-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wf2d+d6WGxSSUQFEZU0xtPpk2ouLyJt0Go27vm/p4Rm5IrZA+sokEGXYcxDwBqUE dn8hiR68BJLggVN+Hqtm6w== 0000912057-97-025520.txt : 19970731 0000912057-97-025520.hdr.sgml : 19970731 ACCESSION NUMBER: 0000912057-97-025520 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970730 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK COMPUTING DEVICES INC CENTRAL INDEX KEY: 0000886138 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 770177255 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20124 FILM NUMBER: 97648348 BUSINESS ADDRESS: STREET 1: 350 NORTH BERNARDO AVENUE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4156940650 MAIL ADDRESS: STREET 1: 350 NORTH BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______to ______ Commission file number: 0-20124 NETWORK COMPUTING DEVICES, INC. (Exact name of registrant as specified in its charter) California 77-0177255 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 350 North Bernardo Avenue, Mountain View, California 94043 (Address of principal executive offices and zip code) Registrant's telephone number: (415) 694-0650 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The number of shares outstanding of the Registrant's Common Stock was 17,008,123 at June 30, 1997. NETWORK COMPUTING DEVICES, INC. INDEX DESCRIPTION PAGE NUMBER - ----------------------------------------------------------- ----------- Cover Page 1 Index 2 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Operations for the Three-and Six-Month Periods Ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II: Other Information Item 1: Legal Proceedings 16 Item 4: Submission of Matters to a Vote of Security Holders 16 Item 6: Exhibits and Reports on Form 8-K 17 Signature 18 2 NETWORK COMPUTING DEVICES, INC. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS June 30, December 31, 1997 1996 ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents $ 14,356 $ 23,832 Short-term investments 22,306 11,839 Accounts receivable, net 25,295 21,549 Inventories 10,602 9,776 Refundable and deferred income tax assets 4,259 8,287 Other current assets 3,113 3,652 --------- --------- Total current assets 79,931 78,935 Property and equipment, net 4,868 4,895 Other assets 1,757 1,863 --------- --------- Total assets $ 86,556 $ 85,693 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,557 $ 4,383 Accrued expenses 8,755 9,337 Current portion of capital lease obligations 373 748 Deferred revenue 3,697 3,486 --------- --------- Total current liabilities 19,382 17,954 Long-term portion of capital lease obligations 205 314 Shareholders' equity: Undesignated preferred stock - - Common stock 66,212 68,217 Retained earnings 757 (792) --------- --------- Total shareholders' equity 66,969 67,425 --------- --------- Total liabilities and shareholders' equity $ 86,556 $ 85,693 --------- --------- --------- --------- See accompanying notes. 3 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- 1997 1996 1997 1996 --------- ---------- --------- ---------- Net revenues: Hardware products and services $ 26,889 $ 22,193 $ 49,816 $ 47,100 Software licenses and services 7,473 7,135 15,610 12,667 --------- --------- --------- --------- Total net revenues 34,362 29,328 65,426 59,767 Cost of revenues: Hardware products and services 18,767 20,609 33,836 41,271 Software licenses and services 1,550 2,193 4,542 3,631 --------- --------- --------- --------- Total cost of revenues 20,317 22,802 38,378 44,902 --------- --------- --------- --------- Gross margin 14,045 6,526 27,048 14,865 Operating expenses: Research and development 3,527 4,019 6,971 8,139 Marketing and selling 8,229 9,402 15,370 18,959 General and administrative 1,677 3,527 3,342 6,036 --------- --------- --------- --------- Total operating expenses 13,433 16,948 25,683 33,134 --------- --------- --------- --------- Operating income (loss) 612 (10,422) 1,365 (18,269) Interest income, net 549 385 1,017 824 Other income - - 200 - Gain (loss) on sale of product lines - (27) - 6,932 --------- --------- --------- --------- Income (loss) before income taxes 1,161 (10,064) 2,582 (10,513) Provision for income taxes (income tax benefit) 464 (4,017) 1,033 (4,206) --------- --------- --------- --------- Net income (loss) $ 697 $ (6,047) $ 1,549 $ (6,307) --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share: Primary $ 0.04 $ (0.37) $ 0.08 $ (0.38) --------- --------- --------- --------- --------- --------- --------- --------- Fully diluted $ 0.04 $ (0.37) $ 0.08 $ (0.38) --------- --------- --------- --------- --------- --------- --------- --------- Shares used in per share computations: Primary 18,820 16,504 18,857 16,382 --------- --------- --------- --------- --------- --------- --------- --------- Fully diluted 18,821 16,504 18,858 16,382 --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS)
Six Months Ended June 30, ------------------------- 1997 1996 --------- ---------- Cash flows from operations: Net income (loss) $ 1,549 $ (6,307) Reconciliation to cash provided (used) by operations: Depreciation and amortization 1,616 1,799 Gain on sale of product lines - (6,932) Deferred income taxes 1,026 - Changes in: Accounts receivable, net (3,746) 5,293 Inventories (826) (1,074) Refundable income taxes 3,002 - Other current assets and other 539 (2,881) Accounts payable 2,174 (6,506) Accrued expenses (582) (2,629) Deferred revenue 211 664 --------- --------- Cash provided (used) by operations 4,963 (18,573) Cash flows from investing activities: Short-term investments, net (10,467) 7,289 Proceeds from sale of product lines - 8,625 Changes in other assets 106 973 Property and equipment purchases, net (1,589) (1,599) --------- --------- Cash provided (used) by investing activities (11,950) 15,288 Cash flows from financing activities: Principal payments on capital lease obligations (484) (735) Repurchases of common stock (3,402) (89) Proceeds from issuance of common stock, net 1,397 1,728 --------- --------- Cash provided (used) by financing activities (2,489) 904 Decrease in cash and equivalents (9,476) (2,381) Cash and equivalents: Beginning of period 23,832 13,364 --------- --------- End of period $ 14,356 $ 10,983 --------- --------- --------- ---------
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, results of operations and cash flows for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. The consolidated results of operations for the three- and six-month periods ended June 30, 1997 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 1997. Certain financial statement amounts from 1996 have been reclassified to conform to the current year's presentation. PER SHARE INFORMATION Per share information is computed using the weighted-average number of common and dilutive common equivalent shares outstanding. For primary and fully diluted earnings per share, common equivalent shares consist of the incremental shares issuable upon the assumed exercise of dilutive stock options (using the treasury stock method). The effect of common equivalent shares is not included in earnings per share calculations during periods in which such effect would be antidilutive. