-----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, ANv/13Y2e5UIZ8tJj2oyac6wOwEulWZQ2WW4oEPKHmkCoU7Crehnk60PTHS8qfA3 IzVFNuym0YSey/tp7npI1g== 0000912057-99-005984.txt : 19991117 0000912057-99-005984.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005984 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-20124 FILM NUMBER: 99754247 BUSINESS ADDRESS: STREET 1: 350 N BERNARDO AVE 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 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 September 30, 1999 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) Delaware 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: (650) 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 16,226,205 at September 30, 1999 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 September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3: Quantitative and Qualitative Disclosure about Market Risk 13 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K and S-8 14 Signature 15
2 NETWORK COMPUTING DEVICES, INC. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
ASSETS September 30, December 31, 1999 1998 -------------- -------------- Current assets: Cash and cash equivalents $ 12,306 $ 8,553 Short-term investments 3,525 12,806 Accounts receivable, net 21,849 21,590 Inventories 15,952 14,362 Refundable and deferred income tax assets - 3,126 Other current assets 4,947 3,214 -------------- -------------- Total current assets 58,579 63,651 Property and equipment, net 4,520 3,850 Other assets 3,469 7,645 -------------- -------------- Total assets $ 66,568 $ 75,146 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,929 $ 10,438 Accrued expenses 6,019 5,647 Deferred revenue 4,257 6,105 Other current liabilities 402 364 -------------- -------------- Total current liabilities 24,607 22,554 Long-term portion of capital lease obligations - 69 Shareholders' equity: Common stock 16 16 Capital in excess of par 88,993 87,666 Treasury stock (28,649) (27,945) Accumulated deficit (18,399) (7,214) -------------- -------------- Total shareholders' equity 41,961 52,523 -------------- -------------- Total liabilities and shareholders' equity $ 66,568 $ 75,146 ============== ==============
See accompanying notes. 3 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------ ---------------------------------- 1999 1998 1999 1998 ---------------- ---------------- -------------- ---------------- Net revenues: Hardware products and services $ 26,859 $ 20,877 $ 74,985 $ 58,128 Software licenses and services 2,433 5,238 8,605 21,316 ---------------- ---------------- -------------- ---------------- Total net revenues 29,292 26,115 83,590 79,444 Cost of revenues: Hardware products and services 17,103 15,224 46,892 43,123 Software licenses and services 644 1,700 2,390 6,952 ---------------- ---------------- -------------- ---------------- Total cost of revenues 17,747 16,924 49,282 50,075 ---------------- ---------------- -------------- ---------------- Gross margin 11,545 9,191 34,308 29,369 Operating expenses: Research and development 3,097 3,236 9,808 9,998 Marketing and selling 7,451 7,405 24,431 22,986 General and administrative 1,585 1,427 4,768 3,881 ---------------- ---------------- -------------- ---------------- Total operating expenses 12,133 12,068 39,007 36,865 ---------------- ---------------- -------------- ---------------- Operating loss (588) (2,877) (4,699) (7,496) Interest income, net 125 413 465 1,290 Other income - 228 - 2,090 ---------------- ---------------- -------------- ---------------- Loss before income taxes (463) (2,236) (4,234) (4,116) Provision for income taxes (income tax benefit) 6,951 - 6,951 (658) ---------------- ---------------- -------------- ---------------- Net loss $ (7,414) $ (2,236) $ (11,185) $ (3,458) ================ ================ ============== ================ Net loss per share Basic $ (0.46) $ (0.14) $ (0.69) $ (0.21) ================ ================ ============== ================ Diluted $ (0.46) $ (0.14) $ (0.69) $ (0.21) ================ ================ ============== ================ Shares used in per share computations Basic 16,219 16,228 16,136 16,522 ================ ================ ============== ================ Diluted 16,219 16,228 16,136 16,522 ================ ================ ============== ================
