments totalling $33.5
million. The Company has a $7.0 million bank line of credit; however, as a
result of its loss for the year ended December 31, 1995, the Company is in
default under certain financial covenants in its agreement as of
March 31, 1996, and accordingly, its line of credit was unavailable.
The Company believes that its existing sources of liquidity are sufficient to
meet operating cash requirements and capital lease repayment obligations at
least through the next twelve months.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
EVOLVING NETWORK COMPUTING MARKET
The Company derives a majority of its revenues from the sale of network computer
products, or X terminals, 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 Pro multi-user Windows
application server software and new, lower-priced network computers have allowed
the Company to offer network computing systems that provide users with access to
Windows applications, although sales of these new products have been limited to
date. The Company's future success will depend in substantial part upon
increased acceptance of the network computing model and the successful marketing
of the Company's new network computing products. There can be no assurance that
the Company's new network computing products will compete successfully with
alternative desktop solutions or that the network computing model will be widely
adopted in the rapidly evolving desktop computer market. The failure of new
markets to develop for the Company's network computing products would have a
material, adverse effect on the Company's business, operating results and
financial condition. See "Item 1. Business - Industry Background" and "Business
- - - Markets and Applications" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
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, reduced profit margins and the loss of the
Company's leading market share position in the X terminal market. This
competition has adversely affected the Company's operating results. In addition,
intense competition from alternative desktop computing products, particularly
personal computers, has resulted in a reduction in demand for X terminal
products. 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 "ltem 1. Business - Competition"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
11
NETWORK COMPUTING DEVICES, INC.
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
video monitors, integrated circuits and electronic sub-assemblies, some of which
require substantial order lead times. The Company's operating results may
fluctuate in the future as a result of these and other factors, including the
Company's success in developing and introducing new products, its product and
customer mix, the level of competition which it experiences and its ability to
develop and maintain strategic business alliances. In addition, the Company
operates with a relatively small backlog. Revenues and operating results
therefore generally depend on the volume and timing of orders received which are
difficult to forecast and which may occur disproportionately during any given
quarter or year. The Company's expense levels are based in part on its forecast
of future revenues. If revenues are below expectations, the Company's operating
results may be adversely affected. The Company has experienced an increasingly
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 insure 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 - Research and Development" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
The Company relies substantially on independent distributors and resellers for
the marketing and distribution of its products, particularly its Software
products. During 1995, the Company consolidated its Software sales operations by
creating a single organization devoted to the sale of the Company's PC
connectivity and messaging software and re-oriented its Software sales strategy
toward the increased use of distributors, VARs and other resellers. In late 1995
and early 1996, the Company has experienced significant returns of its Software
products from its distributors. There can be no assurance that the Company will
not continue to experience similar problems. In addition, there can be no
assurance that the Company's distributors and resellers will continue their
current relationships with the Company or that they will not give higher
priority to the sale of other products, which could include products of the
Company's competitors. A reduction in sales effort or discontinuance of sales of
the Company's products by its distributors and resellers could lead to reduced
sales and could adversely affect the Company's operating results. In addition,
there can be no assurance as to the continued viability or the financial
stability of the Company's distributors and resellers, the Company's ability to
retain its existing distributors and resellers or the Company's ability to add
distributors and resellers in the future. See "Item 1. Business - Marketing and
Sales" in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
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NETWORK COMPUTING DEVICES, INC.
RELIANCE ON INDEPENDENT CONTRACTORS
The Company relies on independent contractors for virtually all of the sub-
assembly of the Company's network computer products. The Company's reliance
on these independent contractors limits its control over delivery schedules,
quality assurance and product costs. In addition, a number of the Company's
independent suppliers are located abroad. The Company's reliance on these
foreign suppliers subjects the Company to risks such as the imposition of
unfavorable governmental controls or other trade restrictions, changes in
tariffs and political instability. The Company currently obtains all of the sub-
assemblies used for its network computer products (consisting of all major
components except monitors and cables) from a single supplier located in
Thailand. Any significant interruption in the supply of sub-assemblies from this
contractor would have a material adverse effect on the Company's business and
operating results. Disruptions in the provision of components by the Company's
other suppliers, or other events that would require the Company to seek
alternate sources of supply, could also lead to supply constraints or delays in
delivery of the Company's products and adversely affect its operating results.
The operations of certain of the Company's foreign suppliers were briefly
disrupted during 1992 due to political instability in Thailand. See "Item. 1.
Business - Manufacturing and Supplies" in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
INTERNATIONAL SALES
A majority of the Company's international sales are denominated in U.S. dollars,
and an increase in the value of the U.S. dollar relative to foreign currencies
could make the Company's products less competitive in those markets. Over the
past two years, a significant portion of international revenues have been
derived from sales to a customer in the United Kingdom that have been
denominated in pound sterling and sales denominated in foreign currencies may
increase in the future. These sales are subject to exchange rate fluctuations
which could affect the Company's operating results negatively or positively,
depending on the value of the U.S. dollar against the other currency. Where the
Company believes foreign currency-denominated sales could pose significant
exposure to exchange rate fluctuations, the Company acquires forward exchange
contracts in an effort to reduce such exposure. International sales and
operations may also be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of technology,
political instability, trade restrictions, changes in tariffs and difficulties
in staffing and managing international operations and managing accounts
receivable. In addition, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. There can be no assurance that these factors will not
have an adverse effect on the Company's future international sales and,
consequently, on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees. Recently, Robert
G. Gilbertson was appointed to the position of President and Chief Executive
Officer of the Company. Moreover, partially as a consequence of the
restructuring of its business in 1995, the Company has experienced significant
turnover of management personnel, particularly in its finance, procurement,
manufacturing, and sales organizations. The Company believes that its future
success will also 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.
13
NETWORK COMPUTING DEVICES, INC.
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.
14
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to "Item 3. Legal Proceedings" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 for a description of
litigation pending against the Company and certain of its officers and
directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.41 Asset Purchase Agreement dated February 20, 1996 by and
between the Registrant and FTP Software, Inc.
Exhibit 11.1 Statement Regarding Computation of Shares Used in Earnings
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, 1996.
15
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 28, 1996
By:
/s/ JACK A. BRADLEY
---------------------------------------------
Jack A. Bradley
Vice President - Finance and Chief Financial
Officer (Duly Authorized and Principal Financial
and Accounting Officer)
16