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of basic earnings per share ("EPS") and, for companies with complex capital structures, diluted EPS. SFAS No. 128 is effective for annual and interim periods ending after December 15, 1997. The Company expects that for profitable periods, basic EPS will be higher than primary earnings per share as presented in the accompanying consolidated financial statements, and diluted EPS will not differ materially from fully diluted earnings per share as presented in the accompanying financial statements. Computations for loss periods should not change significantly. INVENTORIES Inventories, stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market, consisted of (in thousands): June 30, December 31, 1997 1996 ---- ---- Purchased components and sub-assemblies $ 8,407 $ 8,396 Work in process 492 240 Finished goods 1,703 1,140 -------- ------- $ 10,602 $ 9,776 -------- ------- -------- ------- INTEREST AND TAX PAYMENTS Interest payments, primarily related to interest on capital lease liabilities, were $14,000 and $41,000 for the second quarters of 1997 and 1996, respectively, and $36,000 and $65,000 for the first six months of 1997 and 1996, respectively. Income tax payments were $60,100 for the second quarter of 1997 and $113,700 for the first six months of 1997, while an income tax refund of $3.0 million was received during the second quarter of 1997. There were no income tax payments for the second quarter and first six months of 1996. 1997 STOCK REPURCHASE PROGRAM In April 1997, the Company's Board of Directors adopted a program to repurchase, from time to time, at management's discretion, up to 1,000,000 shares of the Company's common stock on the open market during the 12-month period ending April 30, 1998 at prevailing market prices. Repurchases are made under the program using the Company's cash and short- 6 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS term investments. Through June 30, 1997, an aggregate of 291,500 shares were repurchased at prices ranging from $10.75 to $12.00 per share for a total purchase price of $3.4 million. Additionally, the Company had committed to repurchase an additional 145,000 shares at prices ranging from $11.63 to $12.00 per share for a total purchase price of $1.7 million. At June 30, 1997, total shares repurchased, or committed to be repurchased, were 436,500 for a total cost of $5.1 million. Subsequent to June 30, 1997, the Company has repurchased, or committed to repurchase, an additional 460,000 shares at prices ranging from $8.38 to $11.63 for a total cost of $4.7 million. Aggregate repurchases, or commitments to repurchase, as of July 24, 1997 under the 1997 stock repurchase program are 896,500 shares for a total cost of $9.8 million. MAJOR CUSTOMERS AND RELATED ACCOUNTS RECEIVABLE International Business Machines Corporation ("IBM") accounted for approximately 23% and 20% of the Company's revenues for the second quarter and first six months of 1997, respectively. At June 30, 1997, related accounts receivable due from IBM were approximately $10.3 million, or 41% of the total accounts receivable balance. 7 NETWORK COMPUTING DEVICES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK FACTORS." THE FOLLOWING DISCUSSION SHOULD BE READ ONLY IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, CONTAINED IN THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K. The Company provides network computer hardware and software that delivers high-performance, easy-to-manage, simultaneous access to any application on an enterprise network from any desktop. The Company's product lines include the EXPLORA and HMX families of Universal Network Computers, WINCENTER PRO-TM- multi-user WINDOWS NT-Registered Trademark- application server software, and PC-XWARE-Registered Trademark- network computer software for PCs. During 1996, the Company underwent significant changes to its operations, including changes in senior management, product focus, and business unit organization. During the first half of the year, the Company initiated and completed the disposition of two software product lines, MARINER and Z-MAIL-Registered Trademark-. Also during the first half of 1996, the Company recorded operating losses of $18.3 million, and combined cash and short-term investments had declined from $36.2 million at December 31, 1995 to $26.4 million at June 30, 1996. By the end of the second quarter, the Company announced that it had appointed a new President and Chief Executive Officer, Robert G. Gilbertson, and a new Executive Vice President of Operations & Finance and Chief Financial Officer, Rudolph G. Morin. Shortly thereafter, Doug Klein, a founder of the Company, was appointed to Senior Vice President & Chief Technology Officer and Lorraine Hariton, the Vice President of Business Development, was added to the senior management team. In September 1996, Cecil M. Dye was appointed Senior Vice President of Sales & Marketing. This new senior management team initiated a "turnaround" program that included recombining its Systems and Software business units, spending and hiring controls, significant reorganization of the Research & Development and Sales & Marketing functions and asset management initiatives. By the end of the second half, profitable, cash-flow positive operations had been achieved. The Company's ability to continue this trend is subject to various risks and uncertainties, however, and there is no assurance that this trend toward profitability will continue into the future. See below under "Future Performance and Risk Factors." In June 1996, the Company announced an agreement with International Business Machines Corporation ("IBM") for the joint development of a network application terminal for resale by IBM. Under the agreement (the "IBM Agreement") and a subsequent letter of intent and funding agreement, IBM agreed to fund a portion of the Company's development efforts through at least the second quarter of 1997. The IBM Agreement provides for IBM to purchase a substantial portion of its requirements for such products from the Company during 1997 and 1998. In March 1997, IBM commenced shipping production versions of such products. However, the volume of sales to IBM under the IBM Agreement may be difficult to predict. See below under "Future Performance and Risk Factors -- Fluctuations in Operating Results." During 1995, the Company took various actions to reorganize the two basic components of its business into two separate business units: the Systems business, consisting of the Company's network computers and related software; and the Software business, consisting of its lines of PC connectivity software and, initially, its electronic messaging software and its MARINER Internet access software. In addition, the Company took steps to consolidate the management and sales organizations of the geographically separated segments of its Software business and reoriented its software sales strategy toward the increased use of distributors, value added resellers ("VARs") and other resellers. During the third quarter of 1995, the Company created and began implementing a plan to restructure the business to improve its operating performance. The plan included substantial modifications to the Company's manufacturing processes, phasing out lower margin products, a reduction in the amount of leased space, and a reduction in the number of employees. During the third quarter of 1995, the Company recognized charges totaling $7.5 million for the implementation of this plan. Included 8 NETWORK COMPUTING DEVICES, INC. in these restructuring charges were amounts related to the severance of personnel, phase-out of certain products, and costs associated with the termination of