See accompanying notes. 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, -------------------------------------- 1999 1998 --------------- --------------- Cash flows from operations: Net loss $ (11,185) $ (3,458) Reconciliation of net loss to cash used in operations: Depreciation and amortization 2,655 2,273 Gain on sale of investment - (2,090) Increase in valuation allowance on deferred tax assets 6,951 - Changes in: Accounts receivable, net (259) 6,602 Inventories (1,590) 2,571 Refundable and deferred income tax assets (329) (745) Other current assets (486) 237 Accounts payable 3,491 (2,079) Income taxes payable 36 (289) Accrued expenses (1,434) (3,374) Deferred revenue (892) (2,253) --------------- --------------- Cash used in operations (3,042) (2,605) Cash flows from investing activities: Transfer from (to) short term investments, net 9,281 (1,917) Proceeds from sale of investment - 2,402 Changes in other assets (869) 13 Property and equipment purchases, net (2,173) (1,086) --------------- --------------- Cash provided by (used in) investing activities 6,239 (588) Cash flows from financing activities: Principal payments on capital lease obligations (67) (131) Repurchases of common stock (704) (9,822) Proceeds from issuance of stock, net 1,327 8,464 --------------- --------------- Cash provided by (used in) financing activities 556 (1,489) --------------- --------------- Increase (decrease) in cash and equivalents 3,753 (4,682) Cash and equivalents: Beginning of period 8,553 21,240 --------------- --------------- End of period $ 12,306 $ 16,558 =============== ===============
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 entries, 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 1998 Annual Report on Form 10-K. The consolidated results of operations for the three and nine-month periods ended September 30, 1999 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 1999. NET LOSS PER SHARE Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and potential common shares from stock options and warrants outstanding, when dilutive, using the treasury stock method. At September 30, 1999 and 1998 there were 3,912,562 and 3,771,087 options and warrants outstanding, respectively, that could potentially dilute earnings per share ("EPS") in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for those periods. 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):
September 30, December 31, 1999 1998 ---- ---- Purchased components and sub-assemblies $12,314 $10,733 Work in process 1,385 1,285 Finished goods 2,253 2,344 ----- ----- 15,952 14,362 ------ ------
INTEREST AND TAX PAYMENTS Interest payments, primarily interest on capital lease liabilities were $900 and $1,900 for the three months ended September 30, 1999 and 1998, respectively, and $8,300 and $11,700 for the nine months ended September 30, 1999 and 1998, respectively. Income tax payments, primarily foreign, were $168,300 and $57,500 for the three months ended September 30, 1999 and 1998, respectively and $262,800 and $159,300 for the nine months ended September 30, 1999 and 1998, respectively. STOCK REPURCHASE PROGRAM In November 1997, the Company's Board of Directors adopted a program to repurchase up to 1,000,000 shares of the Company's common stock during the 12-month period ended October 31, 1998. In July 1998, the repurchase program was completed with an aggregate of 1,000,000 shares repurchased at prices ranging from $6.50 to $9.63 at a total aggregate price of $8.5 million. In June 1998, the Company announced an additional program to repurchase up to 750,000 shares of the Company's common stock during the 12-month period ended May 31, 1999. Repurchases of 694,800 shares were made under this program at prices ranging from $4.63 to $8.25 at a total aggregate price of $4.4 million. 6 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAJOR CUSTOMERS AND OPERATING SEGMENTS The Company has one operating segment, sales of thin client hardware and software. The percentages of total net revenues represented by sales to major customers are as follows:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Adtcom 19% ** 16% ** International Business Machines 13% 34% 12% 27% Tech Data 16% ** 15% ** Ingram Micro 10% ** ** **
** Denotes less than 10% of the Company's revenue for the period noted. INCOME TAXES During the quarter, the Company recorded expense of $7.0 million to increase the valuation allowance for recognized deferred tax assets related to tax loss carryforwards and tax credit carryforwards. The Company presently is unable to conclude that the tax assets would more likely than not be realized based on a number of factors including actual versus forecasted results, the competitive market in which it operates, the nature of the deferred tax assets and the lack of carryback capacity to realize these assets. The composition of the Company's net deferred tax assets is as follows (in thousands);
September 30, December 31, 1999 1998 Gross deferred tax assets 14,616 12,923 Valuation allowance (14,616) (6,305) ------------- ------------ Net deferred tax assets - 6,618 ------------- ------------