lease obligations. In the fourth quarter of 1996, the Company substantially concluded such restructuring activities and determined that $1.1 million in related accruals was in excess of amounts required. As a result, the Company recognized a $1.1 million credit for business restructuring during the fourth quarter of 1996. The credit relates primarily to lease obligations that were exited or subleased at dates or rates more favorable than those anticipated at the time of the initial restructuring plan. In 1994, the Company began the development of MARINER, an Internet access and navigation tool which it intended to market to large enterprises, as well as to original equipment manufacturers ("OEMs") and VARs. In January 1995, the Company entered into a software development and licensing agreement with AT&T to develop a custom version of MARINER for AT&T (the "AT&T Agreement"). The AT&T Agreement provided for total minimum royalties of $15 million through 1998, and contemplated the development of additional Internet access products for license to AT&T. In September 1995, the AT&T Agreement was amended to terminate these provisions for additional product development and to provide instead that the Company would be paid fees totaling $9 million through 1996 for development work completed at the time of the amendment and for a license to evaluate the MARINER product. In 1995, the Company recognized license fees totaling $6.8 million under the AT&T Agreement and received $500,000 in fees for non-recurring engineering costs that offset research and development expenses. In 1995, the Company also recognized revenues of $300,000 from other customers related to the MARINER product line. In 1996 and the first six months of 1997, the Company recognized license fees totaling $426,000 and $1.0 million, respectively. The Company anticipates that revenues of $167,000 will be recognized in the third quarter of 1997, and that no additional related revenues will be recognized in the future. In light of the Company's inability to develop a long-term relationship with AT&T, as well as other changes in the Internet market, including the development of intense price competition among vendors of Internet access products, the Company determined in late 1995 to sell the MARINER product line and focus its attention on its core business of providing desktop information access solutions for network computing environments. In February 1996, the Company sold the MARINER product line to FTP Software, Inc. ("FTP") for $9.8 million. The Company paid FTP a one-time license fee of $2.5 million for the right to incorporate MARINER technology into future versions of the Company's hardware and software products. The net gain recognized on this transaction was $7.0 million. In February 1994, the Company acquired all of the outstanding stock of Z-Code Software Corp. ("Z-Code"), a developer of electronic mail and messaging application products (collectively, "Z-MAIL") for open system environments. The Company's Z-MAIL electronic messaging product was a part of the Company's Software business unit. In light of disappointing operating results, intensifying competition in this market, and other related factors, the Company determined during the second quarter of 1996 to sell or discontinue this product line. In June 1996, the Company sold its Z-MAIL product line to NetManage, Inc. for a total sales price of $1.3 million. The net loss recognized on this transaction was $27,000. RESULTS OF OPERATIONS As mentioned above under "Overview," the Company determined to recombine its two former business units (i.e., "Systems" and "Software") into a single operation in June 1996. Although the Company is now managed as one operating entity, the Company is reporting hardware and software revenues independently. Revenues, cost of revenues and gross margins relating to prior operating periods have been conformed to the current presentation, and the following discussions of net revenues and gross margins address the revised presentation. TOTAL NET REVENUES Total net revenues were $34.4 million and $29.3 million for the second quarters of 1997 and 1996, respectively, representing an increase of 17%, and $65.4 million and $59.8 million for the first six months of 1997 and 1996, respectively, representing an increase of 9%. International revenues were 35% and 32% of total net revenues for the second quarters of 1997 and 1996, respectively, and 32% and 33% for the first six months of 1997 and 1996, respectively. Revenues under the IBM Agreement accounted for approximately 23% and 20% of the Company's revenues for the second quarter and first six months of 1997, respectively. No single customer accounted for greater than 10% of the Company's revenues in the same periods of 1996. HARDWARE REVENUES Hardware revenues consist primarily of revenues from the sale of network computers, related hardware, and to a lesser extent, fees for related service activities. Hardware revenues were $26.9 million and $22.2 million for the second quarters of 1997 and 1996, respectively, and $49.8 million and $47.1 million for the first six months of 1997 and 1996, respectively. The 9 NETWORK COMPUTING DEVICES, INC. increases in revenues were due to increased unit volume shipments, including revenues from IBM related to the IBM Agreement, partially offset by lower average selling prices. SOFTWARE REVENUES Software revenues consist primarily of revenues from the licensing of software products and related support services. Current software products that are generating revenue include WINCENTER, the Company's multi-user WINDOWS NT application server software, PC-XWARE, the Company's network computer software for PCs, and NCDWARE-Registered Trademark-, the Company's proprietary network computer software. Revenues from software and related services were $7.5 million and $7.1 million for the second quarters of 1997 and 1996, respectively, and $15.6 million and $12.7 million for the first six months of 1997 and 1996, respectively. The increase in software revenues resulted primarily from higher sales of WINCENTER and the related support revenues, offset in part by declines in revenues related to PC-XWARE and the absence of revenues related to the former Z-MAIL product line, which was sold during the second quarter of 1996. Revenues related to the former Z-MAIL product line of $352,000 and $1.1 million had been recognized in the second quarter and first six months of 1996, respectively, while no such revenues were recognized during the second quarter and first six months of 1997. In addition, revenues related to the AT&T Agreement of $250,000 were recognized in the second quarter of 1997 while no such revenues were recognized in the second quarter of 1996. Revenues related to the AT&T Agreement of $1.0 million were recognized in the first six months of 1997 compared to $426,000 in the first six months of 1996. The Company anticipates that $167,000 of revenues related to the AT&T Agreement will be recognized in the third quarter of 1997, and that no additional related revenues will be recognized in the future. GROSS MARGIN ON HARDWARE REVENUES The Company's gross margin percentages on hardware revenues were 30% and 7% for the second quarters of 1997 and 1996, respectively, and 32% and 12% for the first six months of 1997 and 1996, respectively. The dramatic increase in margin in 1997 compared to 1996 is primarily due to a charge of approximately $3.0 million incurred in the second quarter of 1996 to reduce the value of certain inventories to market price. Also benefiting margin percentages in 1997 were declines in material costs, reflecting declines in the cost of certain semiconductor and other components. In addition, the Company benefited from certain volume purchase discounts in association with the IBM Agreement during the second quarter and first six months of 1997 while no such purchasing benefits were realized in the same periods of 1996. The Company currently anticipates that the mix of hardware OEM revenues as a component of total hardware revenues will continue to rise. In addition, the Company plans to increase the mix of revenues generated through indirect channels. The anticipated changes in the mix of revenues by sales channel are likely to result in overall reduced gross margin percentages on hardware revenues in future periods. GROSS MARGIN ON SOFTWARE REVENUES The Company's gross margin percentages on software revenues were 79% and 69% for the second quarters of 1997 and 1996, respectively, and 71% for the first six months of both 1997 and 1996. The increase in the gross margin percentage for the second quarter of 1997 was primarily due to the impact of AT&T, as the second quarter of 1997 included revenue that was not included in the second quarter of 1996, in addition to a reduction of estimated obligations in the second quarter of 1997 associated with the AT&T Agreement. This was offset slightly by a higher mix of WINCENTER revenues in 1997, which carry a lower margin due to higher third-party royalty costs, and reduced revenues of other higher margin software products, including revenues associated with the former Z-MAIL product line. The gross margin percentage for the first six months of 1997 remained unchanged from the same period of 1996 due to the increase in the gross margin percentage due to AT&T as discussed above, offset by reduced margin from increased WINCENTER sales and the absence of sales of higher margin Z-MAIL products and the reduction of PC-XWARE sales. Certain technology used in the Company's products is licensed from third parties on a royalty-bearing basis. The costs associated with such royalties increased substantially during 1996, and will continue to be a significant component of total software cost of sales. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses were $3.5 million and $4.0 million for the second quarters of 1997 and 1996, respectively, and $7.0 million and $8.1 million for the first six months of 1997 and 1996, respectively. Decreases in 1997 are primarily due to the absence of R&D expenses related to the MARINER and Z-MAIL product lines in the second quarter and first six months of 1997 while spending on such product line development was a significant component of R&D expenses during the same periods of 1996. As a percentage of net revenues, R&D expenses were 10% and 14% for the second quarters of 10 NETWORK COMPUTING DEVICES, INC. 1997 and 1996, respectively, and 11% and 14% for the first six months of 1997 and 1996, respectively. The Company plans to increase its investment in research and development in the area of network computing products through 1997. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $8.2 million and $9.4 million for the second quarters of 1997 and 1996, respectively, and $15.4 million and $19.0 million for the first six months of 1997 and 1996, respectively. The decreases reflect lower labor and other employee-related expenses due to decreased headcount from the sale of the Z-MAIL and MARINER product lines. The Company also experienced increased efficiencies in these areas resulting from the reconsolidation of the Company's remaining business units, which commenced in June of 1996. As a percentage of net revenues, marketing and selling expenses were 24% and 32% for the second quarters of 1997 and 1996, respectively, and 23% and 32% for the first six months of 1997 and 1996, respectively. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses were $1.7 million and $3.5 million for the second quarters of 1997 and 1996, respectively, and $3.3 million and $6.0 million for the first six months of 1997 and 1996, respectively. The decreases were primarily related to cost containment measures implemented by new senior management, including reductions in legal costs and outside consulting fees and the reconsolidation of separate business units into a single operating entity. G&A expenses for the second quarter and first six months of 1996 included increased expense related to both the severance costs associated with the elimination of certain positions within the Company and to increased personnel costs that resulted from the division of the Systems and Software businesses into separate business units. As a percentage of net revenues, G&A expenses were 5% and 12% for the second quarters of 1997 and 1996, respectively, and 5% and 10% for the first six months of 1997 and 1996, respectively. INTEREST INCOME Interest income, net of interest expense, was $549,000 and $385,000 for the second quarters of 1997 and 1996, respectively, and $1.0 million and $824,000 for the first six months of 1997 and 1996, respectively. The increase was primarily due to higher average balances in interest-bearing accounts. OTHER INCOME Other income for the first six months of 1997 includes the receipt of insurance proceeds for certain legal expenses incurred in association with securities litigation costs. GAIN (LOSS) ON SALE OF PRODUCT LINES The loss on the sale of the product line for the second quarter of 1996 represents the net loss on the Company's sale of the Z-MAIL division. The gain on the sale of product lines for the first six months of 1996 represents the net gain recognized on the sale of the Company's MARINER product line in February 1996, offset slightly by the net loss on the sale of Z-MAIL in June 1996. INCOME TAXES AND INCOME TAX BENEFIT The Company recognized an income tax provision of $0.5 million and $1.0 million for the second quarter and first six months of 1997, respectively, and an income tax benefit of $4.0 million and $4.2 million for the second quarter and first six months of 1996, respectively. FINANCIAL CONDITION Total assets as of June 30, 1997 increased by $0.9 million, or 1%, from December 31, 1996. The change in total assets reflected increases in accounts receivable of $3.7 million and in cash and short-term investments of $1.0 million, partially offset by a decrease of $4.0 million in refundable and deferred income tax assets. The increase in accounts receivable was primarily related to increased sales volumes related to the IBM Agreement, which has increased the Company's days sales outstanding. The increase in cash and equivalents and short-term investments was primarily related to the receipt of income tax refunds, offset partially by repurchases of the Company's common stock. The decrease in refundable and deferred income taxes was primarily related to income tax refunds received. 11 NETWORK COMPUTING DEVICES, INC. Total liabilities as of June 30, 1997 increased by $1.3 million, or 7%, from December 31, 1996. This increase was primarily due to an increase of $2.2 million in accounts payable which was primarily related to increased inventory receipts. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 1997 are estimated at approximately $1.5 million, and at June 30, 1997, the Company had commitments for capital expenditures of approximately $250,000, primarily related to manufacturing tooling. LIQUIDITY In April 1997, the Company's Board of Directors adopted a program to repurchase from time to time at management's discretion up to 1,000,000 shares of the Company's common stock on the open market during the 12-month period ending April 30, 1998 at prevailing market prices. Repurchases are made under the program using the Company's cash resources. Shares repurchased will be available for the issuance under the Company's stock plans and for other corporate purposes. Through June 30, 1997, an aggregate of 291,500 shares were repurchased at prices ranging from $10.75 to $12.00 per share for a total purchase price of $3.4 million. Additionally, the Company had committed to repurchase an additional 145,000 shares at prices ranging from $11.63 to $12.00 per share for a total purchase price of $1.7 million. At June 30, 1997, total shares repurchased, or committed to be repurchased, were 436,500 for a total cost of $5.1 million. Subsequent to June 30, 1997, the Company has repurchased, or committed to repurchase, an additional 460,000 shares at prices ranging from $8.38 to $11.63 for a total cost of $4.7 million. Aggregate repurchases, or commitments to repurchase, as of July 24, 1997 under the 1997 stock repurchase program are 896,500 shares for a total cost of $9.8 million. As of June 30, 1997, the Company had combined cash and equivalents and short-term investments totaling $36.7 million, with no significant debt. The Company believes that its existing sources of liquidity, including cash generated from operations, will be sufficient to meet operating cash requirements and capital lease repayment obligations at least through the next twelve months. FUTURE PERFORMANCE AND RISK FACTORS THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW. EVOLVING NETWORK COMPUTING MARKET The Company derives a majority of its revenues from the sale of network computer products and related software. During the past several years, the Company and other manufacturers of network computing systems and products have experienced intense competition from alternative desktop computing products, particularly personal computers, which has slowed the growth and development of the network computing market. Until recently, the absence of X protocol support from Microsoft Corporation ("Microsoft"), combined with the proliferation of off-the-shelf Windows-based application software, constituted an obstacle to the expansion of the network computing model into Windows-based environments. The introduction of the Company's WINCENTER multi-user WINDOWS NT application server software and new, lower-priced network computers have allowed the Company to offer network computing systems that provide users with access to Windows applications, although sales of these new products have been limited to date. The Company's future success will depend in substantial part upon increased acceptance of the network computing model and the successful marketing of the Company's new network computing products. There can be no assurance that the Company's new network computing products will compete successfully with alternative desktop solutions or that the network computing model will be widely adopted in the rapidly evolving desktop computer market. The failure of new markets to develop for the Company's network computing products would have a material, adverse effect on the Company's business, operating results and financial condition. See "Item 1. Business - Industry Background" and "Business - Markets and Applications" in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 12 NETWORK COMPUTING DEVICES, INC. COMPETITION The desktop computer and information access markets are characterized by rapidly changing technology and evolving industry standards. The Company experiences significant competition from other network computer manufacturers, suppliers of personal computers and workstations and software developers. Competition within the network computing market has intensified over the past several years, resulting in price reductions and reduced profit margins. The Company expects this intense competition to continue, and there can be no assurance that the Company will be able to continue to compete successfully against current and future competitors as the desktop computer market evolves and competition increases. The Company's software products also face substantial competition from software vendors that offer similar products, including several large software companies. See "Item 1. Business - - Competition" in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results have varied significantly, particularly on a quarterly basis, as a result of a number of factors, including general economic conditions affecting industry demand for computer products, the timing and market acceptance of new product introductions by the Company and its competitors, the timing of significant orders from and shipments to large customers, periodic changes in product pricing and discounting due to competitive factors, and the availability and pricing of key components, such as DRAMs, video monitors, integrated circuits and electronic sub-assemblies, some of which require substantial order lead times. The Company's operating results may fluctuate in the future as a result of these and other factors, including the Company's success in developing and introducing new products, its product and customer mix, licensing costs, the level of competition that it experiences and its ability to develop and maintain strategic business alliances. The Company has committed significant resources, including research and development, manufacturing and sales and marketing resources, to the implementation of the IBM Agreement (see "Overview"). The production cycle of related product requires the Company to rely on IBM to provide accurate product requirement forecasts, which have in the past and will in the future, be subject to changes by IBM. Should the Company commence production of related product based on provided forecasts that are subsequently reduced, the Company bears the risk of increased levels of unsold inventories. Should the expected business volumes associated with the IBM Agreement not occur, or occur in volumes below management's expectations, there would be a material, adverse effect on the Company's operating results. The Company currently anticipates that the mix of hardware revenues as a component of total revenues may rise as a result of the IBM Agreement and the Company's current efforts to develop other OEM relationships for its network computers. In addition, the Company plans to increase its revenues generated through indirect sales. This change in the mix of revenues by product type and by sales channel is likely to result in overall reduced gross margin percentages on hardware revenues and on total revenues. In addition, the Company operates with a relatively small backlog. Revenues and operating results therefore generally depend on the volume and timing of orders received, which are difficult to forecast and which may occur disproportionately during any given quarter or year. The Company's expense levels are based in part on its forecast of future revenues. If revenues are below expectations, the Company's operating results may be adversely affected. The Company has experienced a disproportionate amount of