7 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. 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 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, 1998, CONTAINED IN THE COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K. OVERVIEW Network Computing Devices, Inc. (the "Company") provides thin client hardware and software that deliver simultaneous, high-performance, easy-to-manage and cost effective access to all of the information on enterprise intranets and the Internet from thin client, UNIX and PC desktops. The Company's product line includes the NCD THINSTAR line of Windows-based terminals, optimized to access Microsoft's Windows NT Server 4.0, Terminal Server Edition, and NCD EXPLORA, NC200 and NC400 network computers. On the software side, the Company's products include the NCD THINPATH family of client and server software, developed to enhance the connectivity, management and features of the NCD thin clients as well as PCs in accessing information and applications on Terminal Server. The Company also markets PCXware, NCDware, NC software, and Citrix based Wincenter. The Company's products are sold through distributor/VAR channels, and system integrators worldwide. The Company sells hardware products to International Business Machines Corporation ("IBM") pursuant to an OEM agreement dated June 27, 1996 (the "IBM Agreement") . The IBM Agreement is non-exclusive and provides for IBM to purchase a portion of its requirements of such products from the Company through December 31, 2000, although no minimum purchase volumes are required by the contract. Revenue from this product line continues to decline as indicated in the table on page 7. RECENT DEVELOPMENTS On December 31, 1998, the Company completed the acquisition of Tektronix' Network Displays business unit ("NWD") for $3.0 million in cash and warrants to purchase one million shares of the Company's common stock at $8.00 per share. The acquisition was accounted for as a purchase business combination with a total purchase price of $5.9 million. The purchase price was allocated as follows: $1.7 million to net assets acquired, $1.4 million to in-process research and development and $2.8 million to other intangible assets. In addition to acquiring certain assets of NWD, approximately 83 former NWD employees, primarily in sales, marketing and engineering roles, joined NCD. In conjunction with this acquisition, the Company undertook various restructuring activities to eliminate redundancies with the acquired business, including the reduction in personnel of approximately 40 employees. The Company recorded a charge of approximately $1.0 million (a $.9 million cash charge) in the fourth quarter of 1998 related to these restructuring activities. During the third quarter and first nine months of 1999, the Company paid approximately $24,000 and $758,000, respectively, in restructuring costs, leaving approximately $142,000 accrued at September 30, 1999. RESULTS OF OPERATIONS TOTAL NET REVENUES Total net revenues for the third quarters of 1999 and 1998 were $ 29.3 million and $26.1 million, respectively, representing an increase of 12%, and $83.6 million and $79.4 million for the first nine months of 1999 and 1998, respectively. Sales related to the IBM Agreement accounted for approximately 13% and 34% of revenues in the third quarters of 1999 and 1998, respectively, and approximately 11% and 26% in the first nine months of 1999 and 1998, respectively. 8 HARDWARE REVENUES Hardware revenues are primarily from the sale of thin client products, and to a lesser extent, related service activities. Revenues were $26.9 million and $20.9 million for the third quarters of 1999 and 1998, respectively, and $75.0 million and $58.1 million for the first nine months of 1999 and 1998, respectively. Shipments of the Company's Windows-based Terminals and network computer products acquired in the NWD acquisition were up significantly, more than offsetting the combined impact of decreased shipments to IBM and lower average selling prices. SOFTWARE REVENUES Software revenues are primarily from the sale and licensing of ThinPATH and other software products and related support services. Revenues from software and related services were $2.4 million and $5.2 million for the third quarters of 1999 and 1998, respectively, and $8.6 million and $21.3 million for the first nine months of 1999 and 1998, respectively. This decrease primarily reflects the transition from the sale of the Citrix based Wincenter software to the sale of software developed-in-house. The Company's OEM relationship with Citrix for Citrix' WinFrame product ended on September 30, 1998. This has resulted in significantly reduced sales of Citrix based products. GROSS MARGIN ON HARDWARE REVENUES The Company's gross margin percentages on hardware revenues were 36% and 27% for the third quarters of 1999 and 1998, respectively, and 37% and 26% for the first nine months of 1999 and 1998, respectively. The increases in margin relate to decreased sales of lower-margin products sold to IBM on an OEM basis under the IBM Agreement and increased sales of the Company's branded products that have higher margins. GROSS MARGIN ON SOFTWARE REVENUES The Company's gross margin percentages on software revenues were 74% and 68% for the third quarters of 1999 and 1998, respectively, 72% and 67% for the first nine months of 1999 and 1998, respectively. The improvement in gross margin percentage reflects the move from the sale of licensed software to the sale of the Company's branded software at higher margins. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses were essentially unchanged for both the third quarter and year to date when compared to the prior year. As a percentage of net revenues, R&D expenses were 11% and 12% for the third quarters of 1999 and 1998, respectively, and 12% and 13% for the first nine months of 1999 and 1998, respectively. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $7.5 million and $7.4 million for the third quarters of 1999 and 1998, respectively, and $24.4 million and $23.0 million for the first nine months of 1999 and 1998, respectively. As a percentage of net revenues, marketing and selling expenses were 25% and 28% for the third quarters of 1999 and 1998, respectively, and 29% for the first nine months of both 1999 and 1998. Marketing and selling expenses for the third quarter of 1999 were essentially flat compared to the third quarter of 1998, while the Company grew revenue causing a decline in marketing and selling expenses as a percentage of revenue. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses were $1.6 million and $1.4 million for the third quarters of 1999 and 1998, respectively, and $4.8 million and $3.9 million for the first nine months of 1999 and 1998, respectively. As a percentage of net revenues, G&A expenses were 5% for both the third quarters of 1999 and 1998, respectively, and 6% and 5% for the first nine months of 1999 and 1998, respectively. The increase in general and administrative expense is due in part to goodwill amortization expense. Goodwill amortization expense, related to the acquisition of the Tektronix Inc.'s Network Displays business, was $.1 million for the third quarter and $.3 million for the nine months ended September 30, 1999. 9 INTEREST INCOME, NET Interest income, net of interest expense, was $125,000 and $ 413,000 for the third quarters of 1999 and 1998, respectively, and $465,000 and $1,290,000 for the first nine months of 1999 and 1998, respectively. The decrease was primarily due to lower average balances in interest bearing accounts. INCOME TAXES AND INCOME TAX BENEFIT At September 30, 1999, the company recorded a non-cash charge of $7.0 million to increase the valuation allowance on deferred tax assets. Deferred tax assets at September 30, 1999 include operating loss carryforwards for federal and state income tax purposes of approximately $11.0 million and $2.6 million respectively. These carryforwards are available to offset future taxable income, if any, thru 2018 and 2003 respectively. The Company recognized an income tax benefit of $658,000 for the first nine months of 1998. FINANCIAL CONDITION Total assets of $66.6 million at September 30, 1999 decreased from $75.1 million at December 31, 1998. The change in total assets primarily reflects decreases in cash and short-term investments of $5.5 million, an increase in the valuation allowance on deferred tax assets of $7.0 million, partially offset by increases in inventories of $1.6 million, plant and property of $0.7 million, and a strategic investment of $.9 million. Total current liabilities as of September 30, 1999 increased by $2.1 million, or 9%, from $22.6 million at December 31, 1998. The change was primarily related to an increase in accounts payable of $3.5 million, partially offset by a decrease in deferred revenue of $1.8 million. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 1999 are estimated at approximately $600,000. LIQUIDITY As of September 30, 1999, the Company had combined cash, cash equivalents and short-term investments totaling $15.8 million, with no significant debt. Cash used in operations was $ 3.0 million in the first nine months of 1999 compared to $2.6 million in the first nine months of 1998. In the first nine months of 1999, an increase in inventories of $1.6 million and a net loss of $11.1 million were only partially offset by an increase in accounts payable of $3.5 million and an increase in the valuation allowance on deferred tax assets of $7.0 million and an increase in accounts payable of $3.5 million. In the first nine months of 1998, decreases in accounts receivable and inventories of $6.6 million and $2.6 million, respectively, and depreciation and amortization of $2.3 million were largely offset by decreases in accounts payable and deferred revenue of $2.1 million and $2.3 million, respectively, the gain on sale of the investment in Precept Software, Inc. of $2.1 million and a net loss of $3.5 million. Cash flows used in investing activities of $0.6 million in the first nine months of 1998 primarily reflects proceeds from the sale of the company's investment in Precept Software, Inc. of $2.4 million. Cash flows used in financing activities of $1.5 million in the first nine months of 1998 primarily reflects Intel's investment in the Company's common stock, offset by a corporate common stock repurchase of $9.8 million. The Company believes that its existing sources of liquidity will be sufficient to meet operating cash requirements and capital lease repayment obligations at least through the next twelve months. YEAR 2000 ISSUES In the next year many companies could face a potentially