shipments occurring in the last month of its fiscal quarters. This trend increases the risk of material quarter-to-quarter fluctuations in the Company's revenues and operating results. In the past, the Company has experienced reduced orders during the first and third quarters due to buying patterns common in the computer industry. In addition, sales in Europe have been adversely affected in the third calendar quarter, when many European customers reduce their business activities. NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS The markets for the Company's products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. The Company's future results will depend to a considerable extent on its ability to continuously develop, introduce and deliver in quantity new hardware and software products that offer its customers enhanced performance at competitive prices. The development and introduction of new products is a complex and uncertain process requiring substantial financial resources and high levels of innovation, accurate anticipation of technological and market trends and the successful and timely completion of product development. Once a hardware product is developed, the Company must rapidly bring it into volume production, a process that requires accurate forecasting of customer requirements in order to achieve acceptable manufacturing costs. The introduction of new or enhanced products also requires the Company to manage the transition from older, displaced products in order to minimize disruption to 13 NETWORK COMPUTING DEVICES, INC. customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demand. As the Company is continuously engaged in this product development and transition process, its operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. The inability to finance important research and development projects, delays in the introduction of new and enhanced products, the failure of such products to gain market acceptance, or problems associated with new product transitions could adversely affect the Company's operating results. See "Item 1. Business - Industry Background" and "Business - Product Development" in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS The Company increasingly relies substantially on independent distributors and resellers, particularly in European markets, for the marketing and distribution of its products, particularly its software products. During 1995, the Company consolidated its Software sales operations by creating a single organization devoted to the sale of the Company's PC connectivity and messaging software and re-oriented its software sales strategy toward the increased use of distributors, VARs and other resellers. In early 1996, the Company experienced significant returns of its software products from its distributors. There can be no assurance that the Company will not experience some level of returns in the future. In addition, there can be no assurance that the Company's distributors and resellers will continue their current relationships with the Company or that they will not give higher priority to the sale of other products, which could include products of the Company's competitors. A reduction in sales effort or discontinuance of sales of the Company's products by its distributors and resellers could lead to reduced sales and could adversely affect the Company's operating results. In addition, there can be no assurance as to the continued viability or the financial stability of the Company's distributors and resellers, the Company's ability to retain its existing distributors and resellers or the Company's ability to add distributors and resellers in the future. See "Item 1. Business - Marketing and Sales" in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. RELIANCE ON INDEPENDENT CONTRACTORS The Company relies on independent contractors for virtually all of the sub-assembly of the Company's network computer products. The Company's reliance on these independent contractors limits its control over delivery schedules, quality assurance and product costs. In addition, a number of the Company's independent suppliers are located abroad. The Company's reliance on these foreign suppliers subjects the Company to risks such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs and political instability. The Company currently obtains all of the sub-assemblies used for its network computer products (consisting of all major components except monitors and cables) from a single supplier located in Thailand. Any significant interruption in the supply of sub-assemblies from this contractor would have a material adverse effect on the Company's business and operating results. Although the Company is currently planning to develop alternative locations in different countries from which to obtain sub-assemblies, there is no assurance that the Company will be successful in this pursuit. Disruptions in the provision of components by the Company's other suppliers, or other events that would require the Company to seek alternate sources of supply, could also lead to supply constraints or delays in delivery of the Company's products and adversely affect its operating results. The operations of certain of the Company's foreign suppliers were briefly disrupted during 1992 due to political instability in Thailand. See "Item 1. Manufacturing and Supplies" in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. INTERNATIONAL SALES A majority of the Company's international sales are denominated in U.S. dollars, and an increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products less competitive in those markets. Over the past two years, from time to time, a significant portion of international revenues have been derived from sales to a customer in the United Kingdom that have been denominated in pound sterling and sales denominated in foreign currencies may increase in the future. These sales are subject to exchange rate fluctuations which could affect the Company's operating results negatively or positively, depending on the value of the U.S. dollar against the other currency. Where the Company believes foreign currency-denominated sales could pose significant exposure to exchange rate fluctuations, the Company acquires forward exchange contracts in an effort to reduce such exposure. International sales and operations may also be subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of technology, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations and managing accounts receivable. In addition, the laws of certain countries do not protect the Company's products and intellectual property 14 NETWORK COMPUTING DEVICES, INC. rights to the same extent as the laws of the United States. There can be no assurance that these factors will not have an adverse effect on the Company's future international sales and, consequently, on the Company's operating results. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continuing contributions of its senior management and other key employees, particularly Robert G. Gilbertson, its President and Chief Executive Officer, and Rudolph G. Morin, its Executive Vice President of Operations & Finance and Chief Financial Officer. The loss of these individuals or other key management personnel could have a material adverse effect on the Company's business, operating results or financial condition. The Company believes that its future success will depend in large part on its ability to attract and retain highly-skilled engineering, managerial, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, integrating and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on the Company's business, operating results or financial condition. VOLATILITY OF STOCK PRICE The market price of the Company's common stock has fluctuated significantly over the past several years and is subject to material fluctuations in the future in response to announcements concerning the Company or its competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by the Company or its competitors, general conditions in the computer industry, developments in the financial markets and other factors. In particular, shortfalls in the Company's quarterly operating results from historical levels or from levels forecast by securities analysts could have an adverse effect on the trading price of the common stock. The Company may not be able to quantify such a quarterly shortfall until the end of the quarter, which could result in an immediate and adverse effect on the common stock price. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices for technology companies and which have been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may adversely affect the future market price of the Company's common stock. 15 NETWORK COMPUTING DEVICES, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1996, two purported class action complaints, WOODWARD, ET AL V. BRADLEY, ET AL and CURLEY, ET AL V. MARINARO, ET AL, were filed in the United States District Court for the Northern District of California, and a third purported class action complaint, MAIZEL, ET AL V. MARINARO, ET AL, was filed in the Superior Court of the State of California for the County of Santa Clara. In May 1996, a fourth purported class action complaint, CLEVELAND, ET AL V. MARINARO, ET AL, was filed in the United States District Court for the Northern District of California. The plaintiffs in the MAIZEL, CURLEY and CLEVELAND actions claimed to be suing on behalf of a class of persons who purchased the Company's Common Stock during the period February 2, 1995 to March 21, 1996; the plaintiffs in the WOODWARD action claimed to be suing on behalf of a class of persons who purchased the Company's Common Stock during the period February 1, 1996 to March 21, 1996. Certain named current and former officers and a director of the Company were named as defendants in the actions. The MAIZEL complaint also named as defendants Morgan Stanley & Co. and Stephen Milunovich, an employee of Morgan Stanley & Co. The complaints alleged, among other things, that the Company issued false and misleading statements to the public about the Company's financial performance and prospects, in violation of California and federal securities laws. The complaint in the MAIZEL action alleged that the officer and director defendants sold or otherwise disposed of the Company's Common Stock in violation of California securities laws. The parties entered a settlement agreement during the first quarter of 1997. As part of the settlement arrangement, the Company agreed to contribute $1.1 million toward the $12 million in costs to settle all pending securities litigation. This settlement arrangement was approved by the federal court handling the case at a settlement hearing held on May 2, 1997. A final judgment and order of dismissal of action was filed on May 2, 1997. The Company anticipates that no further charges related to such settlement will be incurred in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on May 28, 1997. (a) The following five persons nominated by management were elected as directors at the meeting: Robert G. Gilbertson Philip Greer Paul Low Stephen A. MacDonald Peter Preuss (b) A proposal to increase the number of shares of Common Stock reserved for issuance under the Company's 1989 Stock Option Plan by 200,000 shares was approved by a vote of 12,497,198 shares for, 3,427,258 shares against, 119,347 shares abstaining, and 130,914 broker non-votes. (c) A proposal to increase the number of shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan by 100,000 shares was approved by a vote of 14,814,006 shares for, 1,190,595 shares against, 66,002 shares abstaining, and 104,114 broker non-votes. (d) A proposal to increase the number of shares of Common Stock reserved for issuance under the Company's 1994 Outside Directors' Stock Option Plan by 50,000 shares was approved by a vote of 12,649,390 shares for, 3,421,675 shares against, 76,752 shares abstaining, and 26,900 broker non-votes. (e) A proposal to ratify the selection of KPMG Peat Marwick LLP as independent auditors of the Company for the current fiscal year was approved by a vote of 16,113,340 shares for, 24,905 shares against, and 36,472 shares abstaining. 16 NETWORK COMPUTING DEVICES, INC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 10.44 IBM Letter of Intent and Funding Agreement. Exhibit 11.1 Statement Regarding Computation of Shares Used in Income (Loss) Per Share Computations. Exhibit 27 Financial Data Schedule. (b) The Company filed no reports on Form 8-K during the three-month period ended June 30, 1997. 17 NETWORK COMPUTING DEVICES, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Network Computing Devices, Inc. (Registrant) Date: July 24, 1997 By: /s/ RUDOLPH G. MORIN ---------------------------------------- Rudolph G. Morin Executive Vice President, Operations & Finance and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) 18 EX-10.44 2 EXHIBIT 10.44 EXHIBIT 10.44 [IBM LETTERHEAD] June 5, 1997 Lorraine Hariton Vice President Network Computer Devices, Inc. 350 North Bernardo Ave. Mountain View, CA 94043 RE: LETTER OF INTENT AND FUNDING AGREEMENT Dear Lorraine: This Letter of Intent and Funding Agreement ("Letter of Intent") sets forth the agreement of parties regarding the items described below. This Letter of Intent shall be considered and Attachment to Article 1 - Development of the IBM - NCD Alliance Agreement dated June 27, 1996 ("Alliance Agreement"). It shall be effective upon the last signature of the parties' authorized representatives. In recognition that IBM has and will request NCD to undertake certain tasks in development of the IBM Network Station and related software that are not specified in the existing Alliance Agreement, IBM and NCD agree as follows: 1. IBM and NCD agree that for a period of up to 90 days from the effective date of this Letter of Intent, IBM and NCD will negotiate in good faith for an amendment to the existing Alliance Agreement that provides for additional funding and/or an expansion of IBM's commitment to utilize NCD for the manufacturing of Products through the renewal term of the existing Alliance Agreement. Such negotiation shall include consideration of NCD's role in development of Network Station software for the Power PC 603 platform and other development tasks not originally contemplated by the current Alliance Agreement, including NCD's potential role in development the IBM network computer on a Java OS platform. Notwithstanding this 90 day period, the parties acknowledge that their goal is to complete such amendment by June 30, 1997. In the event an amendment is not executed at the end of the 90-day negotiation period, such period may be extended by mutual agreement by the parties. Although the parties may exchange proposals (written or oral), terms sheets, draft agreements, or other