serious information systems problem because many software applications and operational programs written in the past were designed to handle date formats with two-digit years and thus may not properly recognize calendar dates beginning in the Year 2000. This problem could result in computers either outputting incorrect data or shutting down altogether when attempting to process a date such as "01/01/00." In response to this, the Company has formed a task force (the "Task Force") specifically assigned to addressing Year 2000 issues. The Task Force is composed of members from all essential functional groups within the Company. The Task Force meets regularly, and the meeting minutes are reviewed on a regular basis at the Executive Staff's operational meeting. The Company has reviewed all of its current product offerings and believes that its current products are Year 2000 compliant. As 10 to the Company's internal operations, the Task Force's general plan of action has been to inventory all essential systems, equipment and facilities, contact suppliers to ascertain vendor readiness for Year 2000, test all critical systems and resolve all mission-critical problems by the end of November of 1999. The Company has completed a comprehensive inventory, and is currently in the process of completing the evaluation, remediation and testing of its systems, equipment and facilities. The Company has also identified all essential suppliers and has contacted them to determine whether these suppliers' operations, products and services are, or will be, Year 2000 ready. The Company has received substantially all supplier responses. In addition, the Company is in the process of an on-going audit of its largest supplier to ensure Year 2000 readiness. The Company has a number of projects underway to replace or upgrade systems, equipment and facilities that are not currently Year 2000 ready. To date, the Company has not identified any specific contingency plans should the replacement or upgrade of these systems not be completed on a timely basis. The Company estimates it's total Year 2000 costs to be between $600,000 and $700,000. As of September 30, 1999, the Company has spent approximately $400,000 related to Year 2000 issues. In addition to potential costs or losses directly associated with the Year 2000 issue, the Company could experience reduced revenues resulting from other companies' information systems budgets being allocated to solving Year 2000 issues, thus reducing amounts available to purchase the Company's products. The Company could also be exposed to a potential adverse impact resulting from the failure of key suppliers, financial institutions and other third parties to adequately address the Year 2000 problem, despite assurances to the contrary given to the Company. However, the Company cannot currently estimate the incidental costs and losses which may be incurred from reliance on these third parties, nor can any assurance be given that the Year 2000 problem will not have a material adverse effect on the Company's business, operating results or financial condition. The Company believes that the most likely worst case scenario related to Year 2000 compliance that the Company may experience would be a delay or inability to procure components from suppliers or an interruption of orders from key customers due to their failure to successfully remediate Year 2000 related issues. Such scenarios, if they were to develop, could materially, adversely affect the Company and its operations. The Company has in place only general contingency plans, such as replacement of suppliers and stockpiling of critical components, to respond to such scenarios. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. The Company will adopt the standard no later than the first quarter of fiscal year 2001 and is in the process of determining the impact that adoption will have on its consolidated financial statements. 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 THIN CLIENT COMPUTING MARKET The Company derives a majority of its revenues from the sale of thin client network computing products. The Company's future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of the Company's new thin client computing hardware and software products. There can be no assurance that the Company's new thin client computing products will compete successfully with alternative desktop solutions or that the thin client computing model will be widely adopted in the rapidly evolving desktop computer market. The failure of new markets to develop for the Company's thin client computing products would have a material, adverse effect on the Company's business, operating results and financial condition. 11 OTHER RISK FACTORS The Company experiences significant competition from other network computer manufacturers, suppliers of personal computers and workstations and software developers. Competition within the thin client 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, such as Microsoft and Citrix. The Company's operating results have varied significantly, particularly on a quarterly basis, as a result of a number of factors, including general economic conditions affecting industry demand for computer products, the timing and market acceptance of new product introductions by the Company and its competitors, the timing of significant orders from and shipments to large customers, periodic changes in product pricing and discounting due to competitive factors, and the availability and pricing of key components, such as DRAMs, video monitors, integrated circuits and electronic sub-assemblies, some of which require substantial order lead times. The Company's operating results may fluctuate in the future as a result of these and other factors, including the Company's success in developing and introducing new products, its product and customer mix, licensing costs, the level of competition which it experiences and its ability to develop and maintain strategic business alliances. The Company 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. 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 introduction of new or enhanced products also requires the Company to manage the transition from older, displaced products in order to minimize disruption to customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demand. As the Company is continuously engaged in this product development and transition process, its operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. The inability to finance important research and development projects, delays in the introduction of new and enhanced products, the failure of such products to gain market acceptance, or problems associated with new product transitions could adversely affect the Company's operating results. The Company relies increasingly on independent distributors and resellers for the distribution of its products. In early 1996, the Company experienced significant returns of its software products from its distributors. Although controls have since been improved, 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. The Company relies on contract manufacturers for virtually all of the sub-assembly of the Company's thin client computing products. The Company's reliance on these contract manufacturers limits its control over delivery schedules, quality assurance and product costs. In addition, a number of the Company's 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 thin client computing 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. 12 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. A number of components and parts used in the Company's products, including certain semiconductor components, also are currently available from single or limited sources of supply. The Company has no long-term purchase agreements or other guaranteed supply arrangements with suppliers of these single or limited source components. The Company has generally been able to obtain an adequate supply of parts and components in a timely manner from existing sources under purchase orders and endeavors to maintain inventory levels adequate to guard against interruptions in supplies. However, the Company's inability to obtain sufficient supplies of these parts and components from existing suppliers or to develop alternate supply sources would adversely affect the Company's operating results. 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. 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. The Company's success depends to a significant degree upon the continuing contributions of its senior management and other key employees. 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. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's market risk sensitive instruments as of September 30, 1999 are primarily exposed to interest rate risks. Because of the short-term maturity of these instruments, a 100 basis point change in related interest rates would not have a material effect on their fair value. Fluctuations in foreign exchange rates do not have a material effect on the Company's financial statements 13 NETWORK COMPUTING DEVICES, INC. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K and S-8 (a) The following exhibits are filed herewith: Exhibit 27 Financial Data Schedule. (b) The Company filed reports on Form 8-K, and S-8 (Transfer of Unused Shares) during the three-month period ended September 30, 1999. 14 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: November 12, 1999 By: -------------------------------------- Gregory S. Wood Vice-President and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) 15 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 12,306 3,525 23,477 1,628 15,952 58,579 24,095 19,575 66,568 24,607 0 0 0 60,360 (18,399) 66,568 83,590 83,590 49,282 49,282 39,007 0 1 (4,234) 6,951 (11,185) 0 0 0 (11,185) (0.69) (0.69) INCLUDES REVENUES FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES. INCLUDES COSTS FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES.
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