materials, neither party will have any obligation or liability regarding the matters being negotiated (except those obligations specifically set forth in this Letter of Intent) unless and until our companies enter into a more comprehensive written amendment. Neither party will rely on a successful conclusion of such an amendment, and any business decision made in anticipation of the conclusion of such an amendment is at the sole risk of each party. Each party shall be responsible for its own expenses and costs related to such negotiations. Lorraine Hariton Page 2 June 5, 1997 2. In consideration for IBM's payment obligation as specified below, NCD agrees to perform development tasks assigned by IBM that are outside the scope of the existing Alliance Agreement and that are consistent with and implement the Product Roadmap provided to NCD on May 15, 1997. Such tasks include but are not limited to: a. Work in support of the port of the NCD operating system onto a PowerPC 603- version of the Product. This work will include providing and completing for the PowerPC 603 platform the Deliverables and tasks currently described in the Development Article of the Alliance Agreement, as well as completing additional tasks and Deliverables necessary to support the Power PC 603 platform (including acquisition and utilization of the appropriate GNU gcc compiler for the PowerPC 603 platform); b. Support for a second web browser on the Product; c. Implementation of changes required to incorporate Motif Library and Motif Window Manager Version 1.2.5 into the Products. d. Support and integration of IBM-Hursley's version of the Java VM 1.1.2 and Java VM 1.2.X into the Products (rather than the standard Sun version). e. Other tasks assigned by IBM and consistent with the referenced Product Roadmap. The parties acknowledge and agree that the above list is not intended to be exhaustive. The parties also agree that nothing in the above list or in this Letter of Intent relieves or in any way affects either parties' existing obligations under the Alliance Agreement. 3. For the time period described in paragraph 4, below, IBM shall pay to NCD an NRE amount of up to $200,000 per calendar month for development work and resources applied to perform the work described in paragraph 2 above. Payment of such amount shall be subject to NCD's application of key resources to accomplish the additional work described in this Letter of Intent, and reasonable demonstration, if requested by IBM, that its total additional development work performed pursuant to this Letter of Intent for the applicable calendar month equaled or exceeded $200,000 in cost (using a rate of $200,000 per person/year for purposes of this Letter of intent only). Nothing herein shall require IBM to pay any additional amount for the work described in this Letter of Intent. NCD may invoice IBM for the amount described herein no earlier than the final business day of the calendar month for which the payment was earned, and shall submit with the invoice documentation supporting the above NRE costs, if requested by IBM. IBM's payment of the invoice shall be made no later than 30 days after receipt of the invoice and requested documentation supporting the invoice. Lorraine Hariton Page 3 June 5, 1997 4. The payment described in paragraph 3, above, shall be paid retroactively to April 1, 1997, in recognition that NCD has been performing certain work described by this letter during such time period. Such payment shall continue on a month-to-month basis until the earlier of (i) the parties' execution of a more comprehensive amendment to the Alliance Agreement as described in paragraph 1; (ii) IBM's written notice that it no longer requires or desires such additional work (as described in paragraph 2) to be performed; or (iii) March 31, 1998. The parties agree that termination of IBM's obligation to pay the NRE described herein shall not in any way relieve NCD of its continuing obligations to fulfill the terms of the Alliance Agreement, regardless of whether or not it is amended. 5. The parties agree that all amounts paid to NCD pursuant to this Letter of Intent are to be credited against any amount that IBM agrees to pay to NCD in the comprehensive written amendment to be negotiated pursuant to paragraph 1 of this Letter of Intent, if such an amendment is concluded. 6. All Materials created and all modifications to Materials made by NCD pursuant to the development tasks described above shall be considered Deliverables under the terms of the Alliance Agreement. All warranties and other applicable terms and conditions of the Alliance Agreement apply to such Materials. 7. NCD agrees that during the negotiation period described in paragraph 1, above, it will continue to operate its business in the ordinary course, and will undertake no commitments nor take any actions that would conflict with its ability to perform the work described herein and enter into a more comprehensive amendment as described in paragraph 1. 8. Nothing in this Letter of Intent shall be construed as a waiver of any claims or rights under the Alliance Agreement or under law, or in any way eliminates, limits, changes, or otherwise affects either parties' existing obligations under the Alliance Agreement. Network Computing Devices, Inc. IBM Corporation By: /s/ Lorraine Hariton By: /s/ Kenneth R. Johnson -------------------- ---------------------- Name: Lorraine Hariton Name: Kenneth R. Johnson Title: Vice President, Network Title: Director of Network Station Computing Devices, Inc. Development Date: 6/7/97 Date: 6/10/97 ------------------ ------------------- EX-11.1 3 EXHIBIT 11.1 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 June 30, Six Months Ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 ----------- ---------- ---------- ----------- Primary: Weighted average common shares outstanding during the period 17,121 16,504 17,105 16,382 Common share equivalents: Dilutive effect of stock options 1,699 - 1,752 - --------- -------- -------- -------- Total 18,820 16,504 18,857 16,382 --------- -------- -------- -------- --------- -------- -------- -------- Net income (loss) $ 697 $ (6,047) $ 1,549 $ (6,307) --------- -------- -------- -------- --------- -------- -------- -------- Primary income (loss) per share $ 0.04 $ (0.37) $ 0.08 $ (0.38) --------- -------- -------- -------- --------- -------- -------- -------- Fully Diluted: Weighted average common shares outstanding during the period 17,121 16,504 17,105 16,382 Common share equivalents: Dilutive effect of stock options 1,700 - 1,753 - --------- -------- -------- -------- Total 18,821 16,504 18,858 16,382 --------- -------- -------- -------- --------- -------- -------- -------- Net income (loss), adjusted for fully diluted calculations $ 697 $ (6,047) $ 1,549 $ (6,307) --------- -------- -------- -------- --------- -------- -------- -------- Fully diluted income (loss) per share $ 0.04 $ (0.37) $ 0.08 $ (0.38) --------- -------- -------- -------- --------- -------- -------- --------
EX-27 4 EXHIBIT 27 -- FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 14,356 22,306 28,043 2,748 10,602 79,931 25,816 20,948 86,556 19,382 0 0 0 66,212 757 86,556 65,426 65,426 38,378 38,378 25,683 66 36 2,582 1,033 1,549 0 0 0 1,549 0.08 0.08 Includes revenues from licensing of software and support services. Includes costs from licensing of software and support services.
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